DEATH AND TAXES: WHAT BETTER LEGACY THAN TAX-FREE WEALTH?

It is not often that one gets a small glimpse of the estate planning of the super wealthy. Most estate plans are administered through trusts which are privately managed by trustees. If you peer closely through the small crack in the door, however, you can find executive death benefits from those companies subject to compensation reporting rules.    

As reported by Bloomberg Business, General Electric paid $314,511 in premiums for $22 million of life insurance coverage for C.E.O. Jeffrey Immelt. Why would the super wealthy need a multimillion dollar policy when they leave behind a massive fortune? For the super wealthy, life insurance is about providing liquidity to the beneficiaries to pay large estate taxes rather than for the replacement of lost income, according to Bloomberg Business.

Life insurance is a tax efficient estate planning strategy. So long as the insured does not retain any incidents of ownership over the policy, life insurance proceeds are not taxable as income to the beneficiary or includible in a decedent’s estate. For this reason, most life insurance policies are owned by an irrevocable life insurance trust to separate the insured from ownership and control.  

With the federal estate tax rate at 40% on amounts over the $5.43 million federal exemption, the super wealthy can save millions on estate taxes. Most of the 16 states that have an estate tax have a lower exemption amount capturing more taxable transferable wealth. In Connecticut, the exemption is $2 million and the excess is subject to an estate tax rate as high as 12%. Jurisdictions with an estate tax are Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, Washington and the District of Columbia. Let’s not forget that seven states have a separate inheritance tax regime to consider, including Iowa, Kentucky, etc.  Maryland and New Jersey have both estate and inheritance taxes.

For high net worth individuals, it is not easy to achieve tax-free deferred transferable wealth. The taxation of life insurance is complex and involves a review of the myriad of exceptions that live in the vast labyrinth of federal and state estate, gift, inheritance (state level) and trust tax rules. 

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: How much life insurance coverage should a high-level executive receive?

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