As you take inventory of your assets, you are probably thinking that you want to see the total of your assets before you divide it among your heirs. This make sense, but you have to evaluate that total very closely in light of the potential ravages of the Federal estate tax.
If your resources exceed the amount of the exclusion that is in place at the time of your death, the tax will be imposed unless you have taken steps to gain estate tax efficiency.
When you are conducting this inventory, you should be aware of the fact that life insurance proceeds are considered to be part of your estate for estate tax purposes.
You may be aware of the fact that the estate tax is not applicable on asset transfers between spouses. While it is of course possible to make your spouse the beneficiary, you still have to concern yourself with the estate tax because the proceeds would become part of the taxable estate of your spouse.
A solution exists in the form of an irrevocable life insurance trust. When you place life insurance policies into the trust, they become property of this trust vehicle and are no longer part of your estate (if you live for at least three years after taking this action). The assets are available to the beneficiary, but the estate tax is not a factor.
It should be noted that you could avoid this three-year rule by having the trust purchase the policies rather than buying them yourself and placing them into the trust.
Life insurance is a big part of many estate plans, but you do have to be aware of the potential for taxation. To discuss the matter with an expert, take action right now to arrange for an informative consultation with a San Jose estate planning attorney who has a thorough knowledge of current tax laws.
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