Life insurance is obviously a part of many estate plans. We would like to take a look at some frequently asked questions about taxes and probate as they apply to life insurance proceeds.
I have been named as the beneficiary of a life insurance policy. Will I be required to report this as income when I ultimately receive the proceeds?
The answer to this question is no. If you are the beneficiary of a life insurance policy the proceeds are not considered to be taxable income.
Must I wait until the probate process is completed before I gain access to the proceeds?
No, assumption of ownership of life insurance policy proceeds will take place outside of probate.
Is the estate tax going to be a factor?
The answer to this question is possibly depending on the overall value of the estate.
We have a federal estate tax that carries a 40% maximum rate and a $5.25 million exclusion. In the state of New York there is a state level estate tax with a $1 million exclusion and a 16% top rate.
If the person who passed away owned the policies personally the proceeds would be counted as part of this individual’s taxable estate.
Is there anything that can be done to mitigate estate tax exposure?
Yes there is. It is possible to transfer the policies into an irrevocable life insurance trust. If this is done at least three years before the passing of the individual in question the trust will legally own the policies, and as a result estate taxes would not be a factor.