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How are L.I. policies taxed upon payout?
Old 01-10-2007, 10:55 AM   #1
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How are L.I. policies taxed upon payout?

I was just wondering if I have enough life ins. It's hard to answer that question not knowing the tax consequences.

How are they taxed?

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JD
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 11:00 AM   #2
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Re: How are L.I. policies taxed upon payout?

Generally the death proceeds from LI policies are not taxed by the IRS to the beneficiaries, as the premiums that are used to pay for the insurance is with money that has already been taxed.
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 11:54 AM   #3
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Re: How are L.I. policies taxed upon payout?

They are, however, part of the estate for estate tax purposes.
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 12:09 PM   #4
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Re: How are L.I. policies taxed upon payout?

Quote:
Originally Posted by brewer12345
They are, however, part of the estate for estate tax purposes.
What if it's owned by an irrevocable life insurance trust?
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 12:11 PM   #5
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Re: How are L.I. policies taxed upon payout?

Quote:
Originally Posted by retire@40
What if it's owned by an irrevocable life insurance trust?
Prolly not in that case. But this is obviously a complex area and highly dependent on your state's laws, so best idea would be to see a lawyer. I get nailed with state estate taxes starting at an estate of $625k. Other states have no estate tax.
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 12:15 PM   #6
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Re: How are L.I. policies taxed upon payout?

Quote:
Originally Posted by brewer12345
I get nailed with state estate taxes starting at an estate of $625k. Other states have no estate tax.
Not 100%, but I believe in some states, you can amend the trust to follow the federal guidelines rather than state, if the federal is higher. Wouldn't the fed guidelines supersede the state??

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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 12:32 PM   #7
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Re: How are L.I. policies taxed upon payout?

Quote:
Originally Posted by retire@40
What if it's owned by an irrevocable life insurance trust?
That is why ILITs are set up, it moves the proceeds out of your estate

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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 12:42 PM   #8
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Re: How are L.I. policies taxed upon payout?

Quote:
Originally Posted by FinanceDude
Not 100%, but I believe in some states, you can amend the trust to follow the federal guidelines rather than state, if the federal is higher. Wouldn't the fed guidelines supersede the state??

Dunno about that. Something to discuss with my attornet at the next will update. The issue is that Federal estate tax kicks in at $X million in assets, while NJ estate tax kicks in at $625k in assets. Separate tax systems for state & Federal.
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 03:19 PM   #9
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Re: How are L.I. policies taxed upon payout?

One way to avoid inclusion in the gross estate is to have the beneficiary own and pay for the policy. Just make sure you trust him/her.
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Re: How are L.I. policies taxed upon payout?
Old 01-10-2007, 05:42 PM   #10
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Re: How are L.I. policies taxed upon payout?

Quote:
Originally Posted by retire@40
What if it's owned by an irrevocable life insurance trust?
You know the answer so why ask the question? Instead, why don't you say: "you might look at an irrevocable life insurance trust if you think you might have a taxable estate. " Might be more helpful.

Quote:
Originally Posted by tio z
One way to avoid inclusion in the gross estate is to have the beneficiary own and pay for the policy. Just make sure you trust him/her.
I know some people who did this as part of their estate planning. They gifted the policy to a couple of their children in order to do some equalizing as well as to save taxes. The policy was paid for in full so there was no need to think about how premiums would get paid. Of course, these two children can cash it in for the cash value or change the beneficiaries to themselves or whoever they want. Which was fine in this case. The children are smart enough not to cash it in today.

Note that there may be gift tax as well as the estate tax consequences to weigh when deciding what to do with your insurance policies.
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Re: How are L.I. policies taxed upon payout?
Old 01-14-2007, 07:08 PM   #11
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Re: How are L.I. policies taxed upon payout?

Your worried that insurance wont be high enuff after the taxation ? Interesting.

It took me awhile to think of what was missing from the conversation.. It might be more important to have all the other i's dotted. The will and the living will and whatever other trusts might be helpfull.

Interestingly if you gift the insurance you have to wait 3 yrs before dying. Otherwise they disregard the gift and tax it !
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