SHOULD YOU TRANSFER YOUR LIFE INSURANCE POLICY TO AVOID ESTATE TAXES?
On Jan. 1, 2013, the U.S. Congress passed a permanent estate tax exemption for those who have less than $5 million in assets. This number has been adjusted for inflation every year. That means that in 2015, people may either leave or give away as much as $5.43 million without having to pay the 40 percent federal estate tax. In Illinois, the amount is less, but still substantial with a $4 million dollar exemption. Therefore, even if no income tax is applicable, heirs may still have to pay an estate tax on amounts over these exemption limits.
As an estate planning attorney in Illinois would know, in addition to the 40 percent federal tax rate, people may have to pay a 16 percent state tax rate on the amount subject to tax in Illinois. While the federal rate is one of the lowest rates in decades, the Illinois rate is substantially higher than it used to be. Blended, they have a substantial impact on an estate. Fortunately, there are ways to avoid this tax, especially when it comes to a life insurance policy.
According to Cornell University Law School’s Legal Information Institute, U.S. Code states that the value of a decedent’s life insurance policy should be included in the gross estate subject to estate tax.
People who want to avoid paying the tax have several options, such as exploring the option of an irrevocable life insurance trust, establishing an estate planning trust, which can be especially useful for married couples and avoiding purchasing life insurance, if that is a viable option.
Anyone who is considering transferring a life insurance policy into an irrevocable trust to avoid estate tax should be aware of the three-year look back rule. Should someone die within three years of the transfer, any proceeds from the life insurance policy will be counted toward the value of the decedent’s estate. If that brings the estate’s value to more than the state or federal exemption allows, then the appropriate estate tax will be applied to the overage.
Lastly, as an estate planning attorney in Illinois knows, life insurance policyholders cannot keep any incidents of ownership once it is transferred. In other words, they may not use the policy to borrow money, change the named beneficiary or convert the policy, among other tasks. Doing so can negate the tax benefits of the transfer.
Anyone interested in exploring their options regarding life insurance policies should consult with an estate planning attorney in Illinois.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Business Immigration, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law, Collaborative Divorce & Mediation.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.
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