After you die, all assets that you held in your personal name at the time of your death will be listed on your Federal Estate Tax Return. If your property value is higher than the property tax threshold for that year, property tax will be payable. In 2011, the estate tax threshold will be $1 million and the estate tax will be a whopping 55 (fifty five) percent. Land tax must be paid in cash within nine (9) months after death. For every dollar you pass over the first million, your estate will be taxed 55 cents. A million dollars may sound like a huge amount of money, but it’s actually very small when you consider that it includes life insurance proceeds, the value of your home, stocks, bank accounts, retirement accounts, jewelry, paintings, and anything else you own. may have the title in your name at the time you die.
One approach to providing ready-made cash to pay these taxes and other costs is through life insurance proceeds. The proceeds can be paid to the Federal government instead of your heirs having to liquidate assets to pay the land tax bill. Life insurance provides an income tax-free death benefit but the value of the benefit is added to the total assets in the estate if it is not properly structured. This creates a never-ending cycle of taxes and insurance policies. A way to avoid this outcome, limit or eliminate your property taxes, and provide tax-free money to your beneficiaries is to hold a life insurance policy at the Irrevocable Life Insurance Trust, or ILIT.
An ILIT combines trust protection with the liquidity of life insurance benefits. Using the $13,000 per year gift tax exemption, you can provide assets to ILIT annually to cover insurance premiums without tax consequences. On your death, the proceeds are transferred to your heirs free of all income taxes and all property taxes. This will provide your heirs with the liquidity they need to pay your funeral expenses, estate taxes, probate fees, and settlement fees.
Upon your death, the ILIT trustee will make an appropriate distribution of the cash proceeds to cover debts, taxes, and funeral expenses. The trustee may even buy part or all of your business with cash proceeds and run the business professionally until your children are old enough to take over. Trustees can also make suitable loans to spouses, children, and businesses.
ILIT provides flexibility and tax advantages. For more information about the ILIT and to determine if it is the right vehicle for you, please contact your South Florida estate planning attorney.