Funding Your Estate Tax
To reduce the amount of the estate taxes your beneficiaries will need to pay following your death, you may want to consider transferring the ownership of your life insurance policy or creating a life insurance trust. This only needs to be a consideration if you expect that your assets will be in excess of $2 million, thus subject to the hefty associated estate taxes.
Understanding the Estate Tax Reform
The Economic Growth and Tax Relief Reconciliation Act of 2001 developed a tax repeal schedule to ensure that the estate tax would be reduced over a number of years, and by 2010, would be repealed. The following excerpt is from "Shifting Life Insurance Ownership," an article on the Investopedia website.
"In 2006, the federal estate tax exclusion amount increased to $2 million per person. This will be in effect until 2009, when the amount will increase again -- to $3.5 million. In 2010, there will be no federal estate tax, but for all years after that, the exclusion amount will be reset to $1 million per person. This means that if your taxable estate exceeds $2 million, you will most likely be subject to estate taxes; these taxes can be as high as 46%, but this rate will fall to 45% in 2007, where it will remain until 2009... After its expiration, the exclusion amount will be $1 million and the highest rate will be 55%, assuming no further changes are made."
Click here to get your free life insurance quote!
Transferring Ownership of Life Insurance
If you maintain ownership of your life insurance policy, and your assets are in excess of $2 million, the policy will be included in the estate and subject to federal taxation. By transferring ownership, the death benefit will not be included in your estate, and your beneficiaries can use the tax-free proceeds to pay the estate taxes. Transferring ownership has a number of requirements:
- You will need to notify your insurance company and fill out the appropriate paperwork
- The new owner(s) will be responsible for paying the premiums; you are allowed to gift them up to $12,000 per person, per year, to be used towards premiums
- Since you will no longer own the policy, you will no longer be able to make changes to the policy
- You will need a written confirmation from your insurance company documenting the change of ownership
Creating An irrevocable life insurance trust
Another way to prevent your life insurance payout from becoming part of the estate is with an irrevocable life insurance trust. This type of trust is a beneficial alternative to transferring ownership of your policy because it allows you to maintain control over the policy and make sure that all premiums are paid. See the irrevocable life insurance trust page for more details.
IRS Three-Year Rule
For both transferring ownership and creating a life insurance trust, the IRS has a "three-year rule," dictating that either of these arrangements must be made at least three years prior to your death, otherwise the policy becomes part of your estate and subject to taxes.
Life-Insurance-Info.us is not a life insurance broker or carrier, and cannot issue life insurance policies. This site provides free information on insurance providers and coverage options. We are not associated with the companies profiled on Life-Insurance-Info.us and we make no representation, express or implied, that you will receive a quote from a specific company profiled herein. Products and policies may not be available in all states, and product and policy information is subject to change without notice. Please contact the insurance company directly to answer your policy inquiries.
|
