When structured properly, life insurance policy could pay a death benefit is exempt from federal income and inheritance taxes. That does not mean, however, that the insurance death benefit exempt on the board; very important that you understand how you have structured policy if you want to maximize the possibility of tax-free death benefit.
Whole life insurance policy or obtain permanent cash value that can be accessed by the policyholder. If the policyholder decides to take out a loan against the cash value of the policy, these loans are generally not subject to tax. If the loan is not paid back at the time policyholders have died, the death benefit will be reduced by the amount of the loan. If, instead of taking a loan policyholder decides to surrender his policy to accept all cash values and policy lapse, then the value of the cash proceeds may be taxable. Generally, any amount that exceeds the amount of premiums paid into the policy received will be considered and benefits can be taxed.
For estate tax
If the policyholder is not the name of an individual or a trust as the beneficiary of his insurance policy, the insurance proceeds will be paid to his estate. When this happens, the insurance policy proceeds are calculated as part of the gross estate of the deceased individual, which may be subject to federal estate tax.
It is relatively easy to avoid by simply naming non-owners of the individual as the primary recipient or have confidence in you to be the main beneficiaries. When naming an individual as the primary receiver and try to avoid the estate tax, it is important that you also name a contingent Beneficiary will receive benefits should be the main beneficiaries predecease you.
Another way that life insurance proceeds can be part of the estate if the insured spouse is named beneficiary life insurance policy. When your partner receive the death benefit, the fund will be paid out and become part of the liquid assets of your spouse. Then, they can be invested or saved. When the couple passed and transferred their assets to their estate, your death benefit proceeds will be part of their total estate and may be subject to federal estate tax. The easiest way to avoid this is to leave your death benefit in the hands of the trust.
Taxes to beneficiaries
If your beneficiary’s name on the insurance policy you are also the owner of the policy, then the individual has incidents of ownership in the values for your money. Thus, when the benefits are paid, they can be considered taxable income to the individual. By retaining ownership of your own policy or have a belief that has a policy, you can avoid this result.
When the insurance proceeds will be paid, your beneficiaries will be asked to choose a method for the insurer to make payments. They can choose to have the payment of insurance benefits as a lump sum, a one-time payment which consists of the entire death benefit them, or they can elect to have benefits paid in installments. When choosing the method of installment payment of death benefits, death benefits will continue to earn interest. Every part of the installments obtained through the accumulation of interest continue to be taxed. When the lump sum payment is made, if your beneficiary a lump sum investing and investment they make a profit, then they could be exposed to capital gains tax are short or long term when they unload assets. They also may be subject to tax on dividends and interest generating investments.
Take out a life insurance policy without considering the potential tax consequences to the estate and your heirs is a bad idea. Instead, give us a call. Together we can look at a variety of angles tax and estate planning, and develop a plan that helps reduce the tax liability of beneficiaries you will face while maximizing the amount of death benefit that they can use to improve their lives.