Life insurance in your
If I specify that my life insurance is
payable to my estate (total value of estate $800,000) and specify certain amounts
of that insurance money to be paid to various beneficiaries in my will, will those
beneficiaries have to pay tax on the insurance money? All amounts would be more
than $10,000? -- Carolyn
It's usually better to ask these questions before you act.
However, in this case you're still within the limits that are tax-exempt.
you make life insurance payable to your estate, you create an additional estate
asset. In 2003 (I'm assuming you'll make it until then), no estate tax is due
if the total value of estate assets is less than $1 million. The $1 million is
reduced if you previously made taxable lifetime gifts (i.e. gifts in excess of
$11,000 to any one person in any year).
Life insurance proceeds
are always income-tax free. Although there is an $11,000 cap (up from the historic
$10,000) on tax-free gifts, this does not apply to inheritances. Therefore, your
beneficiaries will receive their inheritance income and estate tax-free.
death proceeds from a life insurance policy can sometimes put an estate over the
top for estate taxes, it's usually better to own the policy outside of your estate.
This is accomplished through a life insurance trust.
a life insurance trust is an agreement that you make with your beneficiaries to
own the life policy and pay its premiums. You usually gift money to the policy
owners to pay the premiums. The trust receives the death proceeds and pays it
out in accordance with your wishes established in the agreement at the time the
trust was formed.
You'll need a good tax attorney to establish
the trust as its terms and activities are very technical.