Monday, 8 Oct 2012

How to Avoid Estate Tax on Life Insurance

State and federal regulations make anyone feel worrisome when it comes to taxes, but estate tax on life insurance is usually a concern separately. This is one of the most burdensome taxes that one has to pay, ignoring that a carefully planned tax strategy may help to avoid this imposition. There are many ways to work around estate tax on life insurance, but further understanding on this topic can help you to find what the right solution for you to avoid it is.

One solution to avoid estate tax on life insurance is getting an Irrevocable Life Insurance Trust (ILIT,) which means assurance on your insurance. However, a life insurance trust will only reduce taxation and some financial advisors say this option is only worth it when you are the owner of large estate that is worth millions. Naturally, any homeowner may try this options regardless the property value, but savings are only considerable when insurance is taken out on a millionaire real estate investment.

Good news is that you can find many other solutions to avoid, or at lest minimize, tax on life insurance, including to make use of state exemption twice, understanding that the Internal Revenue Service (IRS) allows individuals to get one lifetime exemption over their estate. Therefore, married individuals can enjoy this benefit twice because the exemption applies for both spouses. However, depending on the conjugal situation of the homeowner, an example married for the second time, an ILIT or will is necessary to apply for this benefit.

Nonetheless, another good strategy to avoid estate tax on life insurance is removing your life insurance proceeds from your own estate, because these are often included in home insurance. In this case, the work around consists of reviewing the policy before purchasing life insurance, and make sure the beneficiary is the estate and that you do not possess by the time of your death any of those rights that your home ownerships grants you, such as right to assign, re-assign, or cancel the policy, among others. An estate-planning attorney can advise you on this topic and review your policy to ensure you can avoid this taxation.

Transferring the ownership of your estate or giving it away, is usually a good technique to deal with estate taxation on life insurance by reducing the tax amount in the proportion you are reducing your estate value this way. Giving away your estate is something that you will forcibly have to do when passing away, so why not take advantage by gifting your estate to the people you will give it to in your will.

There are many other strategies to avoid estate tax on life insurance, including getting your estate into a family limited liability company or family limited partnership to enjoy the benefit resulting from annual gift exemption and discounts, while removing part of your estate from life insurance without losing control over it. In this same fashion, you might consider donating part of you estate to charity, although this solution significantly reduces taxation over your estate, be aware that beneficiaries that you left in your will are going to receive less money from your policy, based on the proportional basis of your donation.

The most important thing to remember is that if you want to avoid estate tax on life insurance is to do some research and talk with an estate attorney to learn the best options available. Too many times, estate tax is passed on to beneficiaries if not taken from life insurance, ensuring you know the laws governing such actions will protect your heirs in the future or deal with the issue at the time of your death.

Author Bio: Larry Smith works for a business that provides great quotes on life insurance.

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