Been working with a couple from Lafayette, Louisiana on their estate legal program. One of the reasons they said they came to me was that I had a Masters Degree in Tax Law (from Boston University School of Law) and they wanted to make sure that they avoided estate tax as they passed their rather large estate on to their children.
We were going through their list of assets and I noticed that he had accumulated a number of life insurance policies during his lifetime. He had about $3 million of life insurance - it was a cluster of five different policies that he had been sold over his lifetime - some term insurance, some universal life, and some whole life.
He had done what most people do when they are married and they acquire life insurance. The husband had named himself as the owner of the life insurance policies, and he had named his wife as the beneficiary. This is what most people do.
So, if he has his policies structured this way, what will be the estate tax consequences? Well, if the husband dies first, there will be no estate tax as a result of these life insurance policies because the $3 million will be part of the Husband's gross estate, but they will be deducted from his estate under the federal estate tax marital deduction. But the problem is: THE WIFE NOW HAS AN EXTRA $3 MILLION IN HER ESTATE. There will be no way to exclude these funds from her estate. She can't give it away fast enough pursuant to the annual exclusion. These funds will cause an extra $1.2 million of federal estate tax when the surviving wife dies ($3 million * 40%)
We discussed having the husband and wife transfer OWNERSHIP of these policies either to their children, or to an irrevocable trust naming the children as beneficiaries, so that neither the ownership nor the proceeds of the policies would be in the estate of either spouse. We talked about how special rules apply to ownership of life insurance policies such that three years must pass after the transfer of ownership for the death proceeds to be excluded from the estate of the insured.
If you live in Louisiana, whether you live in Baton Rouge, Monroe, Shreveport, Lafayette, Lake Charles, or New Orleans, and you own life insurance and you would like for the death proceeds to not only avoid income tax but also the 40% estate tax, you may want to give our office a call at 866-491-3884 to start a conversation about how to set up your estate legal program to avoid estate tax when you (or you and your spouse) pass away.