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Tax and Life InsuranceMost people don't like to think about life insurance because it involves two unpleasant things: dealing with insurance companies and thinking about death and dying. Life insurance actually makes a great tax saving gift because it is valued for tax purposes and not at what the proceeds will be when you die, but at the cash value of what you've paid in?a much less dollar amount. You can use life insurance to help your charitable giving and the beneficiary doesn't pay income tax on the proceeds either!Many people think life insurance proceeds aren't taxable, but they are! Life insurance proceeds don't count for income tax purposes, but proceeds paid to anyone to her than your spouse or a charity DO count toward your estate for estate tax purposes, if you are both the insured person and the owner of the policy. Thought the proceeds of a life insurance policy paid to your spouse won't be taxed when you die 9because of the marital deduction, but the money augments the living spouse's estate so that when he/she dies, it might exceed the exemption threshold. To escape this huge estate tax, you must see to it that the policy is not owned by your estate. There are two ways to do this. If you take out a policy on your life that benefits your children or other beneficiaries, make sure that you place the policy not in your name, but in your CHILDREN's names. You can then give them the money each year to pay the premiums, making sure to keep your total gift to each person below $11,000 pre year to avoid any gift tax. As long as you live more than three years after transferring ownership, the policy is out of your estate. The other way to make sure that the policy is not owned by your estate is to set up a life insurance trust in which the trust owns the policy on your and your spouse's life, not you. You can do this with an existing policy (by transferring ownership to the trust) or a new policy. Each year, the husband can buy $10,000 worth of premiums in the policy. When he dies, say ten years later, the wife can live off the income from the trust, about $400,000.00, none of it taxable as a part of his gross estate. When the wife dies, the children, tax free, can take the principal that is left. While most estates are not subject to the federal estate tax, those estates valued at over $2million in the year 2006 are subject to the federal estate tax. To compensate for this, one can purchase life insurance to provide additional funds from which to pay these taxes. Without knowing it, your life insurance may just be adding to the tax it was actually meant to pay. Make sure that if you choose your spouse as the beneficiary on your life insurance policy you are aware that the left over amount (after the marital deduction) will probably be taxed in either you or your spouse's estate. This can mean that Uncle Sam will take between 46% of your life insurance. As such, the additional expense in preparing such a trust will be well worth the cost. Estate planners have developed this irrevocable life insurance trust to keep this from happening. A universal life insurance policy offers flexibility as well as control. Universal life is a permanent insurance which has the potential to accumulate cash value. However, it offers additional features and options as well. For example, you can increase or decrease your policy's face amount to accommodate your changing protection needs. You can also increase or decrease the dollar amount of your premium payments and make additional lump sum payments to your policy. Whatever life insurance choice you make, making sure you do it right now will saving those who survive you thousands in taxes. |
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