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Will your life insurance policy trigger an estate tax?

On Behalf of | Aug 22, 2021 | Estate Planning |

Many people think that a life insurance policy will help their loved ones. While this is true, many people don’t realize that they need to pay attention to how much the policy is worth. Some people don’t realize that the proceeds from life insurance policies are subjected to estate tax. 

For 2021, the federal estate exemption limit is $11.7 million for one person or $23.5 million for a married couple. Any estate, which includes life insurance policies, is subjected to a 40% federal estate tax if the value is over that exemption amount. 

How can you prevent estate taxes?

The key to limiting estate taxes is controlling the value of the estate. When it comes to life insurance policies, the option that you have is to place the life insurance policy in an irrevocable life insurance trust. This shelters the proceeds from being subject to estate taxes when you pass away. 

A life insurance trust offers you some say in how the proceeds are distributed. Since the policy is owned by the trust, it can be distributed and won’t be included as part of the estate that’s taxable. This leaves you room to work with the other assets in your estate so you can hand down everything in the way you feel is best for your beneficiaries.

Anyone who’s dealing with a high-value estate should discuss their case with a professional who can help them to ensure that their loved ones get the intended benefits from the estate plan. Thinking about estate taxes and other factors that impact your beneficiaries is critical. 

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