Co-Founder, Coastal Financial Partners Group, California
The estate tax is a tax on the transfer of wealth at death to one's heirs. The estate tax is due within nine months.
The amount of an estate exempt from this tax is quite high right now - $5M indexed for inflation ($5.25M in 2013). Thus very few estates (less than 1%) actually pay an estate tax. In most cases, people buy life insurance to provide cash at death to pay this tax instead of liquidating other estate assets.
If life insurance is held outside the taxable estate, it won't be subject to estate tax on the proceeds.
Personal property has an owner. There are privileges and consequences of ownership. Life insurance is personal property. Life insurance always has an owner. That owner can be a person or a legal entity. The goal is not to pay estate taxes on life insurance. But it can occur at the federal and state level. The federal estate tax is uniform throughout the country. Within the federal unified credit, family assets transfer estate tax free. If assets exceed the unified credit allowance and are owned within the estate, they’ll be subject to estate taxation. In addition, each state has its own threshold of asset exemption. So life insurance proceeds could exceed federal or state thresholds and could create a taxable event. So before moving forward with any estate plans or recharacterization of asset ownership consult your tax and legal counsel.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Who pays estate taxes on life insurance? Well the estate executor is usually the one charged with payment from estate assets for any estate taxes due. Are there estate taxes due on life insurance? Yes and no, depending on how well a person has planned for that situation. Life insurance can easily be taken out of the estate tax tab by moving ownership out of the taxable estate, via trust or other trusted family member (not spouse). You can leave ownership of life insurance in the estate, but even though the proceeds go elsewhere, the amount paid out becomes an asset to the estate.
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The amount of an estate exempt from this tax is quite high right now - $5M indexed for inflation ($5.25M in 2013). Thus very few estates (less than 1%) actually pay an estate tax. In most cases, people buy life insurance to provide cash at death to pay this tax instead of liquidating other estate assets.
If life insurance is held outside the taxable estate, it won't be subject to estate tax on the proceeds.