Removing Life Insurance Proceeds From Your Taxable Estate

Under the Bush tax cuts as extended by Obama, no federal estate tax is assessed upon the first $5.12 million of an individual’s taxable estate. On January 1, 2013, federal estate tax exemption amounts will drop to $1 million per person. As such, it is about to be much easier for a person’s assets to exceed $1 million once life insurance is included. While many of us in estate planning and financial planning world expect that the federal estate tax threshold will soon be raised to $3.5 million per person, there is still a window of time in which anything after the first $1 million will of an estate will be taxed at 55%.

Let me repeat that: While the federal estate tax exemption was set at $5,000,000 and the estate tax rate was set at 35% for the 2010 and 2011 tax years, and the exemption increased to $5,120,000 for 2012, on January 1, 2013 the exemption and rate are scheduled to revert back to the numbers that were in effect in 2001/2002 – meaning a $1,000,000 estate tax exemption and 55% estate tax rate.

Without proper planning, this could mean a big tax bill before insurance proceeds could be used for the needs of your spouse or partner, children, and other beneficiaries.