A life insurance policy can be a useful tool for estate planning. However, a large policy can adversely affect your beneficiaries by increasing the estate’s tax liability. Your College Station estate planning lawyer can assist you in using life insurance effectively. The following provides you with some basics on avoiding difficulties.
Life Insurance and Estate Tax
There is no state inheritance tax in Texas. However, the federal government imposes a tax on estates that are substantial. As of 2015 any estate with assets valued at $5.43 million or higher will be subject to this federal estate tax. If, then, you have an estate that includes a home, stocks, and bonds, and investment real estate it is possible that these assets could value at over 4 million. Adding a life insurance policy for $1 million could then place the value over the limit.
Avoiding Estate Tax
While your life insurance policy can pass to your beneficiaries tax-free, then, it can affect whether or not a federal estate tax will be imposed. This is not an issue if your spouse is the beneficiary of your policy, for spouses are allowed to transfer such assets to each other without the assessment of a tax. However, the policy becomes a part of your taxable estate when any other beneficiaries are on the policy, including children. There are two ways you can avoid estate taxes in this situation: transferring the policy to a trust or to another person.
When you transfer the policy to another individual or a trust, you will eliminate it from being subject to estate tax, but you also will no longer own the policy. This means that you will lose control over it, and the new owner can change beneficiaries without your consent. Moreover, such a transfer can be subject to a gift tax. In 2015 the gift tax is imposed on any gift of more than $14,000. A final disadvantage to transferring ownership is that if you die within three years of the transfer, the policy will be included in your estate anyway.
- Transfer the policy to someone else: You will need to be able to trust the person you transfer the policy to implicitly, for you will not have any power over what they do with it, such as cash it in.
- Transfer the policy to an irrevocable life insurance trust: This may be your better option, for you will have control over who the beneficiary will be.
Estate Planning Is Essential for the Benefit of Your Loved Ones
It is very important that you carefully develop strategies that will ensure that your loved ones are provided for after your death. A College Station estate planning lawyer can guide you to decide what is best suited for your needs. Call Peterson Law Group today at 979-703-7014 or 936-337-4681.