Will Your Life Insurance Policy Proceeds be Taxable?

When you die, the size of your estate will determine whether your estate will be subject to estate taxes. Proceeds of a life insurance policy may put an estate over the $1 million estate tax exemption in New York (NY) State. Proper planning today can reduce the burden on your family in the future and keep your estate from paying estate taxes that could have been avoided.

At Makofsky & Associates, P.C., our partners have each earned distinction as estate and trust lawyers in New York. Our breadth of knowledge in estate planning and elder law areas has proven effective in guiding individuals and families through complex estate planning for more than 20 years. We provide clients with effective estate planning strategies that offer security and peace of mind while minimizing estate tax exposure.

Speak to us, to minimize taxes and benefit your loved ones. Call (516) 228-6522 or contact us online.

Life Insurance Policies and Your Estate

Although proceeds from the policy are not distributed until after your death — and to a beneficiary of your choosing — the proceeds are considered a taxable asset of the insured. As such, proceeds of the life insurance policy can increase the total taxable estate and potentially subject what would have been a non-taxable estate to federal and state taxes.

Some people attempt to avoid estate taxes by transferring ownership of the life insurance policy to someone else — a spouse, an adult child or someone else whom they trust. However transferring the policy may not effectively avoid estate tax.

Irrevocable Life Insurance Trusts (ILIT)

Irrevocable life insurance trusts (ILIT) are entities established to hold title to an insured’s life insurance policy. Rather than naming a specific person as beneficiary, the trust is named as the primary beneficiary of the life insurance policy. Upon the insured’s death, proceeds from the life insurance policy are distributed to the trust. The trust instrument directs how, when, and to whom the proceeds will be distributed. The trustee manages the trust assets and distributes proceeds in accordance with the trust agreement.

Because the insured did not own the life insurance policy the proceeds are not subject to state and federal taxes. In order to successfully avoid estate tax exposure, your life insurance trust must be irrevocable, and you cannot be the trustee. The life insurance policy must be transferred into the trust at least three years prior to death of the insured. If the insured does not survive the three years, it is as if the trust never existed and the proceeds of the policy will revert to the insured’s estate.

Depending on your circumstances, the life insurance trust may continue for the benefit of the surviving spouse, enabling life insurance proceeds to pass to your children or other named beneficiaries after your spouse dies without being considered part of your taxable estate or your spouse’s taxable estate.

Serving Long Island Since 1991

Every family situation is unique, and each client of ours has a unique reason for purchasing a life insurance policy. Our estate planning attorneys help you understand the implications of life insurance proceeds and how to maximize the benefits of the life insurance policy. We tailor our services to achieve your specific needs.

To schedule an appointment with an experienced estate planning lawyer at our firm, call us today at(516) 228-6522 or contact us online.

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