People are not cognizant of the fact that life insurance does pass through your estate, for tax purposes unless you take certain precautions regarding the policy. There appears to be a misconception regarding the taxability of life insurance proceeds upon the death of the insured. Many people believe that there is a particular exemption for life insurance proceeds from the reach of estate tax that is not necessarily true. Most life insurance policies for the average American I suspect are owned by the policy holder upon whose life the insurance is based and provision for the payment upon death to certain designated beneficiaries. Such policy will not escape the bite of federal estate tax unless the proceeds together with the remainder of the assets in the estate do not exceed the exemption given for estate tax in general. Currently that figure in dollars is $650,000 and in the next few years will slowly increase until it exceeds a million dollars. However, one must understand that such level of assets is reached quickly when we look at the average family owning a home. One may not think that their estate reaches the level of the exemption. One must periodically review assets to determine whether the value has in the aggregate increased to where one must look to do certain estate planning to avoid their estate being taxed. It is advisable that if life insurance proceeds are not to be subject to estate tax, certain planning needs to be done regarding the life insurance. The policyholder, the insured upon whose life the policy is based, needs to transfer ownership of that policy during their life to avoid tax. Such can be done either to another trusted individual outright or placed in trust for the benefit of the beneficiaries; a "life insurance trust". However, in either case the incidents of ownership are also denied to the insured because of the transfer of ownership of the property. Those incidents include the ability to change the beneficiaries or cancel the policy or otherwise amend the policy and also the ability to borrow on the policy. I know that I for one do rely upon the cash value build up in my policies to act as a reserve during life to be able to borrow at what seems invariably to be at rates well below market. I have done so in the past and its nice to know that I have that little nestegg available to me, such is one reason why I for one am reluctant to transfer ownership of my policy. However, I shall continue to review my estate plan and it may become necessary at some point to transfer the ownership if tax volume dictates. There is also a caution given because of the applicability of the Internal Revenue Code on the Estate Tax question that transfer of the policy if such is to take place must be accomplished within more than three years before death. I have been reviewing the possibility of a life insurance trust in which a trustee is appointed in normal trust fashion and the trust is funded with sufficient funds to pay the life insurance premiums. In this forum, I do not herein plan to give a treatis on the value or mechanics of a trust but different types of trusts are used in estate planning to in effectively avoid taxes on assets that when transferred are considered as having been transferred to an independent third party, independent of the deceased. Trusts can be used during life to continue to fund certain necessities of both the Settlor (the maker of the trust) and designated beneficiaries and so a trust instrument could be used in estate planning in a fashion that would stillallow certain limited access by the trust maker to the assets placed in the trust duringhis/her life. We are available to discuss and advise clients on the necessity for estate planning and certain of the tools that can be used although we do not hold ourselves out to be tax experts. You need the advice also of your accountant and you should seek advice of an investment counselor/estate planner. Mike Napolitano of First Union Securities would be a very comfortable choice. Mike is a well respected client and advisor of this office. Robert Gallaro of Pegasus Capital Strategies LP is also well versed in the area of investment portfolio management and is one of my mentors in this business area. But as in other aspects of legal services we are asked to perform where we are not practicing in a particular area of concern being addressed, we do have other legal and other professional contacts which we have made over the years that we feel very comfortable in referring to a client to more aptly answer questions raised where we do not feel comfortable in giving total advice. Some of the more common referrals that we do make are to individuals and entities recognized in the newsletter.
44 Union Avenue
Rutherford, NJ 07070
(201) 939-7200
Rutherford, NJ 07070
(201) 939-7200