Are the proceeds of life insurance policies
owned first by a taxpayer’s wife and then owned by a family trust, includible
in a taxpayer’s gross estate?
The estate tax is currently set at
a generous level, with married couples able to protect up to $10.5 million combined.
So it can be enticing for many taxpayers to sit back and relax without worrying
about crossing that $10.5 million line. However, one should know there is
always a risk when it comes to ignoring your life insurance.
Fact: without proper planning
and structuring, life insurance will become part of the taxation math for your
“gross estate” and you could end up getting hit by a state and/or federal
estate tax.
Those planning their estates and
working to provide for financial security for their family often do so by way
of life insurance. Indeed, the concept of life insurance is precisely to
replace the lost income from the loss of a breadwinner. Of course, those
planning with life insurance should be mindful of a potentially dangerous term
in “legal speak”: “incident of ownership.”
A recent WealthManagement.com article tackles this term head-on with an
article aptly titled “Incidents of Ownership.” The IRS
employs this term to differentiate those life insurance proceeds that will
count a part of the “gross estate” value and those that will go scot-free to
the family as intended.
Unfortunately, ensuring there
are no incidents of ownership is not just about buying the right policy, but
structuring the ownership and beneficiary arrangements accordingly. Oftentimes
a very specific form of “irrevocable” trust is required. Teaching point: the
time to plan for tax-savvy protection of your life insurance begins before the
application for the insurance is inked.
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Reference: WealthManagement.com
(July 9, 2013) “Incidents of Ownership”