Are Life Insurance Contracts Subject To Inheritance Tax
On the subscribers death, the sums paid to the beneficiary of the life insurance contract do not form a civil part of the estate of the deceased. Contracts taken out for the benefit of a spouse or civil union partner, certain non-profit organizations and, under certain conditions, contracts taken out for the benefit of brothers and sisters, are exempt from any taxation.
When other beneficiaries have been designated, the rules are as follows:
- For contracts subscribed after November 20, 1991, the share of capital corresponding to premiums paid by the subscriber after his 70th birthday is subject to inheritance tax for their fraction that exceeds 30,500
- Before the age of 70, a specific flat-rate deduction after application of a reduction of 152,500 per beneficiary, applies to the sums received by the beneficiary when they correspond to premiums paid by the subscriber since the 13th. October 1998 its rate is 20% on the taxable fraction of each beneficiary, which does not exceed 700,000 and goes beyond 31.25% .
- An additional reduction of 20% applies before the reduction of 152,500 in the case of a ” life generation ” contract.
Do not hesitate to contact your notary. The latter shall give you advise on the most suitable contract, depending on the personal situation.
How Are Life Insurance Premiums Taxed
Theoretically, amounts stipulated as being payable on the insured party’s death to a given beneficiary, other than the insured party him/herself or his/her heirs, are not included in the policyholder’s estate.
However, life insurance policies will be included in the estate:
When there is no designated beneficiary, the capital is reintegrated into the deceased’s estate
When the deceased was married or lived in a civil union, if the policy was taken out using common funds and when the policyholder or beneficiary has died, the value of the policy must be included in the community property. Half of the redemption value of the life insurance policy is added to the estate’s assets.
When the policy is taken out using funds belonging to the deceased who is not the insured party, its redemption value must also be included in his/her estate’s assets.
Premium taxation conditions :
After 70 years old, taxes on transfers without valuable consideration*
*Transfer duty upon death on the proportion of premiums over and above 30,500 calculated on the basis of the family relationship. Representation provisions may not be used for life insurance.All policies for which the insured party is the same should be included in calculation of the 30,500 threshold.
The credit institution deducts this 20% or 31.25% levy directly.
The surviving spouse or the deceased’s partner under a PACS are exempt from this levy and from death duties when the death occurred subsequent to 22 August 2007.
Should You Have An Irrevocable Life Insurance Trust
If you aim to use life insurance in estate planning, an irrevocable life insurance trust can be created to control either a term or permanent insurance policy while a policy owner is still alive. With an ILIT, you can transfer your policy to the trust or use the trust to purchase life insurance, which means the trust owns your insurance policy. The trust document will determine who will administer assets, designate beneficiaries and establish terms on how beneficiaries receive benefits.
You May Like: Best Dental And Vision Plans
The Value Of Your Estate For Federal Estate Taxes Vs Probate
Consider life insurance. You buy a $500,000 policy on your life, naming your daughter the beneficiary. Assuming you own the policy, when you die the entire $500,000 death benefit will be included in your gross estate for purposes of the federal estate tax. If your estate is big enough , the entire death benefit over that exemption is subject to a 40% federal estate tax.
If, however, by estate youre asking if the policy will be included in your probate estate, the answer is no none of the proceeds from your life insurance are subject to probate. This is because the death benefit passes by contract and is not considered a probate asset.
Finally, if youre asking whether the policy is an estate asset in the sense that it will be available for heirs, creditors taxing authorities and the like, the answer is a little more nuanced. Since youve named your daughter the beneficiary of your life insurance policy, the estate cant use the proceeds for fulfilling bequests youve made to others. Even if youve disowned your daughter and changed your will to pass your wealth to your other children, the life insurance policy is a contract. Unless you name a new beneficiary, the money will still go to your disowned daughter.
Questions For Your Attorney
To learn more about avoiding probate or estate taxes, talk to an experienced estate planning attorney. Take some time to find the attorney thats right for you. Here are a few examples of questions you might take to a lawyer:
- What is the best method for leaving life insurance money to my spouse and children?
- Should I set up a trust to be the beneficiary of my life insurance policy?
- How do I claim the proceeds of my dads life insurance policy if I cant find any records for it?
Recommended Reading: Travelocity Car Insurance
Where You Live Matters
In figuring out what you mean by in my estate, you not only need to define the term, but also identify where you call home or, legally speaking, where you are domiciled. For example, there are nine community property states . Assets in these states are treated differently for estate tax purposes than property owned by married couples who live in common law jurisdictions. Similarly, in most states, real estate held on a fee simple basis is transferred at death through the probate estate. However, in some states an alternative exists to use a transfer-on-death deed. This is akin to a TOD bank account where you can leave your account directly to another upon your death.
All of this legal speak makes a difference, because if property is in your probate estate you may be looking at expenses typically anywhere from 2% to 6%, whereas when the asset is out of the probate estate, no probate costs attach.
How To Name A Beneficiary
It’s important to name a beneficiary for each policy form when you purchase life insurance. If you dont, your insurer will assume by default the beneficiary is your estate.
You may want to consider naming an alternate or contingent beneficiary. This is the person or persons who will receive the proceeds of the death benefit if your named beneficiary dies either before you or at the same time as you.
It’s a good idea to review your beneficiary designations from time to time and update them if necessary.
Read Also: What Is Liberty Mutual Home Protector Plus
Real People Real Stories
Baie dankie Capital Legacy. Hierdie is great diens! Dankie vir julle.
Received from a Financial Advisor
The Consultant who helped us was so friendly and knowledgeable. An absolute pleasure to deal with.
Received from a client in Bryanston
Such amazingly prompt assistance and fantastic service. Thank you.
RECEIVED FROM A CLIENT IN CAPE TOWN
Dear Estates Team. Thank you for all your help with our fathers Estate. You have made this tough and emotional process bearable through all your efforts.
Message attached to a bouquet of flowers from a client in JHB
Thank you so much again for the excellent service. The turnaround time was phenomenal. Keep up the brilliant work.
Received from a client in Durban
Thank you so much for the excellent and super quick way that you handled this matter for my client. I really, really appreciate it.
Received from a Financial Advisor in JHB
I learnt so much from the Consultant I met with. He is a pleasure to work with.
Received from a Financial Advisor in Durban
Such amazingly prompt assistance and fantastic service. Thank you
Received from a client in Port Elizabeth
Ive been putting off doing my Will for too long now, but your quick and simple process and helpful consultant made it easy to get it all sorted hassle free. Thank you.
Received from a client in Pretoria
DID YOU KNOW?
Nearly 75% of South Africans pass away without a valid or up-to-date Will in place which has devastating consequences for their family.
DID YOU KNOW?
DID YOU KNOW?
When In Doubt Be As Specific As Possible
Do not assume your family, the insurance company, and state government representatives will be able to work out a fair resolution for your life insurance proceeds and assets after you pass away. Be specific when naming your life insurance beneficiaries. Name one or several beneficiaries on the life insurance policy and he or she will not have to wait an extended period of time hoping to receive the death benefit.
There is no reason to put loved ones through the drama of the egregiously slow probate process. It can take between several months and a year for the probate process to reach a conclusion. If your estate is especially large or complex, your loved ones will likely be waiting for an extended period of time to receive compensation of any sort. Furthermore, the probate process is not free. Fees must be paid to settle the estate, cover creditor claims, and so on. These fees will gradually reduce the life insurance policy death benefit, leaving the designated beneficiary with that much less money.
Also Check: Ail Pyramid Scheme
Life Insurance In A Taxable Estate
However, since Life Insurance proceeds to become a part of the taxable estate, it automatically becomes an object for the Estate Taxes.
There are two scenarios of how Life Insurance Proceeds may become a part of the gross estate:
- If they are directly or indirectly payable to your estate
- If they are payable to named beneficiaries once you possessed any incidents of ownership in the policy at the time of your death.
Estate And Inheritance Taxes
One poor decision that investors seem to frequently make is to name “payable to my estate” as the beneficiary of a contractual agreement, such as an individual retirement account , an annuity, or a life insurance policy. However, when you name the estate as your beneficiary, you take away the contractual advantage of naming a real person and subject the financial product to the probate process. Leaving items to your estate also increases the estate’s value, and it could subject your heirs to exceptionally high estate taxes.
Section 2042 of the Internal Revenue Code states that the value of life insurance proceeds insuring your life is included in your gross estate if the proceeds are payable: to your estate, either directly or indirectly or to named beneficiaries if you possessed any “incidents of ownership” in the policy at the time of your death.
Also Check: Does Insurance Cover Bat Removal
When Life Insurance Does Go Through Probate
Life insurance becomes part of your estate if your named beneficiaries have predeceased you, at which point it may also need to go through probate.
The death benefit will be distributed according to your will and the beneficiaries named in it, if you have one. If you die without a will, then the court will step in to determine who inherits your estate, including the life insurance proceeds.
It’s generally better to specify beneficiaries and contingent beneficiaries in your life insurance policy than to have your policy pay out to your estate. When life insurance becomes part of your estate, your may be able to make a claim on the death benefit payout.
Having the life insurance proceeds become part of the estate could also impact probate costs and have tax implications: having more assets in your estate could result in higher filing fees if theyâre charged at a percentage of your estate. For that reason, you should always keep your life insurance beneficiaries up to date to make sure that the death benefit doesnât become part of the estate when you die.
Does Life Insurance Count Towards Estate Tax
According to the IRS, life insurance always becomes part of a decedent’s taxable estate if the proceeds were payable to the estate itself. In cases where the proceeds pass directly to heirs, the IRS considers life insurance proceeds a part of the decedent’s estate if the decedent was the legal owner of the policy.
Recommended Reading: Dental Insurance Covers Veneers
Is Life Insurance Part Of The Deceased Estate
Normally life insurance proceeds go directly to the name beneficiaries and are not probate assets. … It is the money of the insurance company which, under the policy, has a legal obligation to pay the named beneficiary. So that money is not part of your estate, and you cannot control who gets it through your Last Will.
How Do Life Insurance Proceeds End Up In The Decedent’s Estate
Life insurance proceeds that go directly to a named beneficiary never become part of the decedent’s probate estate, so the money isn’t available to creditors. Beneficiaries have no legal obligation to use the money to satisfy the decedent’s debts unless they also happen to be cosigners on the loans.
You May Like: Does Insurance Cover Broken Car Windows
How To Avoid Taxation On Life Insurance Proceeds
Wouldn’t it be nice if you could pass on your entire estate free of taxation? While this scenario is highly unlikely, there are some smart decisions that you can make to avoid future tax consequences. One poor decision that investors seem to frequently make is the naming of “payable to my estate” as the beneficiary of a contractual agreement, such as an individual retirement account account, an annuity, or a life insurance policy.
When you name the estate as your beneficiary, you take away the contractual advantage of naming a real person and subject the financial product to the probate process. Leaving items to your estate also increases the estate’s value, and it could subject your heirs to exceptionally high estate taxes.
Here, we show you some ways to reduce the taxes on your estate and ensure that your heirs will benefit from it as much as possible.
Who Becomes The Owner Of A Life Insurance Policy When The Owner Dies
The owner of a life insurance policy is entitled to 100% of the cash value of the policy while the policy is still in force and before the insured person dies. While the payer of the policy premiums does not necessarily have to be the owner, the cash value of the policy becomes the owner’s to control.
Don’t Miss: Is American Income Life Good Insurance
Who Should I Speak To About Claiming On A Life Insurance Policy
In almost every case, the best contact on this subject is the insurance company with which the policy is held. You may already know about any policies, but if not, professional administrators, such as Kings Court Trust, may be able to conduct a search if you believe the deceased had a policy. It will then be a question of understanding the terms under which the policy was written.
How Life Insurance Death Benefits May Be Taxed
One of the benefits of owning life insurance is the ability to generate a large sum of money payable to your heirs upon your death. An even greater advantage is the federal income-tax-free benefit that life insurance proceeds receive when they are paid to your beneficiary. However, while the proceeds are income-tax-free, they may still be included as part of your taxable estate for estate tax purposes.
Section 2042 of the Internal Revenue Code states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: to your estate, either directly or indirectly, or to named beneficiaries if you possessed any incidents of ownership in the policy at the time of your death.
The Tax Cuts and Jobs Act of 2017 determined the exemption amount at above $11.7 million for 2021 , while maintaining the top rate of 40%. Note that not all estates are subject to taxes, however.
You May Like: Banfield Active Care Plus Cost
Bottom Line: Is Life Insurance Part Of An Estate
Life insurance policyholders need to remember one vital thing when naming a beneficiary: be specific. You should not leave anything up to guesswork. If you worry that your intended beneficiary may pass, name several. But name each one specifically.
Otherwise, they may have to wait a lengthy amount of time to receive the policys death benefit. Or, they might even need to go to probate court to contest if things are too ambiguous. Probate is both long, taking upwards of a year, and costly. You can help your loved ones avoid that by acting carefully.
How To Name The Beneficiary Of Life Insurance
The subscriber is of course completely free to designate the beneficiary or beneficiaries of his choice. He can do so at any given time, either on the day when the contract is signed with the insurer, or afterwards… In practice, this designation is mentioned in writing on the insurance contract itself or on another document, like a will for example.
The major advantage of the designation of the beneficiary by will is bound to absolute secrecy. The subscriber retains complete freedom, especially if he wishes to change beneficiaries . However in this case, it is advisable to specify in the insurance contract that the beneficiary will be designated by will, not forgetting to mention, if applicable, the contact details of the notary depositary, of the deed.
Read Also: Do Amazon Employees Get Health Insurance