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Avoiding Estate Taxes with Life Insurance

The US Federal Estate Tax

An Estate Tax is a tax paid on the transfer of all property you own or have an interest in after death. The IRS tabulates the fair market value for everything you own. Items included in this tabulation are:

  • Cash holdings
  • Securities
  • Real estate
  • Trusts
  • Annuities
  • Business
  • Insurance (Life, Property, Homeowners)

This total number is called Gross Estate.

From the Gross Estate, you can deduct certain things:

  • Value reductions
  • Mortgages
  • Debts
  • State sales taxes (so far, this is only guaranteed through 2011)
  • Personal charitable contributions
  • Student loan interest
  • Costs when seeking employment (food, hotels, transportation costs, etc.)

After all deductions are made, you have what is called Taxable Estate. If your Taxable Estate is over $1 million (though this number may be lower in the future), you have to pay a percentage of that to the IRS.

The 2011 Exemption

The Estate Tax normally affects only people who inherited large sums of money. With the 2011 Exemptions, those sums are even larger: $5 million. If you inherit more than that, a 45% tax applies. Without the exemption, anyone inheriting over $1 million would have faced a 55% tax.
As things stand, only 0.5% of people will pay the Estate Tax.

How to Make Sure Your Leavings Aren’t Taxed

Marital Deduction

If you leave money for a spouse, it cannot be taxed. No problem there. But then the surviving spouse has to plan for their death.

Bequests to Charities

You can leave as much as you want to charities without that money being taxed. Many people choose to have their financial planner direct the exact amount to charities that would leave your accounts under the $5 million threshold.


You can lower the worth of your estate so that it cannot be taxed by giving away money while you are still alive. As long as a cash gift is less than $13,000, you can make any amount you want without paying tax. If you give any gift over the 13-thousand-dollar threshold, you will have to pay a tax on everything over that 13. For example, if you give a gift of $15,000, $2,000 of that will be taxed.

However, you may only use this gift exemption once a year. Start giving it away now!

Demutualized Stock

When an insurer switches from mutual company to a stockholder company, a life insurance policyholder receives stock. This is no longer taxable as of 2009.

Now is a great time to make a donation to charity. The American Red Cross, as well as several other worthy, IRS-approved causes, are raising money to provide relief for Japanese impacted by the recent natural disaster.

Are Life Insurance proceeds included?

Generally, yes. Your insurance payout is added to the Gross Estate, which is completely taxable after the threshold. If you have a permanent life insurance policy, you may be able to withdrawal your death payout in advanced age even before dying. This will allow you to use deductions, like charity, to make sure that your hard-earned money is spent how you want it to be spent - not how the federal government does.

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