Shield Insurance Proceeds from U.S. Estate Tax

Life insurance can play an important role in estate planning. But complexities arise for those subject to U.S. estate tax.

While life insurance proceeds are generally not taxable in the hands of a beneficiary, U.S. law includes the value of life insurance in the gross estate of the deceased if he or she owned the policy. Factors used to determine ownership include who can cancel or make changes to the policy’s terms, who is paying the premiums, and who can leverage the policy for investment purposes.

If a client has life insurance in her taxable estate, it can mean paying U.S. estate tax when none would otherwise be due. Consider an example of an unmarried U.S. citizen with a net worth of $5 million in real estate and investments. If that person were to add a $1-million life insurance policy, its inclusion in the gross estate would push the estate’s value beyond the current exclusion amount, and result in approximately $264,000 in tax. Here’s why, and what you can do about it.

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