Paying the Estate Tax

Bigstock-Dollars-House-3639183One of the biggest headaches for executors of large estates is coming up with the cash to pay the estate tax. If the cash or other liquid assets are not a part of the estate, then other things might have to be sold that the testator would have preferred to have gone to his or her heirs. There is a way to avoid this problem.

Estate law lore is full of stories about things that had to be sold to pay the estate tax. Businesses, art collections, real estate, wine collections and much more have been sold so that money could be made available to pay the estate tax. However, there is a relatively simple way to provide your estate with enough cash to pay the estate tax: life insurance.

This was recently explained in the Wills, Trusts & Estates Prof Blog in "How Life Insurance Can Be Used To Help With Estate Taxes."

You can create an irrevocable trust and make it the beneficiary of a life insurance policy.

When the insurance is paid out, the executor of the estate can use the money to pay any estate taxes owed. It is important that the trust be irrevocable in order for the life insurance proceeds to not be included in the estate and also subject to the estate tax.

For this to work the trust must be created at least three years before you pass away. If not, then it will be considered as part of your estate.

Of course, life insurance is not the only way to provide liquid assets that can be used to pay estate taxes. Before rushing to create an irrevocable trust and buying a life insurance policy, talk to an estate planning attorney about your other options.

For more information about estate planning, please visit my estate planning website.

Reference: Wills, Trusts & Estates Prof Blog (October 15, 2015) "How Life Insurance Can Be Used To Help With Estate Taxes."


Death Tax Gets Serious Consideration by Congress

Death_and_taxes_quote_big_1_.54f0993e85ae8The House voted last week to repeal the estate tax, a longtime priority of Republicans that also spurred Democratic charges that the GOP is in the pockets of the rich. The 240-179 vote broke down largely on partisan lines, with seven Democrats voting to repeal the estate tax and three Republicans voting against it.  The White House has threatened to veto the measure, and the bill does not appear to have the 60 votes necessary to break a Democratic filibuster and get through the Senate. GOP leaders pushed ahead with Thursday’s vote, timed to coincide with this week’s tax filing deadline, in part to give their rank and file the opportunity to vote on repeal.

The House last voted to end the estate tax 10 years ago, which means that the vast majority of Republicans never had the opportunity to stand up for small businesses who are threatened by the death tax every day, said a Republican quoted in The Hill’s article titled“House votes to repeal estate tax.

Senator John Thune (R-SD) introduced legislation to repeal the estate tax, but it’s uncertain when or if that proposal might get a vote. There were 54 senators who supported the estate tax repeal last month in a non-binding budget resolution vote. Nonetheless, this is six votes short of the 60 needed.

The article notes that a repeal of the estate tax would increase the deficit by $269 billion over the next 10 years, and the Joint Committee on Taxation projects that the estate tax will impact 5,400 estates in 2015. This is approximately 0.2% of the 2.6 million deaths expected in the U.S. this year.

Under current law, individuals with estates of under $5.43 million in the year 2015 (and couples with $10.86 million estates) are exempt from paying the estate tax of 40% on the amount of assets above that threshold.

The article says that Republicans think they have a strong argument for repealing what they believe is “an immoral tax that resonates with voters across the economic spectrum.” The GOP claims that people are taxed every step along the way as they accumulate assets—as a result, their heirs shouldn’t have to worry about the estate tax when they die. In addition, the estate tax is more likely to hit family farms and small businesses than the ultra-wealthy who can afford complex estate planning. But, as one might guess, the Democrats see this differently and see the vote as another way to portray the Republicans as the party of tax cuts for the rich.

For more information about estate planning, please visit my estate planning website.

Reference: The Hill (April 16, 2015) “House votes to repeal estate tax”

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