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Estate Taxes – Will They Affect Me?


The following is an example of the possible estate tax liability under current law for a person dying in 2013:

   Size of Estate  2013  
   $5,250,000  $0  
   $7,000,000  $700,000  
   $10,000,000  $1,900,000  
   $20,000,000  $5,950,000  

The calculations assume the decendent used his/her entire $5,250,000 estate tax exemption amount at death. 

How will you pay the transfer costs?
The federal estate tax is generally nine months after your death. Even using basic estate planning tools, you should be able to reduce your taxable estate. Nevertheless, if you have a large net worth, it is likely that your estate will be subject to the federal estate tax.

Your estate could pay the resulting federal estate tax by doing any of the following:

  1. Using cash 
  2. Borrowing funds
  3. Liquidating assets, or
  4. Life insurance death benefit proceeds
   Method Advantages  Disadvantages   
   Cash Simple Few estates have enough cash and/or liquid assets  
   Borrowing Prevents possible “fire sale” of assets Defers and compounds the liquidity problem since loans must be repaid with interest  
   Liquidating Prevents payments over time with associated costs May be forced to have a “fire sale” of assets

May cause the sale of a closely-held family business

 
  Life insurance held by an irrevocable life insurance trust (ILIT)




Prevents possible “fire sale” of assets

If properly structured and funded, life insurance death benefit proceeds should pass to heirs free from income1 and estate2 taxes

Terms of an ILIT are irrevocable and cannot be changed

Cost of life insurance premiums may incur expenses in establishing and maintaining an ILIT

 


Adding Life Insurance to Your Estate Plan


Pacific Life Insurance Company's single life and second-to-die universal life insurance products may help you provide sufficient liquidity for your estate plans.

Ask your life insurance producer which Pacific Life insurance product will fit for you. To get ideas on how others have used life insurance in their estate plans, visit our Life Insurance and Estate Planning page.

CWS-L-21A


 

1For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)(i.e. the transfer-for-value rule); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).

2According to the American Taxpayer Relieve Act of 2012, the federal estate, gift and generation skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%.

For more information on this subject, and professional guidance in selecting the right kind and amount of insurance coverage, contact your life insurance producer.

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any fixed subaccount crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which this product is purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Variable insurance products are distributed by Pacific Select Distributors, Inc. (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company, and are available through licensed third party broker-dealers.

Pacific Life's Home Office is located in Newport Beach, CA.