Business Meeting Notes

Are the proceeds of life insurance policies owned first by a taxpayer’s wife and then owned by a family trust, includible in a taxpayer’s gross estate?

The estate tax is currently set at a generous level, with married couples able to protect up to $10.5 million combined. So it can be enticing for many taxpayers to sit back and relax without worrying about crossing that $10.5 million line. However, one should know there is always a risk when it comes to ignoring your life insurance.

Fact: without proper planning and structuring, life insurance will become part of the taxation math for your “gross estate” and you could end up getting hit by a state and/or federal estate tax.

Those planning their estates and working to provide for financial security for their family often do so by way of life insurance. Indeed, the concept of life insurance is precisely to replace the lost income from the loss of a breadwinner. Of course, those planning with life insurance should be mindful of a potentially dangerous term in “legal speak”: “incident of ownership.”

A recent article tackles this term head-on with an article aptly titled Incidents of Ownership.” The IRS employs this term to differentiate those life insurance proceeds that will count a part of the “gross estate” value and those that will go scot-free to the family as intended.

Unfortunately, ensuring there are no incidents of ownership is not just about buying the right policy, but structuring the ownership and beneficiary arrangements accordingly. Oftentimes a very specific form of “irrevocable” trust is required. Teaching point: the time to plan for tax-savvy protection of your life insurance begins before the application for the insurance is inked.

For more information on gift tax exclusions please visit my estate planning and elder law website.

Reference: (July 9, 2013) “Incidents of Ownership

Mr. Amoruso concentrates his practice on Elder Law, Comprehensive Estate Planning, Asset Preservation, Estate Administration and Guardianship.