BY RONALD A. FATOULLAH, Esq. and STACEY MESHNICK, Esq.
Estate tax is a tax imposed on property that an individual owns and transfers at the time of his/her death. An estate will be subject to state and federal estate tax, depending upon the size of the estate. There is certain property that is not includable in the estate for purposes of an estate tax calculation. Any property to which the decedent had ties, or “incidents of ownership” is includable. Life insurance proceeds are among the types of property that can be included in a taxable estate.
Estate taxation of life insurance proceeds depends upon ownership of the policy and payment of the proceeds. If the proceeds of a policy are paid to the insured person’s estate, the amount will be fully subject to tax on the death of the policy owner.
However, if the life insurance policy is not owned by the decedent or paid for directly from the decedent, the proceeds will not be included in his/her estate upon his/her death. The proceeds may then be used to pay the estate taxes. As long as the decedent does not own the policy or have any right to borrow from it, the amount will not be part of his/her taxable estate. If one does not own the policy, he/she cannot make any changes to the policy including changing the beneficiaries or cancelling the policy.
An Irrevocable Life Insurance Trust (“ILIT”) is a vehicle through which one can benefit from life insurance without the decedent having any incidents of ownership, thereby excluding the proceeds from one’s estate. As such, estate tax will be reduced, ultimately leaving more assets to be inherited by a spouse and/or children. Premiums are paid by the Trustee of the trust rather than by the individual. The source of the funds for the premiums may be income producing property that is transferred to the trust or annual exclusion gifts ($13,000) contributed to the trust.
The Trustee of an ILIT may purchase a policy with funds transferred to it by the grantor of the trust (the individual whose life is insured) or, if one already owns a life insurance policy, the ownership of the policy can be transferred to the Trustee of the ILIT.
One caveat of transferring ownership is that if the insured/transferor dies within three years of the date from when he transferred the policy, the life insurance proceeds will be included in his estate and subject to estate tax, as if ownership had never been transferred.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The firm has offices in Forest Hills, Great Neck, Manhattan, Brooklyn, and Cedarhurst, NY. Fatoullah has been named a “fellow” of the National Academy of Elder Law Attorneys and is a former member of its Board of Directors. He also served on the Executive Committee of the Elder Law Section of the New York State Bar Association for over 15 years. Fatoullah has been Certified as an Elder Law Attorney by the National Elder Law Foundation. Fatoullah is a co-founder of Senior Umbrella Network of Queens. Stacey Meshnick, Esq., supervises the Medicaid Department at the firm. The firm can be reached by calling 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.
