Many New York estate planning lawyers will often encourage their clients to maintain enough life insurance when dealing with personal finances, but some people may salso not realize that they can actually collect life insurance without having their proceeds subject to taxes.
Most individuals decide to get life insurance to replace income they could potentially lose in the event they die prematurely. Policy beneficiaries can typically receive life insurance death benefit payments without any federal income taxes and, in most instances, even state income taxes. But can New Yorkers avoid federal estate taxes on their life insurance too?
According to SmartMoney, tax rules say a person owns a life insurance policy if he or she has “incidents of ownership,” which means the individual has the authority to change coverage amounts and policy beneficiaries and cancel the policy.
So if the tax rules treat you as a life insurance policy owner, your death benefits would then be considered part of your taxable estate, unless the money ends up going to your spouse, who is a U.S. citizen. Life insurance is still considered taxable if the money is directed to a non-spouse policy recipient, like a child or sibling, or your estate is more than the $5 million estate tax exception.
To avoid potential estate taxes, you may want to consider creating an irrevocable life insurance trust to own the policy, which would remove life insurance from being considered as part of your estate. The trust would pay for your premiums, and your death benefits could be passed down to anyone you wish to name as your beneficiary.
Plus, an irrevocable life insurance trust is not subject to any federal estate taxes on death benefits and does not face any federal income taxes too.
There are additional details to consider in setting up a trust, so to learn more about how to set up an irrevocable life insurance trust, or other options in saving on estate taxes, seek legal counsel from an experienced estate planning attorney.
- Meet With A New York Estate Planning Lawyer (FindLaw)
- Transfer Your Life Insurance Policy to Lower Your Estate Tax (FindLaw)
- 10 Ways to Reduce Estate Taxes (FindLaw)
- New Yorkers Encouraged To Review Their Life Insurance Policies (FindLaw’s New York Estate Planning Law News Blog)