With the national debt continuing to climb, the government needs to generate more income. Lowering the estate tax threshold and expanding the death tax is a likely route they could take.
Two sites that highlight the dire state of our debts as a country are
U.S. Debt Clock - https://www.usdebtclock.org/
The site shares current information and information for four years from now and then finally eight years into the future. We are currently almost $35 trillion in debt as a country. The debt clock predicts that we will be almost $64 trillion in debt by 2032. Ask yourself what the interest on that amount of money will be in the future. The unfunded liability for Social Security by 2028 is $35 trillion and by 2032 it is forecast to be $45 trillion. The unfunded liability for Medicare by 2028 is $54 trillion and by 2032 it is forecast to be almost $72 trillion. The total of all unfunded liabilities by 2032 is predicted to be almost $400 trillion. Isn’t that money that we do not have? What do you think will happen if you do not plan?
2. Truth in Accounting - https://www.truthinaccounting.org/
This website shows the financial conditions of our government, all 50 states and the 75 largest cities in America. It is not pretty. Our federal government has tremendous unfunded liabilities. Forty of the 50 states are broke and 63 of the 75 largest cities in our country are in serious debt with substantial unfunded liabilities. Why is it important to know about the cities and states? Isn’t it because they can’t print money? Then isn’t their only recourse to raise income taxes, property taxes, sales taxes and user fees which is another term for taxes? Oh, isn’t there one more alternative? Can’t they ask the federal government for a bailout? Where will the Federal Government get the money for a bailout? Won’t it be higher taxes and printing more money which is a stealth tax?
The death tax must be paid within 9 months of the date of death, so oftentimes, heirs are forced to panic sell assets belonging to the deceased in a fire sale to pay the tax. Keep in mind, we're just talking federal estate taxes for the purposes of this post. Many states have their own state estate taxes that would be levied in addition to the federal death tax.
So, in this environment, it would be wise to assume you will have an estate tax problem and address it rather than pretend it will go away. There are exactly three ways to address your estate tax problem.
1. Give your assets away. There are many gifting strategies to move assets out of your taxable estate and into the hands of outside parties, family, friends, a favorite university, charities, and foundations, for example.
2. Spend it. You've got money to burn, so get to burning it. Buying cars, cruises, and other depreciating and value-wasting items is one way to minimize your estate and reduce any future estate taxes you'll owe.
3. Insure it. Rather than spending money like (crazy or just giving all of your hard-earned assets away, you can utilize a life insurance policy that will pay out enough to take care of that tax bill upon your death. This strategy turns pennies into dollars and lets a life insurance company pay your estate tax bill for you. Many people don't know that life insurance is, by itself, subject to the death tax. That means that if you have a $1 million policy and a taxable estate, your beneficiaries could owe $400,000 from that policy back to the government in estate tax.
So, to take proper and full advantage of this life insurance strategy, the insurance policy must be set up in a way that does not include the policy in your estate. This is where an irrevocable life insurance trust,or ILIT, comes into play. An ILIT sets up a trust outside of your estate that will own, pay for, and be the beneficiary of a life insurance policy on your life.
An ILIT is not simple to set up, and you will need the help of a skilled estate planning professional to execute this strategy. But when executed properly, an ILIT can save your loved ones and heirs millions of dollars in death taxes and ensure that the legacy you've worked so hard to build is passed on in the most efficient, cost-effective manner possible.
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