How to Avoid Taxes on Life Insurance

Life Insurance

The main reason most people have life insurance is to replace income that would be lost if they die prematurely. The death benefit payment of life insurance in general can be perceived by the beneficiaries of the policy free of federal income taxes (and generally free of state income taxes too.)

That's fine, but what about the federal tax? If the tax rules that deal as an owner of a policy in his own life, the death benefit is included in the taxable estate - unless the money goes to your spouse and he or she is a U.S. citizen . When the death benefits go directly to a policy of non-beneficiary spouse, a son, brother or sister (even without having to go through their assets), money is included in your taxable estate. If your estate exceeds $ 5 million (for 2011 or 2012), which could, if you have a lot of life insurance coverage, his heirs stand second line behind the IRS (and, possibly, the collector state tax). Not good.

Here's the problem: tax rules have life insurance if you have what are called you have if you retain the power to change the beneficiaries of the policy change the number of "incidents of ownership." Cover, set aside politics and so on.

If the benefits of life insurance with death included in your taxable estate tax would cause a successful legacy, the solution is the creation of an irrevocable trust to own life insurance policy. The trust then pays the premiums and death benefits to which you name as beneficiaries of the trust. Your estate is out of the picture. With this arrangement, there is no federal tax on death, and no federal income tax either.