Life insurance can be a great tool to ensure that your loved ones are cared for after you are gone.
But, Uncle Sam often becomes the recipient of as much as half of the life insurance proceeds. How can you make sure your life insurance benefits go to your family after your death and not Uncle Sam?
This is important because the Federal Estate Tax rate is 45 percent. Your life insurance will be included in your taxable estate if either your estate is the beneficiary of the insurance proceeds or you possessed certain economic incidents of ownership in the policy at your death, or within three years of your death, often referred to as the look-back rule.
Avoiding the first situation is easy; just make sure your estate is not the beneficiary of the policy. The second rule is more complicated.
Clearly, if you own the policy, it is included in your estate regardless of who the beneficiary is. But simply having someone else possess legal title to the policy will not keep it out of your estate if you keep what the IRS calls incidents of ownership in the policy.
Incidents of ownership are the right to change the beneficiaries, assign the policy or revoke an assignment, pledge the policy as security for a loan, surrender or cancel the policy or borrow against the policy's cash surrender value
Keep in mind that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise the power. Keeping all of the insurance for the family can be accomplished through various strategies, such as a buy-sell agreement or a life insurance trust. These are complicated, technical tools that require a competent planning team, you, your advisor and an estate planning attorney.
For more information, call (760) 918-5811 or visit www.geigerlawoffice.net.
Disclaimer: The information provided in this article is intended for educational purposes only and does not constitute legal advice.
But, Uncle Sam often becomes the recipient of as much as half of the life insurance proceeds. How can you make sure your life insurance benefits go to your family after your death and not Uncle Sam?
This is important because the Federal Estate Tax rate is 45 percent. Your life insurance will be included in your taxable estate if either your estate is the beneficiary of the insurance proceeds or you possessed certain economic incidents of ownership in the policy at your death, or within three years of your death, often referred to as the look-back rule.
Avoiding the first situation is easy; just make sure your estate is not the beneficiary of the policy. The second rule is more complicated.
Clearly, if you own the policy, it is included in your estate regardless of who the beneficiary is. But simply having someone else possess legal title to the policy will not keep it out of your estate if you keep what the IRS calls incidents of ownership in the policy.
Incidents of ownership are the right to change the beneficiaries, assign the policy or revoke an assignment, pledge the policy as security for a loan, surrender or cancel the policy or borrow against the policy's cash surrender value
Keep in mind that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise the power. Keeping all of the insurance for the family can be accomplished through various strategies, such as a buy-sell agreement or a life insurance trust. These are complicated, technical tools that require a competent planning team, you, your advisor and an estate planning attorney.
For more information, call (760) 918-5811 or visit www.geigerlawoffice.net.
Disclaimer: The information provided in this article is intended for educational purposes only and does not constitute legal advice.