Life insurance often plays a major role in estate planning, both in Texas and nationwide. The insured individual should maximize the estate planning value of his or her life insurance by making sure that all considerations are covered and effectively applied. One goal of this process is to free the insurance proceeds as much as possible from the grasp of the IRS and to put those proceeds into the hands of one's beneficiaries.
For federal tax purposes, the value of life insurance proceeds is included in one's gross estate for estate tax purposes. To avoid including the life insurance in the gross estate for federal estate tax purposes, the insurance policy itself can be owned by a living trust or another individual. Furthermore, the beneficiary should not be the estate or the executor of the estate in order to keep the proceeds from being included in the gross estate value.
This will keep the proceeds from being taxed and will keep the funds free from attachment by one's creditors. It is thus important how the policies are owned and who is named as a beneficiary. These questions become complex in a large estate with substantial assets and large insurance policies.
In Texas as well as elsewhere, the process is one that is ideal for working out in cooperation with one's financial planner and the estate planning attorney. In most instances, federal estate taxes will not be assessed due to high thresholds currently in place. However, the amount subject to a federal estate tax is subject to change on a regular basis so that careful estate planning is crucial to the success of one's plan. Furthermore, expertise in planning is essential to make sure that the life insurance proceeds generally are given to one's beneficiaries and not dissipated by claims of creditors against the estate.
Source: eastvalleytribune.com, "Financial Focus: Maximizing the estate planning value of life insurance", Phil Hotchkiss, Aug. 31, 2015