There are some very important things to look at when you are creating your estate plan.

1.  It is important to figure out the necessary liquidity that your beneficiaries will need upon death.  This is something that is often not considered because a person thinks they have enough assets to cover their loved ones.   This may be the case, but the assets may not be in cash and require a liquidation of the assets.  The need for liquidity may require an immediate sale of the asset and command a lower number than the value of the asset.   The other way to get liquidity could be taking a loan to cover the necessary expenses to settle the estate.  This is not a great option as it will create debt for your loved ones.   Life insurance can be a very good tool to create immediate liquidity to the estate.

2.  Will you be subject to Estate Taxes and what is your maximum exemption?  Will the government come in and tax up to 50 % of your non-exempt estate when you pass away?

3.  Have you created a trust?  Should your trust be irrevocable or revocable?  How is it structured and what type of trust is it?

4.  Does all of your beneficiary information match up on all of your assets with the beneficiary information with your trust?  If not, the beneficiaries on the assets will supercede the trust designations.  Make sure all of this matches up.

When you are creating your estate plan, make sure to consult with your tax, financial, and estate planning attorney.   You should make sure you review it every few years and make sure nothing has changed, etc.

The tax treatment of life insurance is important to understand as you plan for your future.

The death benefit of a life insurance policy is income tax-free to the beneficiaries, but can be subject to estate taxes if the insured estate is large enough.  In 2009, the exemption is 3.5 million dollars that you can pass to heirs with no estate taxes.  If you have an estate that has a value above the exemption level, you can be subject to paying the estate tax on the amount above.  While the exemption stands at 3.5 million in 2009, it goes away for 1 year in 2010 and returns at the 1 million dollar level in 2011.  The tax rate in 2009 can be up to 45% and in 2011 it can be up to 55%.    The way they have set it up is pretty strange and how it is set up could completely change in the near future.  One of the ways people avoid paying the estate tax on their life insurance is to keep it outside of the estate in an ILIT (irrevocable life insurance trust).   When that money comes in to the family, they can use it to pay the immediate estate tax bill.  Life insurance death benefits are sometimes taxable in some business scenarios, but not usually with individuals.

The cash value of life insurance grows tax-deferred and can be accessed tax free if used correctly.  There is a limit on how much money can be stuffed inside a permanent life insurance because of its tax preferred status.  If the amount deposited exceeds the policy limit than the policy becomes a MEC (modified endowment contract).  Under IRS guidelines, the policy then becomes income taxable.   If the policy is surrendered and the policy is cashed out, then the growth in the cash value would be subject to taxation.  The correct way to access  the money is through withdrawals up to the cost basis and then preferred policy loans.

The premiums are typically are not deductible, except in some business applications.

One effective tool to help protect your net worth is a survivorship life insurance policy.  Without proper estate planning, a chunk of your money could go to the IRS at your death. While estate taxes may be inevitable, there are ways to conserve — or at least replace — a portion of your estate.

Survivorship Life is a great policy to have if you have significant net worth as estate taxes can be as high as 55%.    Survivorship / “Second to Die” policy’s cover you and your spouse’s lives and it is paid out on the second death.   It serves as a great estate planning tool as it can be purchased by an irrevocable trust, with your heirs as the beneficiary and the insurance proceeds are kept out of the estate for tax purposes.    The death benefit can replace a portion or all of the estate that was eaten up by paying Uncle Sam.   Survivorship life has other benefits too as it is generally less expensive than individual polies as two lives are insured.  It also has more lenient underwriting generally as two lives are insured.  It is not uncommon for a client to be denied coverage individually and then be able to qualify with their spouse for a “Second To Die” policy.

The estate tax future is up in the air and may have a shake up with this new administration.    Currently,  the exemption for 2009 is 3.5 million and the estate tax rate is 45%.  In 2010, the estate tax goes away for the year and it is unclear where it goes from there.  According to the Economic Growth and Tax Relief Reconciliation Act of 2001, in 2011 a single person will have an exemption of 1 million dollars and the amount above that will be estate taxed at a rate between 41%-55%.   Something to consider as well is if you have state death or inheritance taxes in your state.  Also, your heirs may need to pay capital gains taxes when selling inherited assets.    Talk to your advisor about your estate plan and see if survivorship life may be right for you.