Hello everyone. I am sick and tired of people recommending cash value life insurance as a way to pay estate taxes. Cash value life insurance are ripoffs and have no purpose. I've been in financial services for many years now and if you are worried about estate taxes when you die, then here are some ways to lower or eliminate your estate taxes on your own. I am not an estate planner, but someone who is very knowledgeable about many different financial products. If you want to use an estate planner and pay money, then that's up to you.
You may be able to invest in
your state municipal mutual fund and you won't pay any income taxes at all. Not
all states offer tax-exempt municipal mutual funds. So it is important to check
with your state if municipal bonds are exempt from income taxes. Almost every
investment company offer municipal mutual funds in every state. How they work is
that these mutual funds invest only in muncipal bonds, which is offered by
state, city, or local governments. They are low risk and you can withdraw money
any time. They don't provide high returns, but they do pay monthly dividends or
interest. The only big problem with municipal mutual funds is that they have
high annual operating expenses, which reduces the rate of return on your
investment.
Life insurance can also cover estate taxes if you die. I
highly recommend setting up an Irrevocable Life Insurance Trust (ILIT). You will
need an attorney to help set this up. An ILIT offers the opportunity of escaping
taxes not just in one estate, but in several estates. The ILIT is typically a
trust for the benefit of the spouse and/or children. I suggest getting a level
term insurance policy from Primerica. I don't know your age, but if you are 70
years old or younger, you can get a 10 year to 20 year level term. Primerica
offers the lowest renewal rates on term policies in the entire life insurance
industry (as of 2010). When you are applying for life insurance, make the ILIT the owner and
beneficiary of the policy. You will lose your right to make changes to the
policy (such as getting more coverage or changing beneficiaries). You must make
an annual tax-exempt gift to the ILIT so that the ILIT can pay the premiums
every year. If the premiums become too expensive, you can let the policy lapse
by not putting any money into the ILIT. Don't forget, you can withdraw money from your state municipal mutual fund.
You can rollover a 401k or
Traditional IRA into a Roth IRA. You will owe income taxes upon the conversion.
Money can grow in a Roth IRA forever and you pass it on to your heirs tax free.
If you are currently working, you can contribute up to $5000 (if you are 49 yrs
old or younger) or $6000 (if you are 50 yrs old or older) every year into your
Roth IRA. If you earn less than $5000 or $6000 per year, then you can 100% of
whatever income you earn from your job. For example, if you only earn $4000 for
the year, then you can only put in a maximum $4000, not $5000 or
$6000 (*Please note that your contribution limits into IRA may change in the future. Consult with IRS website and search for Publication 590).
Open a 529 plan. You can make a tax-free gift contribution of up
to $13,000/year (don't forget about the contributions you made to the ILIT if you set that up). You can name anyone as the beneficiary (hopefully you name your
child or grand child as beneficiary). You have full ownership of the plan. If
you have financial hardship, you can take money out, but you will pay a 10%
penalty and income taxes on the earnings.
You should also consider
setting up a Will to make sure who in your family gets what ever belongs to you
from personal belongings, house, cars, to all your assets and investments. I
remember there was one family where 2 sisters fought over silver forks and other
silver ware when their dad died. They went to court over silver forks. Its
ridiculous, but its true. You should get a Will through Prepaid Legal. It cost
about $20/month and the Will is done for free. After you get the Will and setup
the ILIT, its up to you if you want to keep Prepaid Legal.
