10 Estate Planning Tax Facts You Need to Know

will with clockMy Comments: For many advisors, estate planning will take a back seat as the combined exemption (husband and wife) now exceeds $10.5M. That eliminates a lot of folks who nevertheless have substantial wealth. But there are still questions that should not be ignored. Here’s a quick summary that will put all this in perspective for you, especially if you have substantial life insurance on yourself.

The fiscal cliff deal cleared up every estate planning tax question ever, right? Or not. Because for as much fanfare as the new estate tax received, there are still a lot of sticky tax-related questions out there. Like what, exactly, constitutes an estate? Do life insurance proceeds count? What about employer-provided income benefits? How are annuities treated? Here are 10 big estate planning tax questions, answered.

Q. If life insurance proceeds are payable to an insured’s estate, is their value includable in the insured’s estate?
A. Yes. The entire value of the proceeds must be included in the insured’s gross estate even if the insured possessed no incident of ownership in the policy, and paid none of the premiums.[1] But proceeds payable to an executor in his or her individual capacity rather than as executor for the insured’s estate were not treated as payable to the insured’s estate by the Tax Court.[2]
[1] .IRC Sec. 2042(1); Est. of Bromley v. Comm., 16 BTA 1322 (1929).
[2] .Est. of Friedberg v. Comm., TC Memo 1992-310.

Q. When are life insurance proceeds that are payable to a beneficiary other than the insured’s estate includable in the insured’s estate?
A. Proceeds are includable in an insured’s gross estate if the insured legally possessed and could legally exercise any incidents of ownership at the time of the insured’s death. It does not matter that the insured did not have possession of the policy and therefore was unable to exercise his or her ownership rights at the time of his or her death,[1] or that the insured was unable as a practical matter to effect any change in the policy because the policy was collaterally assigned.[2]
The proceeds are includable even if the insured cannot exercise his or her ownership rights alone, but only in conjunction with another person.[3] It has been held that an insured did not possess incidents of ownership where the insured had paid no premiums, did not regard the policy as the insured’s own, and had made an irrevocable designation of beneficiary and mode of payment of proceeds.[4] But even if the proceeds are payable to a beneficiary other than the insured’s estate, and the insured possesses no incidents of ownership in the policy, the proceeds are nevertheless includable in the insured’s gross estate if they are receivable for the benefit of the insured’s estate. Even though the insured retains no incidents of ownership in the policy, the proceeds may be includable in the insured’s estate if the insured has transferred the policy within three years before the insured’s death.
[1] .Comm. v. Est. of Noel, 380 U.S. 678 (1965).
[2] .Est. of Goodwyn v. Comm., TC Memo 1973-153.
[3] .IRC Sec. 2042(2); Goldstein’s Est. v. U.S., 122 F. Supp. 677 (Ct. Cl. 1954).
[4] .Morton v. U.S., 29 AFTR 2d 72-1531 (4th Cir. 1972).

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