Avoiding estate tax on life insurance

On Behalf of | Jun 4, 2017 | Firm News, trusts

Many North Carolina residents know that real estate and investments are considered taxable parts of an estate. However, they may overlook the fact that insurance proceeds are taxable assets as well. This may end up affecting the taxable value of an estate unless handled properly.

Life insurance can play a surprising role in estate and inheritance taxes because it may dramatically increase the value of the estate. While estate taxes may be collected at both the federal and state level, collection varies depending on the value of the assets. Usually, estates must reach a certain value before they become taxable, and the percentage of tax may be based on this value as well. These numbers vary, and they may change from year to year. It is important to consult with an attorney for current specific information.

Just as other assets like homes and vehicles may be put into a trust to protect them from estate and inheritance tax, life insurance proceeds may be similarly protected. The key comes from changing the ownership of the policy from that of the estate to that of the trust. The policy becomes owned by an irrevocable trust and is removed from the estate tax equation upon the estate holder’s death. It is also important that the beneficiary of the trust is outside of the estate; otherwise, the money could end up still being considered part of the estate’s value.

One important consideration for trusts is whether they should be revocable or irrevocable. A revocable trust can be altered, which makes it more flexible but offers fewer legal protections. On the other hand, an irrevocable trust cannot be altered. An estate planning attorney may be able to help a client make the necessary decisions when making an estate plan.