By the time you read this, Clinton will have vetoed Congress’s move to repeal the estate tax. So what do people do to eliminate the pain of the estate tax? According to the National Association of Manufacturers, here’s how business owners offset the tax:
Let’s take a brief look at these 3 devices and see if you could benefit also.
Life insurance is the most popular option because it’s easiest. Here’s a hypothetical example. Say someone projects a $3 million estate and is facing estate tax of $1 million. They buy a $1 million life policy to pay the tax. Hypothetically, the premium is $20,000 a year. So they pay the premium for 28 years, pass away, and the $1 million from the policy pays the estate tax. The investment for the $1 million of insurance is $360,000 ($20,000 x 18 years).
Trusts are next in popularity. The most powerful trusts are not living trusts, but rather irrevocable trusts. As an example, you could use a residential trust (QPRT) to pass a $1 million house to the next generation without payment of estate tax. These trusts can be used to “compress” the value of an asset so that more of an estate can be transferred without tax.
Charitable trusts and gifts are less popular because most people would rather see their assets go to their family rather than to charities. Yet, these devices are still popular because which would you rather do: Give $1 to charity where it will do some good or pay 50 cents in taxes (by retaining the dollar) where the benefit it creates may be doubtful?
Only 6% of estate tax payers apparently do nothing and just pay the taxes.
It’s not often you get to see how others manage their fund, but if you find that your strategy is different than these figures from business owners, feel free to check off on the coupon to learn more about any one of these options.