Tax Tip of the Week
For the week of September 27, 2004

Does it matter who owns your life insurance policy?

Yes — it can be important who owns your life insurance policy. When you die, the proceeds of your policy will go to the beneficiary you specify. But if you are the policy owner, the value of the policy will be added into the value of your estate that is used to determine estate taxes.

That might not be a problem if your estate is valued below the estate tax threshold (currently $1.5 million). But if the policy proceeds put the estate into the taxable range, you’ll be facing taxes starting at 45%. So if your estate is big enough to be taxable, now or within a few years, you should think about changing ownership. If you transfer ownership, you’ll avoid the estate tax problem unless you die within three years of the transfer. In that case, the policy will be included in your estate as if the transfer had never occurred.

Changing ownership of a policy is quite simple, although there can be some gift tax consequences. You could transfer ownership to the beneficiary, or to your spouse or a child. Another option is to set up a life insurance trust. The trust holds the policy, which won’t be included in your estate. It can disburse the proceeds in the way you define, often with more flexibility than a simple beneficiary designation.

Think carefully before you change ownership of your policy, however. Once you transfer ownership you must give up all control. You’ll no longer have the ability to change beneficiary, modify the policy, or take cash advances. So don’t rush to make a change without understanding all the consequences.

Contact our office if you have questions about policy ownership and estate taxes.

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