Life Insurance: Answers to Tax Questions

June 12, 2013

The role of Life insurance is extremely important when considering your estate plan.  We would like to highlight three commonly asked questions about the tax implications, and provide the answers to them here.
I have been made aware of the fact that I am the beneficiary of a life insurance policy, and I'm concerned about the tax implications. Will I be required to report the receipt of the proceeds when I file my income tax return?
This is a frequently asked question, and the answer is probably going to be a welcome one. In general proceeds received from a life insurance policy are not going to be looked at as taxable income by the Internal Revenue Service.
I own a number of insurance policies, and my estate is quite valuable. Will the value of the insurance policy proceeds count as part of my taxable estate for estate tax purposes?
Unfortunately the answer to this question is yes. At the present time the estate tax exclusion is $5.25 million, and the maximum rate is 40%. If the sum total of your assets is in excess of $5.25 million, including your life insurance policy proceeds, the estate tax may indeed be a factor.
Can anything be done to remove these policies from my taxable estate?
Yes, it would be possible to place the policies into an irrevocable life insurance trust. However, to satisfy IRS regulations you must live for at least three years after transferring the policies into the trust for the assets to be effectively removed from your estate. There are ways to avoid the three-year wait, but they must be addressed by a qualified estate planning lawyer.

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