Let's start with some new tax laws Congress is likely to pass before 2009 ends. First the good news. The 2009 law exempts your first $3.5 million of net worth from the estate tax (double for married folks) with the top rate at 45%. The rate for 2010 is zero (no tax, even if you are worth a zillion dollars), and then starting in 2011 a puny $1 million exemption ($2 million if married) and a top rate of 55%. Crazy law!
Two happy new versions are pending in Congress to replace the current estate tax law: 1) The budget outline passed by the House keeps the $3.5 million 2009 exemption and 45% top rate. 2) Even better is the Senate's budget outline that raises the exemption to a delightful $5 million and—drum roll please—lowers the top rate to 35%. Applause!
Place your bets. I bet the farm that we wind up with at least the House version. A compromise of more than $3.5 million could happen as well.
More good stuff: The gift tax exemption, currently at $1 million, will probably soar to $3.5 million. Yeah!
Here's the bad news: 1) Goodbye to a our old friend LIFO. 2) The Washington heads are seriously talking about eliminating long-standing discount rules (typically in the 35–40% range) when valuing a closely held business for tax purposes. A terrible and costly tax change!
My advice: If you intend to transfer your business to your kids, DON'T WAIT. Take action now. Make your transfer to your kids before the new discount rules become law.
And here's another "How to make it" idea: If you need a large amount of life insurance, or just want an investment that creates tax-free wealth, premium financing is at the head of the class.
Life insurance is required for many purposes—to pay estate taxes, provide for your family and pay debts. And if you know how to do it, life insurance is the best tax-advantaged investment I know. It never loses (death is guaranteed) and your profit (policy proceeds, less premiums paid) is tax-free (no income tax, no estate tax).
One problem with life insurance: The blasted stuff costs money for premiums. Is there some way to have your cake (a large amount of life insurance coverage) and eat it too (no or minimal out-of-pocket costs for premiums)? Because of the current credit crunch, premium financing for life insurance has been on a long vacation. But lenders are getting back into the premium financing game.
How does premium financing work? Instead of you paying premiums, the lender pays your premiums (creating a loan). Loan interest can be paid or capitalized and added to the loan. When you go to heaven, the loan is paid back out of the insurance proceeds, while your heirs get the balance of the insurance coverage tax-free.
Result: Your family is enriched at your death, while your cost during life is minuscule.blog comments powered by Disqus