Trying to beat the income tax collector is a time-honored annual activity. But you only get one chance to beat (or be beaten by) the estate tax collector. In most cases, an organized estate plan leaves the collector with an empty estate tax bag or a substantially smaller bag. In my tax practice, two points continually crop up that are being missed in the estate planning documents I review – Q-TIP (qualified terminable interest property) trust and ILIT (irrevocable life insurance trust).
Here’s the first problem. You may want to leave everything to your spouse, but you are afraid your children may get nothing if your spouse decides to remarry. Or, maybe you are married for the second (or more) time. Sure, you want to take care of your present wife, but will she provide for your children? A Q-TIP trust is your solution. Both your (first or current) wife and your children are protected.
Best of all, the tax collector doesn’t get one cent of tax at your death. The income from the Q-TIP trust goes to your wife for as long as she lives. Upon her death, the trust assets go to your children. Only then does the IRS have its first chance to see an estate tax dollar. One more point: if your estate plan is properly structured, a total of $2 million (assuming both you and your spouse die in 2011 or after) can be passed to your children free of tax.
Note: Chances are that the $2 million will be raised by Congress before 2009 ends. Will bet the farm that the so-called exempt amount will rise to $3.5 million (or more) per person, which would mean the first $7 million per married couple will be tax-free.
Here’s the second problem: life insurance is subject to the estate tax – either when you die or when your wife (assuming she is the beneficiary) dies, depending on how your estate plan is set up. Think about this: for every $100,000 in life insurance, the tax collector will get between $37,000 and $55,000. (The estate tax brackets range from 37 percent to 55 percent… again, using 2011 rates). Note: Chances are the top estate tax rate will be lowered by Congress before December 31, 2009.
Apply those percentages to your situation. What’s the solution? Create an ILIT. Upon your death, the trust pays all income to your spouse for as long as she or he lives: then the assets go to your children. Every dollar of the life insurance proceeds will be used for the benefit of your spouse or your kids, without one cent in estate tax being paid.
No attempt is made here to cover every facet, rule, and exception to these two delightful tax-saving ideas. Using this article as a reference and see a competent professional to structure a complete estate plan.
Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection. E-mail him at firstname.lastname@example.org or call 417-9732. His Web site is taxsecretsofthewealthy.com.