Once again I will bravely dip my toe into the dark waters of tax planning. My usual disclaimer is that I am neither a CPA, Tax Preparer or Tax professional in any manner, but I did sleep in a Holiday Inn last night. In all seriousness, I am discussing the topic of estate planning and its arch enemy, estate taxes, because of the relief proper life insurance planning can bring to the matter.

What is Estate planning?

In simple terms, estate planning is providing detailed direction for all money and property while living, to be carried out after dying. The vehicle for this pre-planning is called a trust. A properly planned trusts can avoid costly probate proceedings, baseless claims to property, misuse of funds, and YES even taxes. There are many types of trust that can be created, however we will focus on the main two that all types must fall under, revocable and irrevocable.

A revocable trust is a legal shelter for estate funds and property marked for specific use or delivery to another entity at the creator’s death. This type of trust allows the grantor (creator) to maintain control and direction of the proceeds as well as the right to reclaim if necessary. It is not yet deemed a gift or transfer of property until death, and therefore enjoys all the benefits of being trusted except avoidance of taxes. The key word here of course is “revoke”, meaning this can be reversed or altered by the grantor at any time. Because of the detailed direction and appointment of trustees and beneficiaries, revocable trust are often used in place of a will.

Naturally, a irrevocable trust is one that also enjoys all the benefits of being trusted but also alters your tax burden. Once the grantor places this money and property, all control and rights to such are relinquished. At the point of inception a full gift is deemed to have been made. This gift now is subject to gift and estate taxes, both federal and sometimes state. The lifetime limits however to such a gift is $11.7 million federally ($15,000 annually) and $5 million in the state of Maryland. This means that any gifted amount under these lifetime and annual limits will enjoy a TAX FREE transfer. Current estate tax rates max out at a whopping 40% federally and 10% in the state of MD on amounts over the exemptions. This translates to hundreds of thousands of dollars due, just to receive an inheritance , if due diligence was not done planning in advance of such a burden.

It was a long journey, but we have finally arrived at the art of reducing that burden, and this is where life insurance again earns its gold star. A annual gift exemption caps the amount of money that a grantor can actually transfer out of the taxable estate at one time as of 2021 at $15,000.00. If gifts of this amount are being made in an effort to reduce potential estate taxes, it means the estate as a whole is valued over almost $12 million dollars. In the grand scheme, one would be hard pressed to find enough family to gift enough rounds of these modest payments that actually put a dent in such a liability.

This where I pause and just say, if you find yourself in this sort of predicament, CONGRATULATIONS!

Now this is how we preserve your hard earned legacy. Instead of trying to gift enough money away to keep heirs from dodging the tax man, we preserve your money and multiply it by many factors, TAX FREE. Sound familiar? Yes! by spending your estate on a large life insurance policy you effectively are transferring from a taxable estate to a tax free death benefit, payable immediately to your heirs just like a irrevocable trust. The policy transfers(premiums) would only be bound by the limits of what the insurance company is willing to issue and not the annual gift exemption amounts, allowing more money to flow out and be transferred annually. In addition, rather than every dollar gifted being a dollar taken, a life insurance policy will give your beneficiaries several dollars per dollar of premium. The death benefit is immediate! so instead of hoping you have enough time left as a grantor to continue gifting, you can immediately be covered for all and more of the assumed tax burden. The life insurance plan will effectively be acting as a revocable trust, directed money still under the creator’s management. Upon the creator’s death, the tax free benefit will then provide immediate compensation to the trustee to either be used as directed in the will, satisfy estate taxes due, or a combination of the two. Properly planned, life insurance can nullify estate taxes and even enhance the estate itself, without burdening beneficiaries.

Of course not just any policy will do, fortunately this is the type of high level life insurance planning Bay Life specializes in performing. We sincerely hope this information may be useful, even if we are not granted the opportunity to do so for you.