With the 2022 federal estate tax exemption amount at $12.06 million ($24.12 million for a married couple), it may seem unlikely that your heirs will need to pay estate taxes under current tax law. However, that law is expected to expire at the end of 2025, with the exemption reverting to an inflation-adjusted amount of about $6.2 million ($12.4 million for a married couple). Unless Congress votes to extend the top estate tax exemption amount, many more Americans will be at risk of having their wealth taxed. With a tax rate of 40%, this can mean a significant amount going to the Internal Revenue Service (IRS) instead of loved ones. Additionally, your state may also have an estate tax. State exemption amounts are often less than the federal amount, so your state of residence can still collect significant taxes after your death.

An estate planning tool in particular can be used to pay all or a portion of estate taxes when a large portion of the estate consists of physical assets such as real estate, art, jewelry, collectibles, etc. If your goal is to keep these tangible assets in the family, life insurance owned by an irrevocable life insurance trust (ILIT) can be used to pay estate taxes, so the assets don’t need to be sold. .

An ILIT is a type of trust that is funded during your lifetime by 1 or more life insurance policies. It is irrevocable, meaning that once you create an ILIT, the trust generally cannot be changed or revoked. In exchange for moving your life insurance policy to an ILIT, there are several benefits: you can avoid including the life insurance policy’s death benefit in your estate for federal estate tax purposes; fund the trust with life insurance to help provide the money needed to cover estate taxes and other expenses after you die; and finally, to have the ability to direct, through the trust document, how and when the death benefit is used and for whom.

However, it is important to remember that this is an irreversible trust. Once you transfer an existing policy to the trust or purchase new life insurance using the trust, you must give up any right to make changes to the policy or trust. If you retain any rights to the policy, such as ability to remove the cash value, both the IRS and state taxing authorities would see you as still having “property incidents” and would require the policy to be included in your estate. Therefore, you must choose someone else such as your spouse, sibling, adult child or attorney to be the trustee of the ILIT. The trustee will then oversee the maintenance of the policies held in the ILIT and the life insurance will no longer be part of your estate.

To pay life insurance policy premiums, you transfer money to the ILIT and the trust pays the premiums. However, you should consider gift taxes. Putting money into a trust that will benefit someone else can be considered a gift. If the premium payment to each beneficiary exceeds the gift tax exclusion of $16,000 per year, gift taxes may be due.

One way to avoid this is to have the trustee send the beneficiaries a “Crummey letter” every time you transfer money into the trust. This letter would notify them that they can claim their share of the deposited money within a certain period of time. If they have an immediate right to the money, the gift tax does not apply. However, your beneficiaries would be foolish to take the money, because without the money the insurance premiums would be unpaid and the policy would lapse. The eventual death benefit payment from the life insurance would exceed the amount the premiums were intended to pay.

If you own an existing policy and transfer it to an ILIT, the IRS will still count it as part of your estate if you die within the next 3 years. (This does not apply to policies purchased by the trust.) With the existing estate tax law slated to expire in 2025, we are approaching an alignment between the tax law’s expiration date and the 3-year insurance waiting period of life completes transfers to ILIT. Depending on your age and life expectancy, this timeline may be of some importance to you.

Determining whether you are at risk of paying estate taxes and whether an ILIT makes sense for you will likely require coordination between your certified public accountant, your financial advisor, and your estate planning attorney. Because of the irreversible nature of ILITs, all aspects of your financial life must be carefully considered.

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Investment advisory services provided through MEDIQUS Asset Advisors, Inc. Securities offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC ∙ 5187 Utica Ridge Rd ∙ Davenport, IA 52807 ∙ 563-326 ♈US ME, Financial Partners, DI, Financial Partners, 5187 are independently owned and operated.

Effective June 21, 2005, newly issued Internal Revenue Service regulations require certain types of written advice to include a disclaimer. To the extent the preceding message contains written advice relating to a federal tax matter, the written advice is not intended or intended to be used, and may not be used by the recipient or any other taxpayer, for purposes of avoiding federal tax penalties , and is not written to support the promotion or marketing of the transaction or matters discussed herein.

The information contained in this report is for informational purposes only. Any calculations are made using techniques we believe to be reliable, but are not guaranteed. Please contact your tax advisor to review this information and consult with them regarding any questions you may have regarding this communication.

MEDIQUS Asset Advisors, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. You should consult your tax, legal and accounting advisors before engaging in any transaction.

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