Retiring in Ohio? Life Insurance Aids Tax-Efficient Wealth Transfer

Ohio is one of the many states that updated its estate tax laws recently. Current residents no longer have to pay the Ohio estate tax and the state has never levied an inheritance tax. Overall, the state’s tax laws are friendly for retirees, so there’s a lot of ways to lessen your burden for yourself and your heirs.

Not everyone is exempt from Ohio estate taxes, though, because the estate tax repeal wasn’t retroactive. Only those who died after January 1, 2013, with a gross estate greater than $338,333 are exempt. Even if you don’t have to worry about estate taxes, you still need a solid estate plan if you’re a resident of Ohio.

What Retired Residents of Ohio Need to Know

Tax laws for older and more affluent individuals in Ohio have undergone quite a few revisions over the past few years. One of the most recent changes was the complete elimination of estate and pick-up taxes in the state. Estates of individuals who died prior to January 1, 2013, follow the tax levels laid out in the table below.

Taxable Estate Bracket Tax Rate
$338,333 to $500,000 $13,900 plus 6% of amount over $338,333
Over $500,000 $23,600 plus 7% of amount over $500,000

As for retirement income, the state does not tax Social Security benefits and only levies a partial tax against public and private pensions. Retirement funds are taxable as regular income, but residents who have an adjusted gross income of less than $100,000 are eligible for a $200 credit on their taxes.

Of course, the state must make revenue somewhere and in Ohio, they do it with property tax. While Ohio isn’t the highest in the United States, it is higher than the national average, with an average tax assessment of 1.5% of the appraised value annually. When you pass on those properties to heirs, you’re also going to pass on those property taxes. That’s why an irrevocable life insurance trust (ILIT) is still a good idea for Ohio estate planning.

Covering the Ohio Tax Bill with an ILIT

Trusts are useful for more than estate tax shelter. They can also be a way to provide ongoing support to heirs for a specific purpose. One such purpose can be for the creation of a pool of funding to cover ongoing property taxes. Here’s how the ILIT can work for that:

  • It’s set up with life insurance policies, which have a face value that far exceeds their cost.
  • Those policies are held in a trust, which will keep their value outside of your name for estate tax purposes.
  • On your death, the trust will pay beneficiaries tax free according to terms you set.
  • Those payouts are not taxable and can be used to cover the yearly property tax bill for any property beneficiaries inherit.
  • Multiple life insurance policies can be used to cover the increased property value and tax cost as time goes on.

Even if you don’t have to worry about Ohio estate tax, depending on the size of your estate, you may have to worry about federal estate tax, and your heirs may have to pay taxes on the property you pass on to them. Trusts can be a useful way to ensure they have the funds to cover all of those end-of-life expenses.

Howard Kaye advisors use strategic life insurance purchases teamed with trusts to ensure that you can continue providing for heirs while minimizing your tax bill. We work with clients all over the United States and, in some cases, we’ve helped discount their estate tax costs by up to 90%. For more information on our estate planning strategies, contact us at 800-DIE-RICH.