Life insurance tax depends on who is beneficiary

June 25, 2011

Learn whether life insurance is subject to estate tax.

Q: Is life insurance subject to the estate tax?

A: It depends. Life insurance paid to an estate will have its cash value and death benefit subject to the estate tax. If it is paid to a spouse directly, and the money stays in the spouse's control at the time of his or her death, then the amount also will be subject to the estate tax (in the spouse's estate).

In the case of a life insurance death benefit left to another party, such as a child, both the death benefit and the cash value will be included in the estate tax of the decedent if the decedent owns the policy. That's why advisers often suggest that the ownership and death benefit of a policy be titled either to a spouse, a child, or an irrevocable life insurance trust (ILIT). The ILIT allows the cash value and death benefit to benefit the spouse and/or children while sheltering the money from estate or income taxes.

Send your money management questions to medec@advanstar.com Answer provided by Steven Podnos, MD, CFP, principal of Wealth Care LLC in Merritt Island, Florida.