Estate taxes, death taxes and inheritance taxes are only for the very rich. Right? Wrong! While the federal estate tax may not start until the taxable estate hits $5 million, state estate taxes and inheritance taxes start at much lower rates. For example, the state of Ohio has an estate tax exemption of only $338,333 with a tax rate of 7 percent on the excess. New Jersey has a $0 exemption for inheritance tax with a tax rate of 16 percent and an estate tax exemption of only $675,000.
This means the combined tax rate in New Jersey could be as high as 54 percent; in Maryland, 51 percent; in Pennsylvania, 45 percent. This is a shock if you are planning for only a 35 percent federal estate tax.
Why small estates need life insurance
Clearly, there is still the need for life insurance for estates of less than $5 million. In Minnesota, which has an exemption of $1 million for estate taxes, your client may still be paying up to 41 percent in state taxes on the amount in excess of this $1 million. A $5 million taxable estate would have Minnesota taxes payable in the amount of $1.64 million. This is almost one-third of the estate.
In light of this, the obvious question is: How do the client's heirs write a check for this amount without negatively impacting the estate? Even if the estate is highly liquid, would your client want his or her family to liquidate assets at a time when this money may be required to keep the family business together, or simply to maintain the family's lifestyle? There are better alternatives than paying 100 cents on the dollar.
How life insurance can help
Tax planning is truly a minefield. It requires working with professionals who understand its intricacies and can guide the client through the process of minimizing taxes with the tools available. One of these tools is life insurance.
Life insurance is a magical tool. It creates money when it is needed the most, and it creates this money for pennies on the dollar.
Pennies on the dollar? Yes. Compare the premium on the life insurance to the face amount of the policy. If the premium for $1 million of permanent life insurance is $20,000 annually, this equates to two cents per dollar of coverage per year, also known as "the two-percent solution." Assuming a normal life expectancy for the client, it would be very difficult for the client to pay in a dollar of premium for a dollar of death benefit. If the ownership of the policy is established properly, it is possible for the death benefits to be received by the beneficiaries tax-free.
Life insurance. It is a simple, elegant solution that still has a place in your estate planning discussions with your clients.
Marvin H. Feldman is the president and chief executive officer of the LIFE Foundation. He can be reached at [email protected].
