Life Insurance – Avoiding Taxes On The Proceeds

Life Insurance - Avoiding Taxes On The Proceeds, when you purchased your life insurance, you probably thought about things like how much coverage, you should have a!!d the cost. The subject of taxes may not have come up, or you may have simply assumed life insurance proceeds are not taxable. As with so many tax matters, though, it's a little more complicated.

In a Nutshell

Although the beneficiary of a life insurance policy usually receives the policy proceeds free of federal income taxes (exceptions apply), federal estate taxes are a potential problem. Your life insurance proceeds will be included in your gross estate for federal estate-tax purposes if: Don'tBeCaughtBySurprise4
  • You keep specific ownership rights in the policy. These include the right to: change the beneficiary; assign the policy or pledge it for a loan; borrow against the policy's cash value; and surrender or cancel the policy; or
  • Your estate is the beneficiary of the policy. This occurs if you name your' estate as beneficiary or if the proceeds default to your estate because the named beneficiary predeceases you..
Estate inclusion might not be a problem if you've named your spouse as your beneficiary, since federal estate-tax law generally allows an unlimited marital deduction for amounts payable to a surviving spouse, But relying on the marital deduction for estate-tax avoidance may not be wise since your spouse could predecease you and policy proceeds may end up being payable to your estate. Without an estate-tax deduction, insurance proceeds generally will be fully includable in your taxable estate, possibly triggering tax if yow' estate is over the available exemption - scheduled to drop to $1 million next year unless Congress acts.

Tax Strategy

You may be able to avoid estate tax on your policy proceeds. How? Simply transfer ownership of the policy to someone else_ If you transfer all "incidents of ownership" and you survive for three years afterward, all of the insurance proceeds escape estate inclusion. You don't need to transfer the policy to another individual. You can also place the policy into a life insurance trust. (The three-year rule also applies in this context.) Talk to us for more details. Penalty Update

It's not too soon for employers to begin evaluating how the employer penalty provisions of tile health care reform law may affect them. Identifying full time (or full-time equivalent) employees will be key to the analysis since:

  • The penalty provisions only apply to employers that have an average of at least 50 full-time (or full-time equivalent) employees all business days during the previous calendar year.
  • The number of full-time employees is used in the penalty calculations.

Very generally, the new "shared responsibility" penalties Will apply if an employer doesn't provide health insurance coverage rneeting certain minimum standards and any full-tlme employee enrolls for subsidized coverage through a state exchange. The penalty provisions become effective in 2014.

A full-time employee is generally a person employed at least 30 hours a week on average The IRS recently provided optional "safe harbor" methods that employers may use to Identify full-time employees, For ongoing employees, the safe harbor method Involves looking back over a "standard measurement period" to calculate which employees averaged at least 30 hours a week. Those employees are then treated as full-time going forward for a predefined "stability period" There are also safe harbor methods for newly hired, variable-hour. and seasonal employees .

November 2012 Page 4

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