Medical Practice Management, Physician Financial Management Services
Mar 22

Life Insurance and Estate Taxes

The following was contributed by my son, Sean Tinsley, who works for AXA Advisors in Austin, Texas (sean.tinsley@axa-advisors.com):

An alternative to selling assets to pay for estate taxes is life insurance.

Many people think the best way to avoid estate taxes is to leave everything to their spouse. While it’s true that leaving an estate to a surviving spouse can postpone estate taxes, it can sometimes mean a large tax bill later on. The unlimited marital deduction enables one spouse to leave an unlimited amount of property to a surviving spouse without federal estate or gift taxation, provided that the surviving spouse is a U.S. citizen. However, doing so may only defer gift or estate taxes until the death of the surviving spouse.

The amount subject to federal estate tax is in flux until 2011 under current law, but estates of less than $1 million will be exempt from federal estate tax under both current and future provisions. For those with larger estates, it may pay to create an estate plan, with the assistance of your attorney and tax advisor. Estate planning can help minimize the amount that goes to the IRS and maximize what goes to heirs.

One aspect of such a plan will address how to pay any estate taxes due when the surviving spouse dies. This may be complicated for many couples with a high net worth who have illiquid assets such as real estate or a business. Because estate taxes must generally be paid in cash within nine months after the death of the second spouse, this may force heirs to liquidate at a loss or sell an asset with the potential to appreciate significantly.

An alternative to selling assets to pay for estate taxes is life insurance. Survivorship life insurance covers two lives (typically a husband and wife, although it also can be used by business partners) and pays a death benefit at the second of the two deaths.

Survivorship life generally is available for a lower annual premium than two traditional life insurance policies covering two lives. The death benefits paid by survivorship life insurance are income tax-free to the beneficiaries. The benefits are generally estate tax-free, subject to certain provisions, if the policy is owned by an irrevocable trust or by a person other than the deceased, such as the insureds’ adult children.

Under the 2001 tax law, the amount subject to Federal estate taxes and the percentage taxed, will decline in each year until 2010, when the estate tax will be abolished altogether. However, in 2011, estate taxes are currently scheduled to go back to 2001 levels. In addition, many states impose estate taxes on relatively modest estates.

AXA Advisors, LLC does not provide legal or tax advice. Please consult your tax or legal advisor regarding your individual situation.

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →