Maxine Aaronson, Attorney at Law
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Tax Newsletter

  • Eligibility for the Elderly and Disabled Tax Credit
    Certain elderly and/or disabled taxpayers may be entitled to a tax credit when filing their federal income tax return. A tax credit can be deducted from the amount of federal income tax owed, as opposed to a tax deduction, which reduces... Read more.
  • Marital Deductions & Non-Citizen Spouses
    A QDOT is a specific type of marital deduction trust that is designed to ensure that non-citizen spouses will eventually pay any taxes that may be due upon distribution of the principal from the trust, even if the surviving spouse... Read more.
  • Affixing a Value on an Estate
    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.
  • Taxation of Long-Term Care Insurance After HIPAA
    People are living longer, but for many a reality of aging is that at some point they are unable to care for themselves. The costs of retirement homes and in-home care are rising, generating concerns for many on how to pay for the cost... Read more.
Tax News Links

Tax Implications of Life Insurance Proceeds

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.