Planning for Increased Estate Taxes in 2013
With the scheduled decrease of the estate tax exclusion from $5.120 million to $1 million on January 1, 2013, many of you may have taxable estates. Without a tax strategy and the right trust arrangement, your heirs could see estate taxes devour up to half of their inheritance and your spouse could find it difficult to access cash funds.
An Irrevocable Life Insurance Trust (“ILIT”) is a vehicle most often used to provide for the potential payment of any estate taxes. An ILIT is funded with life insurance on the grantor’s life and upon the grantor’s death such insurance proceeds (which are income-tax free) can be used to provide lifetime benefits to the surviving spouse, children and grandchildren. If properly structured, the insurance proceeds are not taxed in the estate of the grantor or the estate of the grantor’s spouse. Further, when both spouses die the insurance proceeds can then be used to help pay the federal estate taxes due.
Another highly effective way to protect your assets from estate taxes while providing an income source for your spouse is through a Spousal Lifetime Access Trust (“SLAT”). The SLAT is a special type of irrevocable trust that allows you to make a gift during your lifetime, using your current gift tax exclusion, to an irrevocable trust for the benefit of your spouse and children and the assets will not be includable in the grantor’s estate or the grantor’s spouse’s estate. During the grantor’s lifetime, the trustee may make distributions to the grantor’s spouse for health, education, maintenance, and support. In addition, the grantor’s spouse may be given the right to withdraw the greater of $5,000 or 5 percent of the trust principal annually. Trust income and principal may also be “sprinkled” down to children or grandchildren.
Advice: Many of your taxable estates will be over $1 million on January 1, 2013. If you are worried about paying potential estate taxes, then you should discuss potential planning strategies, including ILITs and SLATs, with your advisors.