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Ways To Fund Estate Tax

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Ways To Fund Estate Tax

Ways To Fund Estate Tax

If your assets become excess of $2 million, you need to reduce the amount of hefty estate taxes that your beneficiaries will be required to pay after your death. You may have to consider transferring the ownership of your life insurance policy or else create a life insurance trust.

In this respect, the Economic Growth and Tax Relief Reconciliation Act of 2001 brought out a tax repeal schedule that ensured the reduction of the estate tax over the years that would be repealed completely by 2010.

The estate tax reform

The amount of federal estate tax exclusion increased to $2 million per person in 2006. This increase will continue till 2009 and afterwards it will increase again to $3.5 million. There will be no federal estate tax in 2010, but in the following years, the exclusion amount will be changed to $1 million per person. Thus, if the taxable estate goes over $2 million, you are likely to be subjected to estate taxes; these taxes can reach to 46%, though the rate will fall in 2007 to 45% and will remain so until 2009. After the period expires, the exclusion amount will be $1 million and the highest rate will be 55%, taking into consideration no further changes.

Ownership transfer of life insurance

If the ownership of life insurance policy is maintained by you, and the assets that you possess are over $2 million, your policy will come within the purview of estate and subject to federal taxation. On transfer of ownership, the death benefit will not be included in your estate and your beneficiaries can make use of the tax-free proceeds for paying the estate taxes. To transfer ownership, you need to maintain certain requirements:

  • You will be required to notify your insurance company and also fill out the necessary paperwork.
  • The premiums will now be paid by the new owner(s); you can gift them up to a maximum amount of $12,000 per person, every year that is to be used towards premiums.
  • Since the ownership of the policy will no longer be with you, you will not be able to maintain changes to the policy.
  • You must have a written confirmation from the insurance company that documents the changes of ownership.

An irrevocable life insurance trust

Creating an irrevocable life insurance trust is another means to prevent your life insurance payout from becoming part of the estate. The trust thus created is a beneficial alternative to transferring your ownership of your policy as you can maintain control over the policy and make payments of all your premiums.

IRS three year rule

The IRS has a “three year rule” for both transferring ownership and also creating a life insurance trust. The rule dictates that either of these arrangements has to be made at least three years before your death, or else the policy becomes part of your estate and is taxable.


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