Irrevocable Life Insurance Trust—4/18/08

INTRO: When you pass away, there are two estate or death taxes that might threaten your estate: there's a federal death tax, and an Ohio death tax. 

1. Would you give us a quick update on the federal and state estate or death taxes?

A. These taxes can cost a lot of money.  The federal estate tax currently applies to estates of $2 million or more.  If your estate is more than $2 million, the tax on anything over that amount is 45%.

The Ohio estate tax is a much lower rate, but it applies to lots more people.  If your estate exceeds $338,000, you'll pay Ohio estate tax.  And the rate will be about 7%.

So for an estate of $3 million, your estate taxes will total about $184,700.  For an estate of $500,000, th e total tax would be about $9,700.

2. IS THERE ANYTHING THAT WE CAN DO TO PROTECT AN ESTATE FROM THESE TAXES?

A. One little-known approach which works is the irrevocable life insurance trust, or ILIT.  This allows you, in essence, to prepay your tax at a much lesser amount.

3. CAN YOU GIVE US AN EXAMPLE?

A. Sure.  Let's take a 65 year old in good health with a $3 million estate.  At death, he'd pay federal and Ohio estate taxes of about $555,000.

But as part of this plan, he buys life insurance for that amount now, inside what's called an irrevocable life insurance trust. 

He could make monthly payments of approximately $1000 per month into the trust to pay the premiums on a policy with  a death benefit of  $555,000.  For a small monthly payment you could buy enough life insurance to pay off the taxes at death.  You don't avoid the tax, but you create a pool of money to pay the tax at your death, so your entire estate can pass to your heirs.

4. ARE THERE OTHER REASONS TO USE AN IRREVOCABLE LIFE INSURANCE TRUST?

A. Yes.  If you have an illiquid asset in your estate, such as real estate or a business, this technique could save you money because it creates liquidity.  I've seen people who have had to sell real estate or a business quickly at death to come up with cash to pay taxes or other costs.  And selling quickly at a fire sale, may mean you won't get the best price possible.  By creating a pot of cash with an irrevocable life insurance trust, you could avoid a fire sale of any illiquid asset.

5. THIS SOUNDS COMPLICATED.  WHERE CAN WE LEARN MORE?

A. Ultimately you will need the help of a lawyer to look at your estate plan and create a technique that best works or you.

CLOSE: The estate or death taxes are not likely to die away.  But you can take steps to protect your family.