My wife and I are joint tenants in a primary residence, land held as an investment and lease by farmer, and investments. We both have Roth IRA's, personal life insurance, and company-paid life insurance of which we are each other's sole beneficiary. The land (worth ~8 million) was inherited by my wife several years ago.
A financial planner told me that because we both owners of our life insurance policies, the other policies are company-paid, and our estate exceeds $10 million, the insurance proceeds are taxable upon death.
I'm a Civil Engineer and my wife is a Medical Doctor so neither of us financially savvy. But it has always been my understanding that life insurance proceeds are exepmt from taxation and that real estate inheritance between joint tenants is also tax exempt.
There are two different taxes to be taken into consideration. The first is income tax. And generally a life insurance "death benefit" (isn't that a great term?) is free from income tax. However if your estate is greater than $1,000,000 it will be subject to estate tax after you die. And life insurance is taxed by estate tax if you are the owner of the property, or if you have owned it within the last three years before you die. The estate tax kicks in at the 41% bracket and goes up to
50% when the estate is over $2,500,000. Which all means that half of your life insurance is likely to go to pay the estate tax on the other half. Normally no estate tax will be due until after you and your wife both die, but that's when the piper will have to be paid. So the question you need to ask yourself is whether you want to save the estate taxes on your life insurance for your heirs. That can be done by making someone other than you the owner of the insurance policies. Irrevocable life insurance trusts are typically used for this purpose. Talk to an estate planning lawyer about your options. Stu
The planner should have gone into more details, and left you with a problem with no explanation. First, the inheritance tax (death tax) is a moving target. In 2010 there's no tax at all, then it goes back to $1M per person. To keep it simple, let's assume I am looking at just one, single person. Assets are $1M, insurance is $1M. Person dies, and leaves money to a child. Upon death, the insurance is part of the estate, and with a $1M exemption, that next million is taxed. This person should open a policy, child as owner, premia paid by child with gift money (you can gift $12,000 per year per recipient). Next level of complexity; same as above, add a spouse. Upon death, there is unlimited spousal transfer, so no tax due. But now when the spouse passes, the estate is $2M and the second million is taxed. For this, we set up a trust to capture the $1M exemption, allow the spouse to access money, but it's in trust for the child and preserves the two separate $1M exemptions. Last level; even more money involved, such as your situation. If you have no kids, and no beneficiaries other than each other, you have no issue. If you had a child, you would want to plan now for worst case scenario, i.e. just the $1M exemption. This is when you set up the trusts, basically a separate tax entity to hold the insurance you need to buy. You would also want to start an aggressive gifting program, to gift shares of the land $24000 at a time (minus the insurance cost) as you can each give the child $12k/yr. You didn't mention kids. Bottom line is you have no worry if it's just you two. JOE
There are two (or more) things in play here. Income tax, of which life insurance proceeds are not taxed, and estate tax, which the policy face value (the payoff) is included in the taxable estate of the decedent. Same for the land, the value as of the date of death (generally) is included in the decedents estate. So, there will be a whopping estate tax bill on a $10 mil estate. Depending on when you intend to die, the tax could be anywhere from $0 to half or more. If you don't have one, get a ~~good~~ CPA firm and an estate tax lawyer.
The reason it is taxable for estate tax is because you have an incident of ownership. Depending on the facts & circumstances, you may be able to changes to eliminate that. But it will take several years for those changes to be effective for getting the insurance policies out of your taxable estate. You really need to find an attorney & CPA to help structure your estate planning. ___________________________________
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