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Free Policy Review & Forensic Analysis
Life
Insurance
Summary Sheet
Life
Insurance
Underwriting Form
Life
Insurance Underwriting Process
Variable
Rescue
Corporate
Issues
FAS
150
Profit
Sharing Plans
Pensions
and 412(i)'s
LIFE
INSURANCE HOMEPAGE
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Life insurance,
contrary to popular belief, is not automatically exempt from the imposition
of estate taxation. The determination as to the estate taxation of
life insurance is a function of who owns the policy (the individual
who has the right to change the beneficiary) and who is the beneficiary.
First, if a beneficiary under a life insurance policy is a spouse
of the insured, and a U.S. citizen, there would never be an estate
tax at the death of the first spouse because of the unlimited marital
deduction, not because it is life insurance. This is fine assuming
there is no concern about taxation of the proceeds to the children
when the surviving spouse passes on.
Second, keep in mind that if the life insurance is owned by an insured
and is payable to anyone other than a spouse, the full face amount
is taxable in the insured’s estate. The way to avoid this is
to have third party ownership. Generally, third party ownership means
either a child owns the policy on your life or an Irrevocable Trust
owns the policy on your life.
The Irrevocable Trust gives you the ability to dictate the terms,
conditions, timing and uses to which the proceeds will be put, while
keeping these dollars out of your taxable estate. Having a child (children)
own the policy will result in the same tax benefit but without any
of the human planning advantages.
Much has been written and discussed about limitations on what an individual
may spend on life insurance premiums going into an insurance trust
because of gifting limitations. Without getting into an overly long
explanation in this section of this letter, suffice it to say that
new techniques have been developed which will permit an individual
to virtually put into an insurance trust as much money as he or she
desires in order to pay the annual premium. This is done through a
combination of annual gifting, lifetime exclusionary credits and some
rather advanced sophisticated estate planning techniques.
Our clients take advantage of the tax law relative to life insurance
products to lower current and future taxes. Via the concepts of family
split dollar, corporate split dollar, contingent beneficiaries, and
other advanced techniques, they are able to capitalize on the positive
aspects of life insurance. Those being:
• Income tax free death benefit
• Estate tax free death benefit
• Income tax free cash value growth
• Income tax free cash value withdrawal
• Leveraged use of annual exclusions beyond own children
• Leveraged use of unified credit, if needed
• Circumventing current gift taxes
• Provide planning vehicle for children
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