The Apportionment Rules: Who Pays the Estate Tax on Life Insurance Proceeds?

The Apportionment Rules:  Who Pays the Estate Tax on Life Insurance Proceeds?

This is an extremely important issue that is often overlooked or that falls between the cracks of an otherwise good estate plan. As a general rule, to collect the federal estate tax, the IRS can follow life insurance proceeds as far as it can trace them. Any person who receives includable property is personally liable to the IRS for a deficiency in the estate tax. Each life insurance beneficiary is liable for that deficit, up…

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The Unlimited Estate Tax Charitable Deduction, Section 2055

The Unlimited Estate Tax Charitable Deduction, Section 2055

An unlimited charitable deduction is allowed for the net amount of life insurance proceeds included in the insured’s estate if they are then paid to a qualified charity. If the proceeds are reduced by a policy loan, only the net amount includable in the estate and payable to the charity will qualify for the charitable deduction. If the policyowner is not the insured but dies first, a charitable deduction will be allowed if the unmatured…

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Our Experts Explain the Estate Tax Marital Deduction, Section 2056

Our Experts Explain the Estate Tax Marital Deduction, Section 2056

An unlimited deduction is allowed for property includable in the gross estate that passes in a qualifying manner to the surviving spouse of the decedent. The surviving spouse must be a U.S. citizen or the property must pass to a Qualified Domestic Trust (QDOT) for the benefit of the surviving spouse. No deduction is allowed, however, for certain nondeductible terminable interests, in general, interests which may terminate or fail to vest upon the lapse of…

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Inclusion of Life Insurance in Retirement Plans

Inclusion of Life Insurance in Retirement Plans

At one time, Code section 2039(c) provided an unlimited exclusion for the amount distributed at a participant’s death from a qualified retirement plan to the extent attributable to employer contributions. That exclusion has been eliminated. Subject to certain transition (grandfathering) rules, a decedent’s executor must include in the gross estate the value of any payment “receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement…(other than as insurance…

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Life Insurance Receivable by Beneficiaries Other than the Insured’s Estate: Section 2042(2) Explained

Life Insurance Receivable by Beneficiaries Other than the Insured’s Estate:  Section 2042(2) Explained

If, at the insured’s death, any incidents of ownership in a policy on his life were held by the insured, (regardless of the monetary value of the incident retained, whether exercisable alone or only in conjunction with another, or how the interest was acquired), the proceeds are includable in the insured’s gross estate. The physical ability of the insured to exercise the ownership right is immaterial; the IRS and the courts generally look to the…

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Life Insurance Proceeds Payable to an Insured’s Estate: Section 2042 Explained

Life Insurance Proceeds Payable to an Insured’s Estate:  Section 2042 Explained

Insurance Payable Directly to Estate Regardless of who purchased the policy, owned the incidents of ownership, or paid premiums, if the proceeds are payable directly to the insured’s estate (executor or administrator), they are includable for federal estate tax purposes. The entire value of the proceeds must be included. Insurance Payable Indirectly to Estate Regardless of who purchased the policy, owned incidents of ownership, or paid premiums, if the proceeds are for whatever reason payable…

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Incident of Ownership within Three Years of Death: Section 2035 Explained

Incident of Ownership within Three Years of Death:  Section 2035 Explained

Code section 2035 is entitled “Adjustments for certain gifts made within three years of decedent’s death.” The statute states that transfers in certain situations will be brought back into the gross estate for estate tax purposes if the decedent held at death an interest which would have been included under one or more of the following sections: Section 2036 (transfers with retained life estate) Section 2037 (transfers taking effect at death) Section 2038 (revocable transfers)…

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Life Insurance Owned on the LIfe of Another: Section 2033 Explained

Life Insurance Owned on the LIfe of Another:  Section 2033 Explained

There are many situations in which one party purchases life insurance on the life of one or more other individuals. For instance, a business partner may purchase insurance on the lives of each of her three partners. Assume she dies before the three insureds do. The policies she owned on their lives would be includable in her estate (to the extent of the value of the policy as of the date of the insured’s death)…

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The Definition of Life Insurance for Estate Tax Purposes

The Definition of Life Insurance for Estate Tax Purposes

Life insurance is a very broadly defined term for estate tax purposes. In its simplest definition, it is a contract under which the insurer agrees to pay a specified death benefit to a specified beneficiary at the death of the insured. The term encompasses life insurance of every description, as long as there is both: (a) risk shifting; and (b) risk sharing in the event of the policyowner’s loss through the insured’s death. So accidental…

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7 Ways in Which LIfe Insurance Will be Included in Your Estate

7 Ways in Which LIfe Insurance Will be Included in Your Estate

Any one of seven reasons can cause life insurance to be includable in a decedent’s gross estate. (Note that in some cases inclusion will result in the lifetime value being includable and in other situations the policy proceeds will be included). Planners should always consider the impact of state death taxation, which sometimes parallels federal estate tax law but often diverges significantly. Section 2033 Inclusion. The value of life insurance owned by the decedent on…

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