Life Insurance Lowers Delaware Estate Tax, Enables Business Continuity
While Delaware isn’t entirely estate tax free, it is modest in comparison to other states that have an estate tax. Its exemption is the same as the federal one, meaning that only the most valuable estates will be affected.
Most people who pay estate tax in Delaware do so as the result of a business because it’s very common for corporations and limited liability companies to use Delaware as a tax-friendly home base. That tax friendliness could cause problems come estate tax time.
One thing you should note about Delaware’s estate tax is that it applies to anyone who owns tangible assets in the state. That means that if you have a business that calls Delaware home, and that business has tangible assets in the state, your ownership interest in the business could put you in a position in which you’ll have to pay estate tax. If that’s the case, you’re going to have to do some advance estate planning if you want to pass that interest to family members or other business partners.
Your Taxable Estate in Delaware
Currently, Delaware allows you to exempt $5.45 million of your estate from taxes, which is the same as the federal exemption. Your estate is calculated based on the value of the following:
- Bank accounts
- Investment accounts
- Certificates of deposit
- Retirement account funds
- Real estate
- Stocks and bonds
- Personal property, such as vehicles
- Proceeds of life insurance policies on your life (doesn’t apply if you don’t own the policy)
- Business interests, such as sole proprietorships, limited liability companies, or small corporations
- The value of your life insurance policy, unless ownership has been transferred to someone else
Delaware’s estate tax can range from 0.8% all the way to 16% depending on the value of your estate. Delaware residents and non-residents who own anything tangible in the state will need to have some sort of estate plan in place, especially in the case of business continuity. For business continuity plans in Delaware, one popular choice is a cross-purchase of life insurance.
Cross-Purchasing Life Insurance as a Strategy
In a cross-purchase, business owners buy life insurance policies on each other. So, for example, if Tom and Diane own a business equally, Tom will buy a policy on Diane’s life equal to her ownership value, and Diane will do the same for Tom. If Diane dies, then Tom will have the funds needed to purchase her portion of the business and vice versa. The cross-purchases allow business to continue while eliminating some of the risk of estate taxes. This works for several reasons:
- The policy is not owned by you, meaning it’s not included in your taxable estate.
- It allows business interest to pass on seamlessly by creating a pool of funding for purchasing it.
- This also works with stock buy-sell agreements because the value of the policy is able to keep up with increases in stock value.
- It can also be done through the use of a trust in the event that you want to pass business interests on to heirs.
At Howard Kaye, we use life insurance as a means of managing business continuity and estate planning for Delaware residents, as well as those who own assets in the state. In our decades of experience, we’ve run into many situations in which clients needed to use life insurance as a business continuity plan.
We’ve even managed to discount estate tax by as much as 90% for some of our clients. This allows their heirs and business partners to continue their life’s work even after they’re gone without having to pay high estate taxes. Contact us by calling 800-DIE-RICH for more information on managing your estate tax burden in Delaware.