When creating an estate plan, it is important to think of ways you can pass on your inheritance without having to pay a host of taxes on your assets and possessions. Once you pass on, all of the things you have worked hard to amass, including your life insurance benefits, are distributed to the beneficiaries that are named in your last will and testament. There are however, ways that taxes can affect the overall amount of the life insurance policy and what is left to distribute to beneficiaries.
First, it may be beneficial to leave your life insurance policy to an actual beneficiary rather than list it as ‘payable to my estate.’ If the name of a beneficiary is not listed, the life insurance policy may become eligible to go through the probate process along with other parts of the estate. Furthermore, if you make the policy part of the estate, it increases the estate’s total value and causes even higher estate taxes. While your beneficiary will not have to pay federal taxes on the life insurance policy earnings they receive, they may have to pay the additional estate taxes if the policies is included in the estate.
Another option is to transfer the ownership of your life insurance policy to a new owner. While the new owner will be required to pay the life insurance premiums, you are able to gift them money in which they can make the payments. Creating an irrevocable life insurance trust can also help to bypass taxes.
This information in intended to educate and should not be taken as legal advice.