When thinking of how life insurance proceeds are taxed, we’re really thinking of two different scenarios: income tax and estate tax. Generally speaking, these two scenarios are at opposite ends of the tax spectrum in most instances.
Income Tax to the Beneficiary
As a general rule, life insurance benefits that are paid to a beneficiary in a lump sum are not included as income to the beneficiary. However, if the policy is combined with a non-refund life annuity contract where a single premium is equal to the face value of the insurance is paid, the the exclusion from income tax does not apply. The additional interest received above the face amount of the policy is taxable.
Estate Tax
Life insurance policies that are owned by the decedent (the person who died) are included as part of his (or her) taxable estate for calculation of estate taxes. This would normally subject the estate to a tax burden, not necessarily the beneficiary of the policy. The only way to avoid the inclusion of the policy in the decedent’s taxable estate is to assign the policy to a different individual (or trust). However, the assignment is subject to a three-year look back by the IRS. If the decedent dies within three years of the assignment, the IRS will still consider the policy to be owned by the decedent for estate tax purposes.
Cheers,
Paul A. Yokabitus
Author Bio
Paul Yokabitus
Founder & Estate Planning Lawyer
Paul Yokabitus is the founder of Cary Estate Planning, where he helps North Carolina families protect what matters most through wills, trusts, probate, and special needs planning. Known for his “planning, not paperwork” approach, Paul turns complex legal concepts into clear, practical strategies so clients feel informed and confident at every step. He has been recognized as a Business North Carolina Legal Elite attorney and a Super Lawyers Rising Star, and was named to the Triangle Business Journal’s 40 Under 40. A graduate of Campbell University School of Law, Paul lives in the Triangle with his wife, Alix, and their two sons.
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How We Help North Carolina Families
Paul and his team at Cary Estate Planning are fully committed to creating a personalized experience to develop thorough and comprehensive estate plans. They value their clients and go above and beyond to make sure that no details are missed. I would highly recommend Paul to anyone looking to create an estate plan.
I was referred to Paul by my Real Estate Attorney and I could not say enough about how exceptional the client service has been from everyone I spoke to. The communication is prompt and I feel like they really took the time to answer all my questions and set things up exactly as I wanted, but also recommended things to make it easier on my family down the line.
After attending one of Paul’s estate planning seminars, my husband and I knew we wanted Paul to assist us with our estate planning. His honest, professional approach to this necessary part of life put us at ease with the process. We will continue to recommend Paul and Cary Estate Planning.
We had a great experience working with Paul Yokabitus and the team at Cary Estate Planning to set up our Will and Estate Plan. The process was clear and easy, and in the age of COVID, our signing session was very well done, easy, and safe.
The Cary Estate Planning team will make sure that you have the information you need to be confident in your estate planning decisions. I learned so much from videos, a one-on-one in-person consultation, the website, emails, and a newsletter mailed the old fashioned way. The fee is very reasonable given the importance of estate planning. No matter the size or number of your assets, don’t procrastinate like I did!
Paul is a masterful attorney. He’s very good at taking your intentions and defining that into a durable Trust and Will. Best of all he is as simple and plain-spoken as you like. Or as fast as intellectual as you may be. It’s all about your your speed and your desired outcomes. Would strongly recommend this firm.
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