Life Insurance and Gift Taxes

Taxes that are placed upon an individual regarding the transfer of assets or other properties, whether in monetary or in material form, to another individual, organization or groups are called gift taxes.

Gift taxes are implemented on a person if he/she gives more than $13,000 worth of money or assets to another party (for 2010, the tax rate is at 35 percent). Accordingly, if an individual is to present a gift to someone else besides his/her wife/husband, with a worth of $15,000, $2,000 will be taxed with a 35 percent rate, thus, the individual will need to pay the tax amounting to $700.

As previously explained, the gift need not necessarily be monetary in nature, meaning, anything of value can be presented as a gift to others, including insurance policies. Usually, when an individual decides to transfer his/her policy, the main reason of doing so is to leave out the proceeds of the original policyholder’s taxable estate but at the same time retain the tax-free nature of the policy upon death. In other words, people are inclined to transfer and pass their policies so as to improve and reduce the estate taxes that they will have to pay later on, thus gift taxes and estate taxes are hand in hand in talking about gifting of life insurance policies.

There are three chief exemptions on gift taxes. One of which is that gift taxes are not issued on gifts or transfers of properties between married couples. The second is that one can give any amount of money as help or donation to established and approved charitable organizations. And the last is for giving help for the purposes of genuine educational and medical expenses which are usually done by the elderly for their grandchildren to effectively decrease their estate taxes.

One benefit of having a life insurance is to produce a large sum of money to be distributed to an individual’s successors which are also income tax-free when given to the beneficiaries. Nonetheless, the proceeds can still be included in the person’s taxable estate, depending on the policy. This is why, in order for the proceeds to avoid federal taxation, the owner needs to transfer the possession of the policy to another person or unit who then pays for the premiums of the said policy.

If the policy was transferred to the spouse of the original owner, a gift tax is not required due to the unlimited marital deduction. Moreover, if the life insurance is given to some other relative other than the spouse, for example the children, the original policy owner is still able to pay for the premiums in some way by giving gifts to the new owner but not exceeding $13,000 for a year to avoid paying gift taxes.

Life insurance policies can also be used as effective help for charities since gifts of this nature with the purpose being beneficial to charitable organizations are exempted from gift taxes. A gift of life insurance is also economical and tax deductible which serves as a tax incentive for the donor. Aside from meeting the goal of helping a charity, gifting a life insurance policy is relatively easy and very flexible.