Wednesday, June 27, 2012

Gift Tax - How Much is the Estate Tax?

(The information in this post is for educational purposes only. Legislation around this area is constantly changing. The examples used are hypothetical and very basic for ease of understanding.)

Many people constantly want to know How Much is the Estate Tax? At the time of writing this post the gift tax is allowable to be passed on from one generation to another is $5,000,000 per person or $10,000,000 per couple. (Here the gift tax is also known as the estate tax. For our purposes, the amount that a person may give to their heirs without a taxable consequence.) It is also important to note that the top gift tax rate is as low as it has ever been since 1931! The amount that you pass along valued above this $5 million (person) or $10 million (couple) is taxed at 35% if you pass away in 2012. If congress does not take any action by the end of 2012, the gift tax is set to reset back to $1 million per person or $2 million per couple and the top gift tax rate will jump up to 55%! 

So, long story short, 2012 is a great time to tackle your estate and gift planning needs. (With our country's $1.2 trillion dollar deficit, maybe the best time we will see in a very long time anyway.) This is the year you will be able to gift more and pay less now and at the time your estate passes on. This is also a great time to consider the power of life insurance in your gift planning needs. Especially the power of  Guaranteed Universal Life Insurance. (GUL) Let' s assume that you have 2 children and as part of your estate plan you wish to gift them $100,000 each.  You can put the $100,000 into a brokerage account in their name and hope for the best or dump it into a single premium GUL and have a tax free death benefit of $332,350 dollars PER CHILD GUARANTEED for your lifetime assuming you were a 60 year old non-smoking male with standard health! So the $200,000 that you plan to leave can immediately be worth almost $700,000 and payable in a lump sum tax free death benefit. There are no capital gains taxes due at any time on growth. 

Another important use for life insurance in your estate planning and gift tax needs is to have enough life insurance to cover the top gift tax rate. Lets assume that the estate tax reverts back to the 55% Federal tax rate on all estates valued over $1 million  dollars per person. For easy math sake, lets  use our life insurance figures above. You are a single person and your total estate is valued at $1.6 million dollars. (Real estate holdings, cash, retirement accounts, titled assets, jewelry, etc.) Remember, you able to pass along $1 million tax free under the gift tax rates and $600,000 of your estate would be taxed. At a 55% tax rate scheduled for 2013 and beyond that would be equal to $600,000 @ 55% or $330,000, due in Federal estate tax after your death. Keep in mind, this doesn't include your State's taxes! A good use for life insurance is to offset the taxes due by re-positioning $100,000 into a life insurance policy and having the $332,350 death benefit available in a tax free lump sum to pay the taxes. (In this example, the policy holder could also pay an ongoing annual premium of  $6,282 for life, again assuming 60 yr old non-smoking male standard health). If this man had no life insurance in place, then $300,000 would be due in just Federal taxes after his death. This would leave his family with 2 options: #1 sell assets quickly at current market value or below, #2 use more liquid cash and/or retirement accounts to settle the bill. 

These are just a few basic ideas of  the power of leveraging life insurance for your estate planning needs. Please see our website or contact us. We are able to help you and answer your questions no matter what State you live in. 

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