Taxing the Rich - Life Insurance Explained
- 2 years ago
Meet Patrick. Patrick was wandering around his humble home. He was thinking about the tax obligations of life insurance. Before purchasing life insurance, Patrick decided to do his research on tax workarounds in life insurance. At the end of the day, he does not want his family to have a hard time after he passed away. Stick around till the end of this video if you would like to know more about avoiding tax in life insurance.
The first thing we need to know is that the death benefit is not considered a taxable income in the US. Nonetheless, tax is paid in some situations. First, let us talk about Federal Estate Tax. This is a one-off tax paid upon death. This is imposed on wealthy people. If your total estate does not exceed 11.4 million dollars, you are exempt from this tax. Nonetheless, this threshold will decrease to 5 million dollars in 2026. If your estate exceeds this amount, Federal Estate Tax should be paid by the beneficiaries within nine months after the date of death. It is not uncommon to exceed this amount when you add up the value of the death benefit, your home, your retirement accounts, and your savings. Retirement assets such as IRA and 401K are also included in your gross estate. In general, the tax rate is between 18% and 40%, but it gets to 40% quickly.
Let’s discuss some tips to avoid or decrease that amount of tax. While I have your attention, please hit that subscribe button and bell button to join our notification squad. The first thing we want to focus on is gifts. Instead of waiting for death, the policyholder can gift their children or beneficiary a sum of money. That amount will not be included in the estate and therefore can bring down the value of the estate when calculating tax. Another thing is transferring the asset to reduce the gross estate value before death. Similarly, the transfer of valuable belongings can reduce the possibility of the beneficiaries paying the Federal Estate Tax. This contributes to reducing the tax liability of very large estates.
But one thing that we must understand is that gifting is not that simple. IRS made sure that people would not simply go with this route. That’s why they use the Three-year rule. This rule states that any gifts of life insurance policies made within three years of death are still subject to federal estate tax. Another thing you may need to consider is the estate tax imposed by each state in addition to the federal tax. Washington for example has the highest estate tax at 20% in addition to the federal estate tax. Connecticut has the highest exemption level at $7.1 million. So it's worthwhile doing some research on the current state you live in.
You would need to know more about taxation rates and exemption levels of estates. Another completely different approach would be using an irrevocable life insurance trust. An irrevocable trust has a grantor, a trustee, and a beneficiary or beneficiaries. The grantor places an asset as a gift to the trust. The grantor ca
The first thing we need to know is that the death benefit is not considered a taxable income in the US. Nonetheless, tax is paid in some situations. First, let us talk about Federal Estate Tax. This is a one-off tax paid upon death. This is imposed on wealthy people. If your total estate does not exceed 11.4 million dollars, you are exempt from this tax. Nonetheless, this threshold will decrease to 5 million dollars in 2026. If your estate exceeds this amount, Federal Estate Tax should be paid by the beneficiaries within nine months after the date of death. It is not uncommon to exceed this amount when you add up the value of the death benefit, your home, your retirement accounts, and your savings. Retirement assets such as IRA and 401K are also included in your gross estate. In general, the tax rate is between 18% and 40%, but it gets to 40% quickly.
Let’s discuss some tips to avoid or decrease that amount of tax. While I have your attention, please hit that subscribe button and bell button to join our notification squad. The first thing we want to focus on is gifts. Instead of waiting for death, the policyholder can gift their children or beneficiary a sum of money. That amount will not be included in the estate and therefore can bring down the value of the estate when calculating tax. Another thing is transferring the asset to reduce the gross estate value before death. Similarly, the transfer of valuable belongings can reduce the possibility of the beneficiaries paying the Federal Estate Tax. This contributes to reducing the tax liability of very large estates.
But one thing that we must understand is that gifting is not that simple. IRS made sure that people would not simply go with this route. That’s why they use the Three-year rule. This rule states that any gifts of life insurance policies made within three years of death are still subject to federal estate tax. Another thing you may need to consider is the estate tax imposed by each state in addition to the federal tax. Washington for example has the highest estate tax at 20% in addition to the federal estate tax. Connecticut has the highest exemption level at $7.1 million. So it's worthwhile doing some research on the current state you live in.
You would need to know more about taxation rates and exemption levels of estates. Another completely different approach would be using an irrevocable life insurance trust. An irrevocable trust has a grantor, a trustee, and a beneficiary or beneficiaries. The grantor places an asset as a gift to the trust. The grantor ca