Not everyone has tens of millions of dollars on hand to leave behind to loved ones when they pass away. The absence of great wealth, however, should not serve as an impediment to providing comfortable support for your survivors. A great way to leave loved ones with adequate financial support after death is through the use of life insurance.
First, for State probate concerns, life insurance contracts and proceeds are non-probate assets and do not require court supervision, inventory, and public scrutiny. Unlike wills, insurance contracts need not become a part of the public record when probating an estate.
Second, life insurance proceeds flow to the intended beneficiary free of income tax. Internal Revenue Code section 101(a) provides that gross income does not include amounts received under a life insurance contract if those amounts are paid by reason of the death of the insured.
Third, with proper estate planning, life insurance proceeds can pass to the beneficiaries free of estate tax. Under Internal Revenue Code section 2042, life insurance proceeds will not be subject to estate tax if the proceeds are not payable to the deceased’s/insured’s estate. Also, life insurance proceeds will not be included in the deceased’s gross estate if the deceased relinquished all incidents of ownership over the insurance policy. Incidents of ownership include (but are not limited to) the power to change beneficiaries, the right to borrow against the policy or offer it as collateral, and the power to assign or cancel the policy. The policy holder needs to make sure that she/he relinquishes any of these incidents of ownership and does not die within three years of that relinquishment (under Internal Revenue Code section 2035, transfers made within three years of death are included in the decedent’s gross estate).
To avoid any gift tax consequences for the payment of insurance premiums, one should consider establishing an Irrevocable Life Insurance Trust. A person can use her/his yearly annual gift tax exclusion (a person is allowed to currently make $13,000 in gifts to another each year) to make the payments to the trust which in turn will make payments on the premiums. This will help ensure that the beneficiaries and estate will not incur any estate tax liability on the life insurance proceeds.
The attorneys of Larsen & Teusink PC are skilled in establishing life insurance trusts and many other instruments to best organize and plan your estate. Contact one of our professionals today to schedule a consultation and to start planning your legacy. 678.553.2923.
Posted under Estate Planning, Probate Law, Tax Law, Tax Planning
This post was written by Todd Larsen on July 23, 2010
