Q&A: Estate taxes on life insurance?

Q: Is it true that life insurance is not subject to the estate tax?

A: Life insurance is generally not subject to income or capital gains taxes upon the death of the insured. But a policy cashed prematurely (during life) could result in taxable gains because of cash build-up within the policy, similar to any other investment. For federal estate tax purposes, life insurance proceeds are taxable, although there is an exemption when the proceeds go to a surviving spouse. Furthermore, there is a way to have life insurance owned by a trust that will keep the proceeds out of your taxable estate and avoid the federal estate tax upon your death. A qualified tax attorney can help you with this.