Life Insurance is an investment. Like other investments, its value is included in the total value of an estate when an individual passes away. Where the value of an estate exceeds the available estate tax exemption (see below), the excess amount will be taxed at up to 45%!
Therefore, if an individual has a large life insurance policy, he or she may unwittingly cause a significant tax liability to his or her estate.
In order to avoid having one's estate pay unnecessary estate taxes, an "Irrevocable Life Insurance Trust", commonly known as an "ILIT" (pronounced "eyelet"), should be considered.
An ILIT is an irrevocable trust, which means that once it established, it cannot be undone (revoked). It must be established for the benefit of someone other than the trustor (the person creating it) or the trustor's spouse. Most often, the trustor's children are named as beneficiaries. During the trustor's lifetime, regular contributions may be made to the ILIT. The contributions will be used to pay for the life insurance policy which is owned by the trust. If structured properly, these contributions will be treated as gifts, but will not be subject to Gift Tax. Upon the trustor's death, the ILIT will be paid to the named beneficiaries, but will not be subject to any estate tax!
*The available estate tax exemption in 2009 is $3.5M. However, this exemption is currently scheduled to revert to $1M in 2011.
Wednesday, September 23, 2009
Monday, September 21, 2009
Property Tax Implications of Grandparent-Grandchild Transfers
It is commonly understood in California that, since 1986, property transfers between parents and children have enjoyed an exclusion from property tax reassessments. While there are some limitations, the vast majority of parent-child transfers of real property qualify for this broad exclusion.
While it would be natural to assume that this parent-child transfer exclusion applies equally to transfers between grandparents and grandchildren, the law is actually much more restrictive for such transfers. There is a grandparent-grandchild exclusion from property tax reassessment, but it is subject to the requirement that all parents of the grandchildren who qualify as children of the grandparent(s) be deceased at the time of the transfer; otherwise, the transfer is subject to property tax reassessment.
So, who qualifies as a "child of the grandparent(s)"?
Revenue & Taxation Code Section 63.1 defines a "child" as: 1) a child, 2) a stepchild or spouse of stepchild, 3) a son-in-law or daughter-in-law, 4) an adopted child if adopted before reaching 18 years of age, or 5) a foster child of a state-licensed foster parent.
Let's look at a hypothetical scenario to see how this works. Upon his death, Grandpa Jones wants his residence to pass to his grandson, Jimmy. Jimmy's father, Brian, was Grandpa Jones' son, but he is deceased. His widow, Janice, has not remarried. If Janice is still living and has not remarried at the time of Grandpa Jones's death, the property transfer to Jimmy will be subject to a property tax reassessment because Janice qualifies as a living child of Grandpa Jones. However, if Janice remarries or predeceases Grandpa Jones, the transfer to Jimmy will not be subject to property tax reassessment because after Janice's remarriage she no longer qualifies as a "child" of Grandpa Jones.
There are many potential pitfalls to be avoided when transfering property to a family member. Therefore, if you are considering a parent-child or grandparent-grandchild transfer of real property, it is highly recommended that you seek the advice of a competent attorney prior to the transfer.
While it would be natural to assume that this parent-child transfer exclusion applies equally to transfers between grandparents and grandchildren, the law is actually much more restrictive for such transfers. There is a grandparent-grandchild exclusion from property tax reassessment, but it is subject to the requirement that all parents of the grandchildren who qualify as children of the grandparent(s) be deceased at the time of the transfer; otherwise, the transfer is subject to property tax reassessment.
So, who qualifies as a "child of the grandparent(s)"?
Revenue & Taxation Code Section 63.1 defines a "child" as: 1) a child, 2) a stepchild or spouse of stepchild, 3) a son-in-law or daughter-in-law, 4) an adopted child if adopted before reaching 18 years of age, or 5) a foster child of a state-licensed foster parent.
Let's look at a hypothetical scenario to see how this works. Upon his death, Grandpa Jones wants his residence to pass to his grandson, Jimmy. Jimmy's father, Brian, was Grandpa Jones' son, but he is deceased. His widow, Janice, has not remarried. If Janice is still living and has not remarried at the time of Grandpa Jones's death, the property transfer to Jimmy will be subject to a property tax reassessment because Janice qualifies as a living child of Grandpa Jones. However, if Janice remarries or predeceases Grandpa Jones, the transfer to Jimmy will not be subject to property tax reassessment because after Janice's remarriage she no longer qualifies as a "child" of Grandpa Jones.
There are many potential pitfalls to be avoided when transfering property to a family member. Therefore, if you are considering a parent-child or grandparent-grandchild transfer of real property, it is highly recommended that you seek the advice of a competent attorney prior to the transfer.
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