Q: What happens to the estate tax exemption in 2026?

A: Under the Omnibus Budget and Border Reconciliation Act (OBBRA) of 2026, the federal estate tax exemption is scheduled to be approximately $15 million per individual (indexed for inflation), down from $13.99 million in 2025. For married couples, this means a combined exemption of around $30 million. However, this is still significantly higher than the pre-2018 levels of approximately $5.5 million per person.

The key concern is that estates valued between $15 million and $27.98 million (the current married couple exemption) may face estate taxes starting in 2026 if no planning is done. Additionally, there's always the possibility of further legislative changes that could reduce exemptions even more.

Q: How do I know if I need life insurance for estate tax planning?

A: Consider life insurance for estate tax planning if:

• Your estate value exceeds or is close to the exemption amount ($15M individual, $30M married in 2026)
• You have illiquid assets (business, real estate) that would need to be sold to pay estate taxes
• You want to preserve your estate intact for heirs
• You have a taxable estate and want to provide liquidity for estate settlement costs
• You're concerned about future exemption reductions

A comprehensive estate analysis can help determine your specific needs and whether life insurance is an appropriate solution.

Q: Do I need to worry about state estate taxes in Ohio, South Carolina, South Dakota, Virginia, Tennessee, or Indiana?

A: Good news—none of these six states currently impose state estate or inheritance taxes. This means you only need to plan for federal estate taxes. However, if you own property in other states or plan to relocate, you should review the estate tax laws in those jurisdictions.

Q: What is an ILIT and why do I need one?

A: An Irrevocable Life Insurance Trust (ILIT) is a trust that owns a life insurance policy on your life. The primary benefits are:

• Estate Tax Exclusion: Death benefits are excluded from your taxable estate
• Asset Protection: Trust assets are protected from creditors
• Control: You determine how and when beneficiaries receive proceeds
• Gifting Strategy: Allows use of annual gift tax exclusions to fund premiums

Without an ILIT, life insurance death benefits are included in your taxable estate, potentially triggering estate taxes on the very funds meant to pay those taxes.

Q: Can I be the trustee of my own ILIT?

A: No. To keep the life insurance death benefit out of your taxable estate, you cannot serve as trustee or retain any "incidents of ownership" in the policy. The trustee must be an independent party—typically an adult child, trusted advisor, or professional trustee. Your spouse also should not serve as trustee if they are a beneficiary.

Q: What are Crummey letters and why are they important?

A: Crummey letters (named after the Crummey v. Commissioner court case) notify beneficiaries of their temporary right to withdraw gifts made to the trust. This withdrawal right converts the gift into a "present interest," which qualifies for the annual gift tax exclusion.

Without proper Crummey notices:

• Gifts may not qualify for annual exclusion
• You may need to use lifetime exemption or pay gift tax
• IRS may challenge the trust structure

The trustee must send these letters within 3 days of each gift and maintain detailed records.

Q: What is the three-year lookback rule?

A: Under IRC §2035, if you transfer an existing life insurance policy to an ILIT and die within three years of the transfer, the death benefit is "pulled back" into your taxable estate. To avoid this:

• Best approach: Have the ILIT purchase a new policy directly (no lookback period applies)
• Alternative: Transfer existing policy but survive three years from the transfer date

This is why it's critical to start ILIT planning early, especially if you have health concerns.

Q: Can I change my ILIT after it's established?

A: ILITs are irrevocable, meaning you generally cannot change the trust terms or reclaim the assets. However, some flexibility can be built in:

• Trustee can have discretion over distributions
• Trust can include provisions for changing circumstances
• You can stop making gifts (though policy may lapse)
• Beneficiaries can sometimes modify trust under state law

This is why working with an experienced estate planning attorney is crucial—they can build in appropriate flexibility while maintaining the trust's tax benefits.

Q: Why is December 31 such an important deadline?

A: December 31 is critical for several reasons:

• Annual Gift Tax Exclusions: The $19,000 per-beneficiary exclusion is annual and doesn't carry over
• Tax Deductions: Charitable contributions and premium payments must be made by year-end for 2025 tax benefits
• 1035 Exchanges: Must be completed by December 31 for 2025 tax treatment
• Estate Valuation: Year-end estate value determines potential tax liability

Missing these deadlines means waiting another full year to implement these strategies.

Q: How long does it take to get life insurance approved?

A: The timeline varies based on several factors:

• Simple cases: 2-4 weeks (good health, straightforward application)
• Average cases: 4-6 weeks (standard underwriting, medical records review)
• Complex cases: 6-12 weeks (health issues, large amounts, additional testing)

This is why starting by mid-November is crucial—it allows time for underwriting, medical exams, and any unexpected delays while still meeting the year-end deadline.

Q: What if I can't complete everything by December 31?

A: If you can't complete all strategies by year-end:

• Prioritize: Focus on time-sensitive items (annual exclusion gifts, charitable deductions)
• Partial implementation: Complete what you can in 2025, finish remainder in 2026
• Document intent: Show good faith effort to complete by year-end
• Plan for 2026: Use the extra time to implement strategies properly

However, some benefits (like 2025 annual exclusions) cannot be recovered if missed.

Q: Should I wait until 2026 to see what happens with estate tax laws?

A: Waiting has significant risks:

• Lost opportunities: You forfeit 2025 annual gift tax exclusions ($19,000 per beneficiary)
• Health changes: You may become uninsurable or face higher premiums
• Market changes: Insurance costs may increase
• Legislative risk: Laws could change unfavorably

The strategies outlined in this article work regardless of future law changes. Acting now provides protection and flexibility for whatever comes next.

Q: Should I buy term or permanent life insurance for estate planning?

A: For estate tax planning, permanent life insurance is typically preferred because:

• Estate tax liability is permanent (doesn't expire)
• Guaranteed coverage for life
• Predictable premiums
• Cash value accumulation

However, term insurance may be appropriate for:

• Temporary needs (until business is sold, children are independent)
• Budget constraints (term is less expensive initially)
• Supplementing existing permanent coverage

Many families use a combination: permanent insurance for core estate tax needs, term insurance for additional temporary protection.

Q: What is a second-to-die policy and when should I consider one?

A: A second-to-die (survivorship) policy insures two lives (typically spouses) and pays the death benefit when the second person dies. Benefits include:

• Lower premiums: 30-50% less than two individual policies
• Easier underwriting: Based on combined life expectancy
• Estate tax timing: Pays when estate taxes are actually due (at second death)
• Unlimited marital deduction: No estate tax at first death anyway

Consider second-to-die if:

• Primary concern is estate tax at second death
• One spouse has health issues (joint underwriting may help)
• Want to maximize coverage while minimizing premium

However, individual policies may be better if you need coverage at first death for income replacement or debt payoff.

Q: How much life insurance do I need for estate tax planning?

A: A general guideline is to purchase coverage equal to your projected estate tax liability plus settlement costs. Here's how to calculate:

1. Estimate estate value: Total all assets (real estate, investments, business, retirement accounts, existing life insurance)
2. Subtract exemption: Deduct applicable exemption ($15M individual, $30M married in 2026)
3. Calculate tax: Multiply excess by 40% estate tax rate
4. Add costs: Include estate settlement costs (typically 3-5% of estate value)

Example: $35M estate - $30M exemption = $5M taxable × 40% = $2M tax + $500K costs = $2.5M coverage needed

Q: What is a 1035 exchange and when should I consider one?

A: A Section 1035 exchange allows you to replace an existing life insurance policy with a new one without triggering immediate tax consequences. Consider a 1035 exchange if:

• Your current policy is underperforming
• You have an old policy with outdated features or high costs
• You want to restructure coverage for estate planning
• You need guaranteed coverage but have a lapsing universal life policy

Important considerations:

• New contestability period begins (2 years)
• Surrender charges may apply on old policy
• Must be completed by December 31 for 2025 tax treatment
• Requires careful analysis to ensure benefit outweighs costs

Q: Can I get a tax deduction for naming a charity as my life insurance beneficiary?

A: No immediate deduction. If you simply name a charity as beneficiary while retaining ownership, you don't receive a current income tax deduction. However:

• The death benefit is removed from your taxable estate
• Your estate receives a charitable deduction at death
• You maintain flexibility to change beneficiaries if needed

For an immediate tax deduction, you must transfer ownership of the policy to the charity (irrevocable gift).

Q: What is a Charitable Remainder Trust and how does it work with life insurance?

A: A Charitable Remainder Trust (CRT) is a split-interest trust that pays you income for life or a term of years, then distributes the remainder to charity. The life insurance "wealth replacement" strategy works like this:

1. Transfer appreciated assets to CRT (avoid capital gains tax)
2. CRT sells assets and reinvests (no tax on sale)
3. CRT pays you income for life
4. Use portion of income to fund life insurance in ILIT
5. Life insurance replaces asset value for heirs
6. Charity receives CRT remainder at your death

Benefits: Immediate charitable deduction, lifetime income, avoided capital gains, wealth replacement for heirs, and significant charitable gift.

Q: Do I need an attorney to establish an ILIT?

A: Yes, absolutely. An ILIT is a complex legal document that must be properly drafted to achieve your goals and comply with tax laws. An experienced estate planning attorney will:

• Draft the trust document with appropriate provisions
• Ensure compliance with federal and state laws
• Coordinate with your overall estate plan
• Provide guidance on trustee selection
• Prepare Crummey letter templates

While this involves upfront costs (typically $2,500-$5,000), it's essential for proper implementation and can save your family millions in estate taxes.

Q: How do I choose the right insurance advisor for estate planning?

A: Look for an advisor with:

• Experience: Specialization in high-net-worth estate planning
• Credentials: Professional designations (CLU, ChFC, CFP)
• Knowledge: Understanding of estate tax laws and trust structures
• Relationships: Network of estate planning attorneys and CPAs
• Carrier access: Ability to quote multiple highly-rated insurance companies
• Approach: Comprehensive planning, not just product sales

The right advisor will coordinate with your attorney and CPA to ensure all strategies work together seamlessly.

Q: What should I bring to my initial consultation?

A: To make the most of your consultation, bring:

• Existing life insurance policies and in-force illustrations
• Current estate planning documents (wills, trusts, powers of attorney)
• List of assets and approximate values
• Business valuation (if applicable)
• Recent tax returns
• List of beneficiaries and their ages
• Questions and concerns about your estate plan

Don't worry if you don't have everything—your advisor can help you gather necessary information.

Q: I live in Ohio but own property in multiple states. How does this affect my estate planning?

A: Multi-state property ownership can complicate estate planning:

• Probate: May require probate in each state where you own real property
• State estate taxes: Some states tax property located within their borders
• Trust planning: Revocable living trust can help avoid multi-state probate
• Life insurance: Death benefits can provide liquidity for multi-state settlement

If you own property in states with estate taxes (like New York, Massachusetts, or Oregon), additional planning may be needed.

Q: Does Crocker Financial serve clients in all six states?

A: Yes, we are licensed and actively serve clients in Ohio, South Carolina, South Dakota, Virginia, Tennessee, and Indiana. We understand the specific estate planning considerations and insurance regulations in each state and can provide comprehensive service regardless of which state you call home.