Estate
Tax Reduction & Planning Strategies
Note: in estate planning one should never overlook a little known
body of tax law dealing with
Income In Respect of Descedant, or IRD. Please click here
to get the basics of this important law.
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This
2009 Estate Tax Strategy Accomplishes:
-
Getting
large lump sum amounts of money out of an Estate with no gift or estate tax
-
Indemnifying
heirs from the costs of long term care confinement & services
-
Passing
a tax free gift onto a grandchild without a generation skipping penalty or
tax
The
Strategy:
Remember,
estate tax reduction strategies may use funding vehicles that the
"donor" may otherwise not like or has rarely considered (i.e. like an
insurance or investment product); however, one must keep their "eye on the
ball" with the end game achieving the desired income or gift tax
avoidance or reduction.
In
this Strategy the donor purchases a single-pay, Tax Qualified, Long Term Care
Insurance policy, with a full non-forfeiture benefit on their child or children
(one that guarantees 100% return of premiums regardless of claims and also
typically doubles the normal premium or funding amount),
making their grandchild(ren) the beneficiary(ies) of the non-forfeiture benefit. All of this allows them to get substantial dollars out of their
estate, take care of their child's long term care needs and liabilities, and
pass 100% of single-pay premiums onto a grandchild(ren) without any tax exposure!
While
it is true that the grandchild receives no technical gain on the proceeds (i.e.
interest or investment earnings), remember, that his father & his parents family did
receive the valuable insurance & liability protection, as well as possibly
the full benefits from the Long Term Care Insurance policy itself (further
protected by a compound inflation adjusted benefit), while, in the end, the
grandchild receives back 100% of the original funds.
Taxing
Authority:
The
basis of this approach is contained in IRC 213(d) - that part of the Internal
Revenue Code that describes tax deductible health care expenses. HIPAA
(the Health Insurance Portability and Accountability Act effective 1/1/1997,
codified as IRC Section 7702B regarding Long Term Care Insurance) legislation added Tax
Qualified Long-Term Care Insurance premiums to this deductibility section of the
Code, and IRC 2503(e) states that the payment of such 213(d) expenses (medical
care expenses), for
others, is also EXEMPT from gift taxes (i.e. not a
"gift" - an unlimited gift tax exclusion). Note: the
amount that you may exclude from taxable gifts appears to be limited by the
annual limitation amount (see IRC 213(d)(10)), although as of this writing,
there appears to be no case law or ruling by the IRS affirming such a limit
(4/03).
The
Code is not yet clear on what the ultimate tax outcome would be for the
grandchild who ultimately, through the non-forfeiture benefits, receives 100% of
the original premiums funded by the grandparent, but, on the face of it, it
looks quite unfettered as of this writing and we believe represents a highly
credible estate tax reduction strategy [IRC Section 7702(b) (2) (C) - i.e.
proceeds received due to death -Vs- being due to a complete surrender or
cancellation that this section otherwise determines would be taxable to the
extent of any deduction or exclusion on the insurance premiums].
Disclaimer: The material discussed
herein
is meant for general illustration or informational purposes only and is
not to be construed as investment advice. Although the information has been gathered from sources believed to
be reliable, it is not guaranteed. Please note that individual situations
can vary; therefore, the information contained herein should be relied upon only when
coordinated with individual professional advice. We are not licensed for
and therefore do not provide tax or legal advice.
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