Does life insurance have any inheritance tax associated with it? ... especiallly if the beneficiary is not a US citizen or even not a US resident? (Unlike many other countries, US taxes inheritance tax for property transfer between husband and wife if the receiving spouse is not a US citizen. So I wonder is there any implications on the life insurance proceeds.) Thanks.
If you are considered the owner of life insurance when you die, the death benefit is included in your estate for estate tax purposes. If you are talking about a non-citizen spouse, you can have the spouse be the owner of the policy, and she will then receive the death benefit free of both income and estate tax. Frequently this kind of thing is done using a life insurance trust, though it is not necessary. Stu
There is a Federal estate tax, which can include the life insurance if the decedent had an interest in the policy. If the decedent had the right to change the beneficiary, it will usually be included in the taxable estate. It is not an inheritance tax. Some states (like NJ for example) do have an inheritance tax. ___________________________________
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Someone please correct my mistakes, but I believe ordinarily life insurance death benefits are not subject to taxation. However, they are included in one's total estate for determining any non-exemptable remainder that is subject to estate tax. Ordinarily the unlimited marital deduction would allow you to transfer your estate to your spouse upon your death without paying federal estate taxes, but is only available to US citizens. If your estate is large enough that you will be subject to estate tax, consider an irrevocable life insurance trust or other vehicle to remove the asset from your estate. I suggest you consult a lawyer, estate planner, and/or CPA to confirm how a non US citizen will affect the taxes.
If the decedent insured held any of the incidents of ownership in the life insurance policy, then the proceeds payable on the decedent's death are included in the decedent's estate for federal estate tax purposes. Thus, if the person who is the insured under the policy (i.e., the person whose death will trigger payment of the death benefit) has no ownership interest in, or control over, the policy, the death benefit is not included in the insured's estate upon death.
Assuming the insured person has no interested in the death benefit (why a dead person want to have any interest in his life policy?), so what you are saying is the death benefit is not included in the decend's estate, i.e. it has no implication on the inheritance perspective. Is it correct? Then I assume the beneficiary will have to pay some kind of income tax? Is it correct?
-- Moderator: The general rule in the United States is "the beneficiary does not pay income taxes on life insurance proceeds."
The only issue is whether or not the insurance proceeds are included in the decedent's estate for federal estate tax purposes. So unless the decedent was very wealthy, this issue is unlikely to arise.
As a corollary to that, is it true that life insurance proceeds paid to a policy owner/beneficiary is treated as taxable income? An example would be parental ownership of a policy on a child, with the parent(s) as beneficiary.
No and no.
The beneficiary does not receive any taxable income from life insurance on another person.
Insurance proceeds are included in the taxable estate of the policy holder if the holder retained any of the "incidents of ownership." There are several factors that can be incidents of ownership but I don't have a list at hand. The most commen incident of ownership, however, is the right to designate or change the beneficiary. It does not matter that the deceased doesn't receive the policy proceeds.
Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans
Taxable for income tax purposes? Generally no. But if the child took the policy out on himself and the parent paid to become the owner, then the death benefit would be taxable. Stu
First of all the reason someone would want to own his own policy is that as the owner he gets to be the one to borrow against the cash value of the policy, and he gets to choose the beneficiary of the death benefit. But you are confusing estate tax with income tax. They are separate taxes and generally have little or nothing to do with each other. Insurance proceeds are generally not included in taxable income for income tax purposes. But the death benefit of life insurance (in which the decedent had any incidents of ownership irrespective of who the beneficiary is) is included in his estatate for estate tax purposes. Stu
So does it mean, typically, the insurance proceed will be more likely included in the deceased estate? I don't have any special point that I can think of, my life insurance policy is sponsored by my employer, i.e. part of a group insurance policy and I do have to specify the beneficiary. BTW, I know US citizens have unlimited marital deduction. What's the limit that a non-US citizen can inherit tax free from his deceased spouse?
No, it's not.
-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
It depends. If a special type of trust is used to make sure that whatever is left to the non-citizen spouse will be subject to estate tax when she dies, you can still get an unlimited martial deduction. Without that you get to pass tax free what you would to anyone who is not your spouse. That is $2 million for people dying in 2007 and 2007, $3.5 million for people dying in 2008, no tax at all for people dying in 2010, and back to $1 million again for people who die in 2011 or after (unless the law is changed again, of course). Stu
As someone said above the key phrase is "incidences of ownership". If you retain any rights of control over the policy, it can be included in your estate (access to loanable cash values, rights to designate beneficiaries, etc). Many people use trusts and/or family LLC & LLP to remove an insurance product from their estates, but do not realize that their control over the trust/corp gives them incidences of ownership. I do not work with group policies, but if you have an ongoing right to change the policy beneficiary (which I imagine you do) you have incidences of ownership and it will be includable in your taxable estate. Whether or not your beneficiaries actually pay taxes on your estate are another matter. Than depends on who your 'benes' are, the value or your estate at that time, and current estate tax laws (which are heading towards major change in the next 3 years).
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