Financial Learning Center
- Basics of Estate Taxes
- Estate-Applicable Credit Amount
- Gift Tax
- State Death Taxes and Gift Tax
- How Life Insurance Is Included in Your Estate
Life insurance can make up a large part of your taxable estate if you own the policy. If you have certain powers over a policy (called "incidents of ownership"), you are considered the owner of the policy. Policy proceeds are also included if they are payable to the estate or the proceeds are receivable by another for the benefit of the estate.
Incidents of Ownership
If you have certain rights over a life insurance policy, the policy proceeds will be included in your estate. Rights that are considered incidents of ownership include the following:
- the right to name or change the beneficiary
- the right to surrender or cancel the policy
- the right to assign the policy
- the right to revoke an assignment
- the right to take a loan out against the surrender value of the policy
- the right to elect how proceeds will be paid out
Paying premiums is not a sign of ownership. You are allowed to pay the premiums for someone else's policy on your life. The premiums could be subject to gift tax if they exceed the 2019 limit of $15,000 (same as in 2018), however where premium amount exceeds the annual exclusion amount in any year such excess can be applied against the additional lifetime gift exclusion of $11.4 million ($11.18 million in 2018); in this way gift tax is avoided. If you have any incidents of ownership in the policy, the policy proceeds will be included in your gross estate, even if it is payable to someone else (your beneficiary). If this happens, the people named in your will may be left with less because there may be estate tax due on the life insurance policy.
SUGGESTION: Even if your life insurance policy is taxable to your estate, it should not generate income tax for the people who receive the death benefit amount.
Second-to-Die Life Insurance Policies
These life insurance policies insure two lives and are primarily used for estate planning purposes to help pay estate taxes at the death of the surviving spouse (second-to-die). They are typically either whole or universal life policies and are usually written to insure husband and wife. This type of policy can be used to cover an estate tax bill, to provide for heirs, or to make a charitable contribution. The premium on a second-to-die policy is generally lower than for separate policies since the policy is priced based on a joint age and the insurance company's administrative expenses are less with one policy.
Typically, an irrevocable life insurance trust is set up before the insurance is issued. The trust is the owner and beneficiary of the policy so that the policy proceeds are not included in the insured's taxable estate.
Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA (Opens in a new Window)/SIPC (Opens in a new Window). UniVest Financial Services is a trade name of UniBank. Infinex and UniBank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of, nor guaranteed or insured by, any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.