Will my life insurance be taxed?

November 5, 2013 - Posted by: admin - In category:

taxes - No Responses

Life insurance is a very important part of any estate plan.  There are a variety of different life insurance options available in the market place today and these options can be custom tailored for every possible scenario and need.  How is life insurance taxed, if at all?  Great question, glad you asked.  See below.

Life insurance can provide cash to the trustee or executor to pay off debts and final expenses, it can be the source of  funds to pay off a mortgage or provide for college, or to replace an income for a surviving spouse and children.  Sometimes life insurance is used to fund a buyout agreement, upon the untimely death of a partner, or in larger estates, to provide the liquidity needed settle up any estate tax liability without having to sell off any of estate’s assets.

When it comes to the subject of taxes, it is important to remember that with estate planning, we are often talking about two different kinds of taxes: income taxes and estate taxes. The very good news is that life insurance is normally income-tax free to the beneficiary. (There are a few exceptions, particularly if the policy is used in business partnerships).

The key to remember is that while life insurance in most instances is income-tax free, it is still taxed under the federal estate tax rules, because the federal estate tax is a tax on the transfer of property. This transfer tax is assessed on the assets you leave to the next generation. Because of this, the proceeds of all the life insurance that you own or control is included in your taxable estate for purposes of calculating your estate taxes, even if the proceeds did not come into your estate.

There are, however, estate planning tools that can address the issue, such as an ILIT, an Irrevocable Life Insurance Trust, that may be used if an estate is facing a tax burden. Work with an estate planning attorney to determine the best tools to meet your specific needs, whether it is determining the role of life insurance in your estate, drafting a will or creating a trust.

At Pharos Law Group, we specialize in legacy and estate planning. That’s all we do.

We are a member of the American Academy of Estate Planning Attorneys** and the National Academy of Elder Law Attorneys.

Please contact us to schedule a FREE consultation. We have offices in Logan, Clearfield and Salt Lake City, Utah.

**Consumer Reports Money Adviser (January 2009) has recommended the American Academy of Estate Planning Attorneys to consumers looking for qualified attorneys. This comes in addition to several recent recommendations by Forbes Magazine, Money Magazine and Suze Orman in her book, 9 Steps to Financial Freedom. For more information about our office and the Academy visit our website at www.utahlivingtrust.com.

Leave a Reply