In the process of estate planning, there are many things to consider. An estate planning attorney can be essential to formulating a sound plan that is best tailored to your individual situation and long-term legacy.
Life insurance is a staple of many estate plans, but there is one factor that is often overlooked when people start thinking about life insurance and estate planning: taxes. While life insurance policies can be passed on free of income tax for the beneficiary, the same can not always be said about estate tax. If you own your life insurance policy it becomes part of your taxable estate, which can significantly impact the estate taxes that your estate may have to pay.
This will not impact you if your spouse is the beneficiary, but if anyone else is the beneficiary, your estate will run into this issue when it comes time to calculate and pay estate taxes as the life insurance policy will be included as part of your taxable estate.
With smart planning, there are ways to avoid this end result. An irrevocable life insurance trust may own the policy or the beneficiary may own the policy. If you take one of these routes you will no longer be the owner of the policy and therefore can no longer change the beneficiaries. Also, if the policy is transferred and you die within three years, it will still be included as part of your estate and subject to estate taxes.
Another thing to be aware of is whether the policy will be subject to gift tax when transferred to another person. This will impact you only if your policy’s current worth (how much you would receive if you cashed the policy) is over a certain amount that tends to fluctuate every couple years.
If you are considering transferring your life insurance policy to another person, be careful about who you choose. Once done, it is not easily reversed. In many instances, a life insurance trust may be a safer option.
If you are just beginning to think about estate planning or are considering your options regarding your life insurance policy, Fields and Dennis can help. An estate planning attorney for over twenty years, Sheryl Dennis knows the ins and outs of creating a sound estate plan to protect your legacy and provide for your loved ones. Contact Fields and Dennis for a confidential consultation today.