When playing sports, it is important to understand the rules to the game in order to win. The same is true for estate planning in California. It is essential to understand the relevant rules and regulations when planning an estate. All legal documents of an estate plan should reflect these applicable laws in order to ensure that one’s estate planning objectives are met.
One of the first things that people should research is the rules regarding life insurance policies. Most people may not understand exactly how tax laws affect life insurance benefits. One aspect that is not commonly known is that who owns the life insurance policy and for how long can make a difference in how the policy is taxed during the estate administration process. The proceeds from a life insurance policy can be included in one’s estate for purposes of estate taxation.
These tax rules are in place regardless of the designated beneficiaries listed in a life insurance policy. However, if one decides to transfer ownership of the life insurance policy more than three years prior to one’s death, the life insurance benefits will not be included in one’s gross estate for estate taxation purposes. The ownership of the life insurance policy can be transferred to another individual or even a trust. Making this timely decision to transfer ownership can save one’s intended beneficiaries from having to pay significant estate taxes to the government.
On the other hand, estate planning will also involve more than just dealing with one’s life insurance policy in California. There are various other things a person can do to help to minimize estate tax liability. However, this will require thorough knowledge of applicable estate planning and tax laws and then understanding how these laws apply to one’s specific situation.
Source: eastvalleytribune.com, “Financial Focus: Maximizing the estate planning value of life insurance“, Phil Hotchkiss, Aug. 31, 2015