While many Georgia residents are aware that life insurance proceeds are not subject to income taxes, they may not know that there are other types of taxes to which the proceeds may be subject. By setting up irrevocable life insurance trusts for life insurance proceeds, people can help to ensure that the proceeds are not includedin the insured’s gross estate for federal estate tax purposes.
A person who receives proceeds from a life insurance policy will not have to report the amount on his or her income taxes. The amount received is included as a part of the insured’s estate, however, if one of two circumstances apply, meaning that it may make the estate subject to federal estate taxes if the life insurance pushes it beyond the exemption amount, which in 2016 is $5.45 million.
Life insurance that is made payable to the isnured’s estate is included in the estate. If the insured has any incidents of ownership or control over the policy, it will also be included in the estate for estate tax purposes. Both of these situations can be avoided by establishing an irrevocable life insurance trust. Since the trust would be the designated beneficiary and the policyholder cannot make changes to the policy once it is placed in the irrevocable trust, it will not be counted as a part of the estate.
While the current federal estate tax exemption amount is $5.45 million, Congress can raise or lower it at any time. In 2001, the exemption amount was set at just $675,000, meaning that many people were subject to estate taxes. People may want to consult with estate planning attorneys about whether or not setting up irrevocable life insurance trusts are smart in their particular situations. An attorney may also be able to suggest other estate planning tools that can help minimize potential taxes.