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Transferring Your Life Insurance Policy Could Save Taxes
The message here is obvious: If you want to give away a life insurance policy to reduce estate taxes, give the policy away as soon as is feasible. (And then don't die for at least three years.)
Another IRS regulation provides that a deceased person who kept any "incidents of ownership" of a transferred life insurance policy is still considered the owner. The term "incidents of ownership" is simply legalese for significant power over the transferred insurance policy. Specifically, the proceeds of the policy will be included in your taxable estate if you have the legal right to do any one of the following:
- change or name beneficiaries of the policy
- borrow against the policy, pledge any cash reserve it has or cash it in
- surrender, convert or cancel the policy, or
- select a payment option -- that is, decide if payments to the beneficiary can be a lump sum or in installments.
Gift Tax Concerns
If you transfer a life insurance policy to a beneficiary, tax authorities regard the transaction as a gift. Under current gift tax rules, if you transfer a policy with a present value of more than $11,000 to another person, gift taxes will be assessed. However, the gift tax won't have to be paid until your death.
And keep in mind that the amount of gift tax will be far less than the amount of estate tax that would be due if your policy remained in your name and in your estate. This is because the policy proceeds (the amount the insurance company pays at death) are always considerably more than the value of the policy while the insured is alive. To find out the present worth of an insurance policy for gift tax purposes, ask your insurance company.
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FAQs
- How can I find a lawyer to help me plan my estate and write any necessary documents?
- Why should I go to the trouble of planning my estate and writing a will?
- Why can't I just use a book, or one of those computerized "will kits" I've seen in bookstores and do it myself?
- Isn't a will all I need?
- If I use a lawyer, how much should I expect to pay?
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