Transferring Life Insurance To Lower Estate Taxes
Filed Under Afforable Life Insurance, Life Insurance Costs, Life Insurance Premiums, Transfer Life Insurance |
Federal estate taxes will affect your estate if it is worth more than $2 million at the time of your death. One way to lower your beneficiaries’ estate taxes is to transfer the ownership of your insurance policy. This works especially well if you have Afforable Life Insurance.
Owning your own policy adds the amount received to your taxable estate, but any other parties owning an insurance policy on your life will not be taxed. This does not apply to spouses; anything left to a spouse is not taxed, but anything left to children, family members, and other beneficiaries is taxed. You can transfer ownership of the policy, to the beneficiary or any other adult, but keep in mind that with ownership they receive complete control of the policy, even in the case of divorce. This applies even for more much lower priced Life Insurance.
You cannot give away your policy if you are expecting to die shortly because life insurance policies given as a gift are disallowed if three years do not pass before the death of the insured. If you use this option, be sure to transfer the policy completely. If you retain ANY control over the policy, this is considered “incidents of ownership” and will make the insurance benefits a part of your taxable estate.
A gift tax will be taken out of the policy upon your death for any amount over $11,000, based on the policy amount at the time of transfer, but this will cost less than the estate tax. The transferee will be responsible for paying premiums once you name them the owner of your life insurance policy. If the policy is paid in full, they will not have to pay but a gift tax will be taken out upon payment of the policy. If not, you can give them the money to pay; if it is less than $11,000 per year, it will not be taxed. This is another good reason to always look for Cheap Life Insurance policies.
A second method of avoiding estate taxes on a life insurance policy is to hold the policy in an irrevocable life insurance trust. This will eliminate ownership without eliminating control. This way you have the power to rename the beneficiary, and it avoids the possibility that a new policy owner cashes in early, fails to pay, or changes the beneficiary. Be sure that this trust is irrevocable, that you are not the trustee, and that three years pass between the establishment of the trust and your death (if you can). If you are able to revoke the trust, you will be considered owner of the policy, and the same three-year disallowment rule applies as the rule regarding policy transfers.
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Well said.