Estate Tax Planning

Request Assistance »In Ohio, a small percentage of estates are subject to federal estate taxes.  However, a large number of estates will meet the criteria for the state estate tax.  Federal and/or state taxes can be difficult for the beneficiaries to manage in the absence of long term planning.

The following will discuss the state and federal tax codes and the steps you can take to reduce your tax liability.  Please contact us to learn more about these valuable estate planning strategies.

Understanding The Ohio Estate Tax

Estate TaxThe Ohio inheritance tax is set to phase out January 1, 2013, but until it does, many estates will be subject to this tax.  This means that any resident of Ohio who passes away before January 1 will be subject to the Ohio estate tax.

The state of Ohio estate tax works much like the federal code.

It uses a sliding scale to calculate liability.  A larger estate owes a larger amount once the owner(s) has passed away.

If the taxable estate is: The tax shall be:
Between $338,333 and $500,000 3,900 plus 6% of the excess over $338,333
Over $500,000 $23,600 plus 7% of the excess over $500,000

Countable Assets For Tax Purposes

Estates in Ohio with countable assets over $338,333 are subject to this tax.   Assets can include real estate, savings and investment accounts, trust assets, business interests, tangible personal property and life insurance proceeds payable to the estate.

In many cases, an estate consisting of mostly real property, such as farmland, may have a difficult time generating the necessary funds to settle tax liabilities.  Oftentimes families must sell acreage in order to create liquidity to settle an estate.  On the other hand, estates with more liquidity will have to cash in certificates of deposit, annuity and brokerage accounts to cover inheritance tax debts.

Avoid State Inheritance Taxes With Life Insurance

The Ohio tax code does provide some relief.  Not all assets are considered countable when determining an estate’s value.  One asset not included in an estate’s net worth is life insurance made payable to beneficiaries.  For tax purposes, this makes life insurance more advantageous than an annuity, certificate of deposit, brokerage account and real estate.

As long as the life policy is not paid directly to your estate, it is not counted for estate tax purposes in Ohio.  Additionally, life insurance proceeds are also income tax free to your beneficiaries.  When setup properly, life policies are not subject to inheritance or income taxes in Ohio.

Single premium life policies can be valuable assets not only to avoid taxes, but also to transfer wealth.  Consider that a reasonably healthy 60 year could multiply his or her premium two fold or more with a life policy.

What was once a $50,000 dollar c.d. or annuity account, can now be a life policy with a $100,000 tax free death benefit to a chosen beneficiary.  Additionally, certain policies provide benefits to the insured for long term care expenses.  You can learn more about the advantages of single premium life insurance here.

Federal Estate Tax Exemption Rates Chart

Calendar Year Federal Gift Tax Exemption Federal Estate & GST Tax Exemption Highest Federal Estate & GST Tax Rates
2006 $1,000,000 $2,000,000 46%
2007 $1,000,000 $2,000,000 45%
2008 $1,000,000 $2,000,000 45%
2009 $1,000,000 $3,500,000 45%
2010 $1,000,000 Unlimited NA
2011 $1,000,000 $5,000,000 35%
2012 $1,000,000 $5,120,000 35%
2013 $1,000,000 $1,000,000 55%

Reducing An Estate Through Gifting

In order to reduce these burdens, Ohio residents can gift a portion of their estates away during their lifetime.  The IRS allows for a $13,000 ($26,000 for married couples) gift each year to any number of people.

Recipients can include children, a child’s spouse, grandchildren and even friends.  For the year 2011 and 2012, an estate can gift up to a lifetime limit of 5 million dollars before a “gift tax” will be incurred.  This is the same as the Federal Estate Tax limit, but is subject to change without congressional intervention at the end of 2012.

Avoid Federal Estate Taxes With Life Insurance

Much like planning for the Ohio tax, many large estates offset tax liabilities using life insurance policies.  Life insurance proceeds can be leveraged to create the needed payment to the estate’s beneficiaries.

As long as the decedent does not own the life insurance policy and the policy is not made payable to the estate, the IRS does not count those funds toward the gross estate.  Unlike the Ohio estate tax where only the beneficiary designation of the life insurance policy is most important, ownership and beneficiary designation matters most when calculating federal estate taxes.

There are several techniques that will keep life insurance from being taxed by the federal government.  Ownership of the policy is the key issue. When purchasing a life policy an individual can appoint his or her children as the owners.  (If the policy was purchased in the past, the owner may assign the policy to a child.)

Alternatively, residents of Ohio with larger estates might gift the maximum $12,000 dollars to their children each year and in turn have the child use those funds to pay for a life insurance policy.  While all of these methods will reduce the size of the owner’s estate and provide a system to pay for inheritance taxes, they can be difficult to implement without proper guidance.  Reassigning ownership and implementing the maximum gift allowance to purchase a life policy can trigger unwanted taxable consequences.

Using An Irrevocable Life Insurance Trust

Yet another method used to avoid direct ownership of a life insurance policy is the creation of an irrevocable life insurance trust, or ILIT.  In this case, the trust is assigned a new tax identification number, rather than the owner’s social security number, and the trust owns the life insurance policy outside of the estate.  An adult child might be appointed trustee of the irrevocable life insurance trust and assist in funding the policy’s premium each year.

At the passing of the insured, the proceeds can be used by the estate’s beneficiaries to help offset any tax liabilities.  Although this option requires the services of an estate planning attorney, it can be more favorable due to the binding nature of a trust document.

Contact Us For Information And Assistance

In summary, federal estate and the state Ohio estate taxes will be a significant outlay for many Ohio residents.  Larger estates will face sizable tax burdens from the state of Ohio, the IRS or both at settlement.

Consumers should consult a qualified estate planning attorney, an experienced accountant and a knowledgeable insurance agent to discuss the options available to them.  With a proper estate plan in place, tax liabilities can be accounted for making the settlement process less difficult for those involved.

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