Tax matters are something to take into consideration when you are looking ahead toward the inevitable. With this in mind questions often arise about insurance policy proceeds.
When the beneficiary receives insurance proceeds he or she will not be asked to pay Federal income tax when the transfer takes place. However, there is another tax that looms large for many individuals.
If you own insurance policies personally the proceeds are considered to be part of your estate for estate tax purposes.
It is true that there is no estate tax imposed if your spouse was to inherit money from you. But, if he or she was to assume ownership of the insurance policy proceeds they would be part of his or her taxable estate.
One way around this is to have an irrevocable life insurance trust purchase the policies. When the trust holds the policies they are not part of your estate for tax purposes but the beneficiaries can still utilize trust resources.
The reason why it is best to have the trust purchase the policies is because there is a three-year waiting period if you place existing policies that you own into the trust. If you die within three years of taking that action the proceeds are still considered to be part of your estate by the IRS.
If you are proactive about planning ahead intelligently you can take steps to gain estate tax efficiency even if your resources do exceed the exclusion amount. Should you be interested in discussing your unique situation with an expert, take action right now to arrange for an informative consultation with a seasoned and savvy Indianapolis estate planning lawyer.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.