Estate plans help minimize tax on heirs

For the third time in four years, the U.S. House of Representatives has voted to permanently repeal the federal estate tax. The current tax law phases out the federal estate tax between now and 2010, the year it is scheduled for a one-year repeal. However, as of Jan. 1, 2011, unless Congress takes action to prevent it, the current tax law sunsets and estate taxes revert to pre-2002 levels, including a top tax rate of 55 percent.

As was the case last time, many do not expect the measure to make it through the Senate. But who knows? Unfortunately, not knowing what estate taxes will be in the future, or if they will even exist, has made many people wonder if it even makes sense to develop an estate plan. If there’s a chance estate taxes will one day be a thing of the past, why go through the expense of planning for them now?

The answer is simple: Unless you know exactly when you are going to die and what your circumstances and the estate tax laws will be on that particular day, it is critical to have a plan in place. Specifically, have a plan that provides the level of flexibility that allows you to keep pace with any changes.

The federal estate tax exists now and, it is generally believed, will likely continue to exist in some form for many years. Additionally, many states will or already have imposed state inheritance and estate taxes to restore revenue lost by the federal changes. Developing an estate plan today can help you minimize the impact of estate taxes on your heirs and ensure that your assets get distributed according to your wishes in the event of your untimely death. A flexible plan will allow you to make appropriate adjustments to reflect any changes in estate tax laws, your goals and/or your circumstances.

Life insurance can be a powerful estate-planning tool, because it can replace income, provide immediate cash at the insured’s death, and serve as a vehicle for passing on assets to heirs. Choosing an owner for a life insurance policy should be done carefully so as not to increase an estate tax liability. In some situations, setting up a trust is the best solution to help remove assets from the taxable estate and minimize future estate taxes.

Trusts are frequently used to minimize estate tax liabilities. A special trust called an irrevocable life insurance trust can provide much-needed flexibility in light of the recent estate tax uncertainty. A bank, trust company or other third party acts as the trustee controlling the property according to the trust terms. Often, the only asset in an irrevocable life insurance trust is life insurance.

Because proceeds payable to a properly structured irrevocable life insurance trust are not included in the grantor’s estate, the trust beneficiaries receive the proceeds free of estate and income taxes.

Here are some possible provisions to provide the flexibility for an irrevocable life insurance trust to accommodate possible changes in the future:

Trustee provisions:

• Authority to access policy cash values during the insured’s lifetime

• For single life policies, opportunity to name the spouse of the insured as trustee

• Power to add new beneficiaries or terminate the trust

• Option of appointing a corporate trustee to exercise broad discretion and provide long-term management

Other provisions:

• Rights for the beneficiaries (and the insured with certain limitations) to replace the trustee

• Control over whether loans may be made by the insured (or others) to the trust or vice versa, assuming arm’s-length terms.

Even if the estate tax is fully repealed, an irrevocable life insurance trust can offer several other possible estate planning benefits, such as a spendthrift provision that protects beneficiaries from creditors, professional management of assets and distribution restrictions that may reduce the risk of unwise spending of assets.

A qualified financial representative and estate planning attorney can help you determine if an irrevocable life insurance trust is an appropriate solution for your estate planning needs. They can help estimate the value of your estate, determine tax liabilities and offer solutions for your particular situation.

There is little one can do about the future of estate tax legislation. Developing an estate plan with enough flexibility to accommodate future changes is one way to minimize the impact of taxes on your estate today and possibly in years to come.

Aaron Tanner is a financial representative with Northwestern Mutual Financial Network. He can be reached at aaron.tanner@nmfn.com or www.nmfn.com/aarontanner.