If you’re reading this article, you are probably looking for ways to pass on all of your life insurance proceeds to your loved ones. However, with the various state and federal taxes on life insurance benefits, this might seem like a tall dream. Fortunately, we have outlined some decisions you can take to avoid taxation on your life insurance proceeds.
Transfer of ownership
One way to avoid taxation on your life insurance proceeds is to transfer the ownership of your life insurance plan to another individual. Here are some few things to keep in mind if you are considering this option:
- Transfer of ownership cannot be reversed after it is done. Therefore, carefully select the new owner of your life insurance policy.
- After selecting a qualified person as the new owner of your policy, contact your life insurance company for the ownership transfer forms.
- Be aware that the new owner will be responsible for the payment of premiums on the life insurance policy.
- By transferring ownership, you give up all rights to alter the life insurance policy in the future. On the other hand, if you appoint your child, spouse or friend as the new owner of your policy, you can request for changes to be made to your life insurance plan.
- Get a written proof from your life insurance company to show that you have successfully transferred ownership of your policy.
Life insurance trusts
Another way you can avoid paying taxes on your life insurance proceeds is to form an irreversible life insurance trust. Putting your life insurance plan into a trust means that you are no longer the owner of your policy. Thus, your life insurance death benefits are not included in your estate taxation. However, unlike the transfer of ownership, this option keeps you in charge of your life insurance policy. It also ensures that your premiums are paid on time. Besides, if your kids are still minors, this option allows you to appoint a reliable trustee who can handle the money for your kids until they are grown.