Maxine Aaronson, Attorney at Law
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Tax Newsletter

  • Income from Debt Cancellation
    When you obtain bankruptcy relief, you are essentially receiving a financial benefit, because most, if not all, of your debts will be wiped away. The tax consequences of debt relief differ greatly depending upon whether the debt is... Read more.
  • Innocent Spouse Relief For Tax Liability
    Many married couples file joint tax returns to take advantage of certain benefits offered by this filing status. This may result in the unfortunate and unintended consequence of one spouse being held responsible for the underreporting... Read more.
  • Structured Settlements
    There are numerous legal situations in which a person may receive a large sum of money through a court award or settlement. Often arising as compensation for personal injuries or other acts, most such payouts are reduced due to some or... Read more.
  • Valuation of Estate Assets for Tax Purposes
    Assets owned by a person at the time of their death, whether real or personal property, is commonly referred to as the decedent’s “estate.” After the person dies, the property or proceeds from the sale of such property... Read more.
Tax News Links

Life Insurance Proceeds & Taxes

A common misconception about life insurance is that it is “tax-free.” While the build up in cash value of a life insurance policy is typically not subject to any income tax, the death benefit payable on the policy may be used for the purposes of calculating any estate taxes that may be owed upon your death.

The key to whether this happens is ownership. If you own a policy at the time of your death, or have retained any ownership rights in the policy, the full amount of the life insurance proceeds will be included in the calculation of the taxable estate.

Example

If you die owning three life insurance policies with a death benefit of $2,000,000 each (assuming they are your only assets), and the applicable unified credit for estate and gift taxes in the year of death is $5,250,000, your taxable estate would be $750,000, with taxes owed up to 40%, or $300,000.

ILITs & Taxation

An attractive option to avoid taxation calculations based on the death benefit is to create an Irrevocable Life Insurance Trust (ILIT) to own your life insurance policies. Policies owned by an ILIT may be excluded from your taxable estate.

Planning ahead is critical. If you already own life insurance, you must create an ILIT and transfer ownership in your life insurance policies to the ILIT at least 36 months prior to your death. Otherwise, the death benefit may be includable in your taxable estate.

Your tax attorney or estate planning attorney can advise you about this important option.