You do need to know your options ... and get your ducks in a row.
Whatever your reason, you purchased life insurance.
You can check it off the list!
Actually, not so fast.
According to a recent article in Forbes, titled “Are Life Insurance Proceeds Subject to Taxes?,” it is not wise to overlook this.
Fiscal irresponsibility of your beneficiaries or the probability of estate taxes are a couple reasons.
Your options when it comes to the payouts?
The insurance company can pay it all at once.
The insurance company can make periodic distributions. Though you should know interest accrued is taxable.
The insurance could be transferred to a trust to control distribution of the proceeds based on the stipulations you set when creating the trust.
Okay, what about the potential estate taxes on the life insurance proceeds?
If you retain “incidents of ownership” in the policy, then the value of the death benefit proceeds will be included in your taxable estate.
In other words, if you retain control over the policy in some way.
Such “incidents” include borrowing against the policy, using it as collateral or assigning it in a contract.
Did you know estate taxes may be delayed if your spouse is the beneficiary, but taxes may be due when he or she passes away?
While we are at it, remember the beneficiary designations on your life insurance are the key, not what your trust says ... unless your trust is the beneficiary.
Be sure to keep your beneficiary designations up to date regarding your life insurance and retirement plans as changes occur in your life, the lives of your loved ones and your estate plans for them.
Talk with your estate planning attorney to ensure that your life insurance policies work in concert with the rest of your estate plan to give your family protection and to help avoid unintended and potentially unpleasant financial consequences.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Forbes (August 30, 2016) “Are Life Insurance Proceeds Subject to Taxes?”