20 Jul Will this life insurance policy be taxable to my children?
Q. Are the life insurance proceeds distributions by an irrevocable life insurance trust (ILIT) taxable to direct beneficiaries? And is the inheritance tax waived for children of the deceased?
A. There are several things to know about life insurance proceeds
When a person who is the owner and insured under a life insurance policy dies, the life insurance proceeds are included in the gross estate of that person and may be subject to estate and/or gift tax, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
“However, when a life insurance policy is owned by an irrevocable life insurance trust (ILIT), the proceeds from the death benefit are not part of the gross estate as long as an existing policy was transferred to the ILIT at least three years before the death of the insured and therefore, are not subject to estate or gift tax,” she said.
New Jersey eliminated its estate tax in 2018 and the federal estate tax exemption in 2020 is $11.58 million, she said.
“New Jersey imposes an inheritance tax on siblings, nieces, nephews, cousins and friends but spouses, children and grandchildren are exempt,” Whitenack said. “Therefore, the proceeds of the policy owned by the ILIT are not taxable to the children who are the beneficiaries of the ILIT.”
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This story was originally published July 20, 2020.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.