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Paying estate settlement costs with discounted dollars

May/June 2007 California Country magazine

Many people do not have the liquid assets to meet estate expenses, such as estate and transfer taxes, at death.



As Congress weighs the merits of repealing the estate tax, many Californians in particular face the prospect of significant estate tax liabilities. The tax, simply put, is the government taxing the estate owner for their right to transfer property and estate assets to their heirs. This is why it is often referred to as a transfer tax. It is confiscatory by its very nature. The problem is, many people do not have the liquid assets to meet estate expenses at death.

To give you an idea, the Federal Estate and Gift Tax rates for an estate valued at $2 million is $780,000. That’s a tax of 39 percent. What’s more, any value in excess of $2 million is taxed at 48 percent! How many people have $780,000 lying around with which to pay such a tax liability? And if they did, would this be the most efficient means of paying it?

There are several ways to minimize, if not eliminate, this estate tax liability. Many people have invested time and money to arrange properly with their professional advisers for wills, various types of trusts, business continuation or disposition agreements and so on. Proper estate planning is highly recommended. The one critical element to a good plan that is often overlooked is adequate funding to execute the plan. You can have the best-laid estate or business plans there are, but without proper funding of tax liability and expenses, the plan is just a lot of legal paperwork.

There are basically three methods of paying for this tax liability and related estate costs. You can pay cash, borrow the money or purchase life insurance. Paying cash costs you 100 cents for every dollar owed. If you borrow money to pay the tax, it would cost you, perhaps, 108 cents for every dollar owed depending on the current rate of interest. If you purchase life insurance, the cost can be as little as a few cents on the dollar.

For example, a male, age 55, would typically pay in the range of $14,500 per year for a $1 million universal life policy. Should the insured live five years and then die, the cost to pay the $780,000 tax mentioned above would be about 9.3 cents on the dollar owed. If the insured lived for 10 years and then died, the cost would be about 18.6 cents on the dollar owed. This is certainly a much more efficient way of meeting these inevitable expenses that likely are only growing over time. This is what is meant by paying estate taxes and settlement costs with discounted dollars. It’s an option certainly worth exploring to determine your exact estate situation.

Federal legislation, whether the estate tax is permanently repealed or not, the value of your estate, etc., all have a bearing on the possible cost you may or may not be facing in the future. In any case, life insurance offers one of the least expensive ways to meet these costs. Be sure to give it some serious investigation in your estate planning.


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