Life insurance is a blessing for most people. Life insurance allows widows and widowers to pay off mortgages and keep their home. It allows them to have the resources they need so they will not suffer financially from theloss of their spouse.  

Life insurance can also provide for minor children. Again, the family home can be saved, bills can be paid, and college funds are available. In some cases, life insurance can provide for a disabled child that will need care long after the parents are deceased.  

For many people, life insurance is a simple matter of owning a policy and designating the appropriate beneficiaries. Life insurance proceeds are not taxable to the beneficiary. This means that the beneficiary does not pay any taxes for receiving the proceeds.  In many cases, the estate pays no taxes because the value of the estate is well below the limit to be taxed. The beneficiaries simply use the proceeds to pay for the things they need and taxes are not an issue.  

For anyone with an estate that may face estate taxes, life insurance planning is necessary so that the estate does not have to pay taxes because of the life insurance. Presently, the estate tax limit is $5 million. That amount is scheduled to be reduced to $1 million in January of 2013. That may seem like a high number; but, the value of a home and other assets can quickly raise a person’s estate value to a level where a sizeable life insurance policy will mean estate taxation. Of course, most estate planning attorneys believe the estate tax limit will be raised to a number above $1million; but, there is no guarantee of that until Congress acts.  

The safest route for individuals is to plan for the $1 million estate tax limit.  This means that there are no taxes for a deceased person’s estate until the value of the estate exceeds $1 million. Any assets exceeding the $1 million limit will be taxed at 55 percent.  

An irrevocable life insurance policy is created for the purpose of keeping your life insurance policy proceeds outside of your estate.  In other words, the value of your life insurance has no relevance whatsoever toward totaling the value of your estate.  This technique may keep your estate value below the limit to be taxed. If your estate is still subject to taxes, the proceeds from the policy can be used to pay any estate taxes that may be owed, pay off debts, and provide funds to a surviving spouse or children.  

Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”

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