Life insurance proceeds


J

Jim Walsh

My wife and I are joint tenants in a primary residence, land
held as an investment and lease by farmer, and investments.
We both have Roth IRA's, personal life insurance, and
company-paid life insurance of which we are each other's sole
beneficiary. The land (worth ~8 million) was inherited by
my wife several years ago.

A financial planner told me that because we both owners of
our life insurance policies, the other policies are
company-paid, and our estate exceeds $10 million, the
insurance proceeds are taxable upon death.

I'm a Civil Engineer and my wife is a Medical Doctor so
neither of us financially savvy. But it has always been
my understanding that life insurance proceeds are exepmt
from taxation and that real estate inheritance between
joint tenants is also tax exempt.

Please clarify this for me.

Jim

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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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S

Stuart Bronstein

Jim Walsh said:
My wife and I are joint tenants in a primary residence, land
held as an investment and lease by farmer, and investments.
We both have Roth IRA's, personal life insurance, and
company-paid life insurance of which we are each other's sole
beneficiary. The land (worth ~8 million) was inherited by
my wife several years ago.

A financial planner told me that because we both owners of
our life insurance policies, the other policies are
company-paid, and our estate exceeds $10 million, the
insurance proceeds are taxable upon death.

I'm a Civil Engineer and my wife is a Medical Doctor so
neither of us financially savvy. But it has always been
my understanding that life insurance proceeds are exepmt
from taxation and that real estate inheritance between
joint tenants is also tax exempt.
There are two different taxes to be taken into
consideration. The first is income tax. And generally a
life insurance "death benefit" (isn't that a great term?) is
free from income tax.

However if your estate is greater than $1,000,000 it will be
subject to estate tax after you die. And life insurance is
taxed by estate tax if you are the owner of the property, or
if you have owned it within the last three years before you
die.

The estate tax kicks in at the 41% bracket and goes up to
50% when the estate is over $2,500,000.

Which all means that half of your life insurance is likely
to go to pay the estate tax on the other half.

Normally no estate tax will be due until after you and your
wife both die, but that's when the piper will have to be
paid. So the question you need to ask yourself is whether
you want to save the estate taxes on your life insurance for
your heirs.

That can be done by making someone other than you the owner
of the insurance policies. Irrevocable life insurance
trusts are typically used for this purpose. Talk to an
estate planning lawyer about your options.

Stu

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
J

joetaxpayer

Jim said:
A financial planner told me that because we both owners of
our life insurance policies, the other policies are
company-paid, and our estate exceeds $10 million, the
insurance proceeds are taxable upon death.
The planner should have gone into more details, and left you
with a problem with no explanation.

First, the inheritance tax (death tax) is a moving target.
In 2010 there's no tax at all, then it goes back to $1M per
person.

To keep it simple, let's assume I am looking at just one,
single person. Assets are $1M, insurance is $1M. Person
dies, and leaves money to a child. Upon death, the insurance
is part of the estate, and with a $1M exemption, that next
million is taxed. This person should open a policy, child as
owner, premia paid by child with gift money (you can gift
$12,000 per year per recipient).

Next level of complexity; same as above, add a spouse. Upon
death, there is unlimited spousal transfer, so no tax due.
But now when the spouse passes, the estate is $2M and the
second million is taxed. For this, we set up a trust to
capture the $1M exemption, allow the spouse to access money,
but it's in trust for the child and preserves the two
separate $1M exemptions.

Last level; even more money involved, such as your
situation. If you have no kids, and no beneficiaries other
than each other, you have no issue. If you had a child, you
would want to plan now for worst case scenario, i.e. just
the $1M exemption. This is when you set up the trusts,
basically a separate tax entity to hold the insurance you
need to buy. You would also want to start an aggressive
gifting program, to gift shares of the land $24000 at a time
(minus the insurance cost) as you can each give the child
$12k/yr.

You didn't mention kids. Bottom line is you have no worry if
it's just you two.

JOE

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
A

Arthur Kamlet

Jim Walsh said:
My wife and I are joint tenants in a primary residence, land
held as an investment and lease by farmer, and investments.
We both have Roth IRA's, personal life insurance, and
company-paid life insurance of which we are each other's sole
beneficiary. The land (worth ~8 million) was inherited by
my wife several years ago.

A financial planner told me that because we both owners of
our life insurance policies, the other policies are
company-paid, and our estate exceeds $10 million, the
insurance proceeds are taxable upon death.
You need to ask the financial planer to clarity the
term "taxable."

Does this mean income tax? If so, it is not correct.

Does it mean Estate tax? If you are joint owners,
and each is beneficiary of the other, estate tax
should be deferred.

Does your state have an inheritence tax or similar?
If so there might be a state tax that applies.

There are lots and lots of taxes, and you should
clarify what tax is being referred to here.
I'm a Civil Engineer and my wife is a Medical Doctor so
neither of us financially savvy. But it has always been
my understanding that life insurance proceeds are exepmt
from taxation and that real estate inheritance between
joint tenants is also tax exempt.

Please clarify this for me.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
P

Paul Thomas

Jim Walsh said:
My wife and I are joint tenants in a primary residence, land
held as an investment and lease by farmer, and investments.
We both have Roth IRA's, personal life insurance, and
company-paid life insurance of which we are each other's sole
beneficiary. The land (worth ~8 million) was inherited by
my wife several years ago.

A financial planner told me that because we both owners of
our life insurance policies, the other policies are
company-paid, and our estate exceeds $10 million, the
insurance proceeds are taxable upon death.

I'm a Civil Engineer and my wife is a Medical Doctor so
neither of us financially savvy. But it has always been
my understanding that life insurance proceeds are exepmt
from taxation and that real estate inheritance between
joint tenants is also tax exempt.
There are two (or more) things in play here. Income tax, of
which life insurance proceeds are not taxed, and estate tax,
which the policy face value (the payoff) is included in the
taxable estate of the decedent. Same for the land, the
value as of the date of death (generally) is included in the
decedents estate.

So, there will be a whopping estate tax bill on a $10 mil
estate. Depending on when you intend to die, the tax could
be anywhere from $0 to half or more.

If you don't have one, get a ~~good~~ CPA firm and an estate
tax lawyer.

--
Paul A. Thomas, CPA
Athens, Georgia

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
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B

Benjamin Yazersky CPA

Jim Walsh said:
My wife and I are joint tenants in a primary residence, land
held as an investment and lease by farmer, and investments.
We both have Roth IRA's, personal life insurance, and
company-paid life insurance of which we are each other's sole
beneficiary. The land (worth ~8 million) was inherited by
my wife several years ago.

A financial planner told me that because we both owners of
our life insurance policies, the other policies are
company-paid, and our estate exceeds $10 million, the
insurance proceeds are taxable upon death.

I'm a Civil Engineer and my wife is a Medical Doctor so
neither of us financially savvy. But it has always been
my understanding that life insurance proceeds are exepmt
from taxation and that real estate inheritance between
joint tenants is also tax exempt.

Please clarify this for me.
Income tax - no
Estate tax - yes

The reason it is taxable for estate tax is because you have
an incident of ownership. Depending on the facts &
circumstances, you may be able to changes to eliminate that.
But it will take several years for those changes to be
effective for getting the insurance policies out of your
taxable estate.

You really need to find an attorney & CPA to help structure
your estate planning.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
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