Intro: 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 the 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. If you want to avoid life insurance proceeds, consult with an experienced attorney to help you navigate through this situation.