MPITM Plans are phenomenal at creating wealth. Unfortunately, if your assets exceed the Federal Estate Tax exemption amount, your estate will be assessed an estate tax. In other words, the fair market value of your home, cash, securities, retirement plans, vehicles, business interests, real estate, personal property, everything you own – including your MPITM Plan – will be included in your federal taxable estate.
The Federal Estate tax rate is currently 40%. (It was 55% in 2001. Some states also charge an estate and inheritance tax too. Maryland, the highest, currently has a 16% estate tax rate.) In 2023, the Federal Estate Tax exemption is $12.92 million per person or a combined $25.84 million for married couples. This means that currently a single person’s estate will be taxed at the Federal Estate tax rate of 40% on everything exceeding $12.92 million. ($25.84million per couple.) However, the Federal Estate Tax exemption amount can vary.
The current rate is schedule to drop to $5 million, adjusted for inflation, per person in 2026. President Biden proposed lowering the federal estate tax amount to $3.5 million per person and raise the tax rate to 45%. (It is also important to know that currently gift tax exemption is the same as the Federal Estate Tax exemption. However, President Biden proposed lowing the gift tax exemption amount to $1 million. This is important because if you already own a MPITM Plan and gift it into a MPI ILIT Legacy Trust, you are using up part of this $1 million gift exemption rather than the current $12.92 million gift exemption amount.)
In 2001, the Federal Estate Tax exemption amount was $675,000 and was only $1.5 million as recently as 2005. MPITM Plan owners seeking to reduce their federal estate tax to the greatest extent possible have their MPITM Plans owned by a MPI ILIT Legacy Trust at the outset. Such a strategy not only removes the initial investment out of their taxable federal estate, but also all future investments and MPITM Plan’s growth. The result can mean millions saved in federal estate taxes. If you already own a MPITM Plan, it is not too late. You can gift the MPITM Plan into a MPI ILIT Legacy Trust to begin enjoying the benefits as soon as possible. The longer you wait, the more of the Federal gift tax exemption you will consume because the value of your MPITM Plan will only continue to grow.
Mr. Skabelund typically charges $5,000 for an ILIT (an irrevocable life insurance trust). MPITM Plan owners pay $3,500 and this price includes an ILIT Legacy Trust for both spouses. (Each spouse owning a MPI Plan will need an ILIT Legacy Trust.)
However, be aware that there are some constraints with an ILIT that may not make it a viable option for all MPITM Plan owners. Further, the MPI ILIT Legacy Trust is irrevocable, meaning it typically cannot be changed later. Therefore, during your consultation with Mr. Skabelund, he will help ensure that a MPI ILIT Legacy Trust is right for you.
* Nothing herein should be considered tax advice. You should seek independent tax counsel regarding your own taxable estate and situation.