Lets Talk Money Online - Tax facts about life insurance

The biggest advantage of owning life insurance is its benefit -- its death benefit. This amount generally is not subject to federal or state income taxes.* This income-tax-free feature can be vitally important to beneficiaries, such as a spouse who would depend on this benefit for income or to help meet financial goals, such as a child's education costs, in the future.**

It's easy to understand why life insurance can help meet a need in a way most other financial products cannot. But this tax-free status doesn't extend to estate taxes. The death benefit of owned life insurance is generally considered an asset that is included in most estates. While any amount of assets typically passes to a surviving spouse estate-tax free, the same doesn't always hold true of assets that pass to a non-spouse.

Should you worry? If you have a very small estate and a small to moderately sized life insurance death benefit, chances are your estate and its beneficiaries will owe little to no estate taxes. But geography has a lot to do with how much bene-ficiaries potentially pay in estate taxes. Some states have estate and/or inheritance taxes that begin at levels much lower than where federal estate taxes begin.

If your life insurance proceeds will eventually trigger estate taxes, ask yourself if your estate can easily handle the taxes or if the estate tax creates a financial hardship. If your estate is large enough to trigger estate taxes and your main intent is to pass on the death benefit estate-tax free, a properly drafted and administered irrevocable trust may limit the effect of estate taxes on your life insurance policy's death benefit, as long as the trust owns the policy and you have not retained any incidents of ownership.

If you plan to buy a life insurance policy and want the policy's proceeds to bypass estate taxes, consider working with an estate planning attorney to establish an irrevocable trust. The trust's terms would govern how and when the trust's assets are distributed. Once the trust is established, make sure that the trustee applies for any life insurance on your life and names the trust both owner and beneficiary. If you already own life insurance, transferring ownership to an irrevocable trust would accomplish the same purpose. However, the death benefit will be included in your taxable estate if you are the insured and die within three years of the transfer.

An irrevocable trust can also accomplish more than estate-tax savings. You can transfer virtually any asset you own to the trust and out of your estate. In this way, your loved ones get to avoid the public scrutiny of probate. Federal or state gift taxes may be applicable.

An estate planning attorney can tell you more about how to govern your estate's disposition, while a licensed financial professional can show you how life insurance can work within an estate plan.

** The death benefit of life insurance policies that were transferred for value may be subject to ordinary income taxes. Estate taxes may apply. Consult your tax advisor for additional information.

A 2001 tax law called for the federal estate tax to be repealed for 2010 only and then reinstated with changes in 2011. As we went to press, Congress was considering a new law that would reinstate the estate tax for 2010.

This is an advertisement prepared by LTM Publishing, Inc. for the use of the sender. The advertisement provided is not intended as legal or tax advice and may not be relied on for purposes of avoiding federal tax penalties. All individuals, including those involved in the estate planning process, are advised to meet with their tax and legal professionals. The individual sponsoring this newsletter will work with your tax and legal advisors to help select appropriate product solutions. We do not endorse or guarantee the content or services of any website mentioned in this newsletter. We encourage you to review the privacy policy of each website you visit. Limitations, restrictions and other rules and regulations apply to many of the financial and insurance products and concepts presented in this newsletter, and they may differ according to individual situations. The publisher does not assume liability for financial decisions based on the newsletter's contents. Great care has been taken to ensure the accuracy of the newsletter copy at press time; however, markets and tax information can change suddenly. Whole or partial reproduction of Let's Talk Money® without the written permission of the publisher is forbidden. ©LTM Publishing, Inc., 2009.

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