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How insurance policies can trigger estate tax

On Behalf of | Oct 16, 2015 | Inheritance And Estate Tax |

When creating an estate plan, many New Jersey residents consider whether life insurance is a useful tool. Life insurance can provide wealth to the loved ones left behind, and can make it far easier for them to maintain their quality of living as they adjust to their loss. However, there is an important aspect of life insurance and estate tax planning that is often overlooked.

When planning for estate tax issues, most people make every effort to ensure that their taxable estate remains below the current level of $5.43 million. Anything beyond that amount will be subject to estate tax. It is important to note that the proceeds from a life insurance policy will be counted within those calculations. Leaving behind a substantial insurance benefit can push an individual’s estate over the taxation threshold.

An attractive alternative for many families is an irrevocable life insurance trust, or ILIT. This financial tool effectively removes the proceeds from life insurance policies from an individual’s taxable estate. Life insurance premiums are paid out of this trust, and in turn, the trust itself becomes the “owner” of the policies.

New Jersey residents who are approaching the $5.43 million threshold should take the time to consider if their existing life insurance might push them over that limit. If so, creating an irrevocable life insurance trust could be a good option. Life insurance is a valuable benefit for loved ones, and an ILIT can ensure that the benefits do not incur a sizable estate tax bill.

Source: Forbes, “Best Financial Moves Every High Income Earner Should Make“, Sept. 28, 2015