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How Does Life Insurance Affect Estate Planning in New York?

life insurance new york estate planning

To understand the role that life insurance plays in your estate plan, you must first make a distinction between a probate estate and a gross taxable estate. For more information on how life insurance affects the estate planning process in New York, please continue reading, then contact an experienced Rockland County wills, trusts and estates attorney today.

What purposes does life insurance serve in estate planning in New York?

Life insurance can serve different purposes for different people, including the following:

  • To provide your loved ones with immediate liquidity to pay estate taxes and funeral expenses until your estate is administered through probate or a trust: This is especially helpful in cases in which an estate consists primarily of illiquid assets like real property, artwork or even wine collections.
  • To equalize beneficiaries who have received other assets, i.e. the family business, or to leave disproportionate assets to beneficiaries if that is your intention.
  • To buy out a business partner, so that you do not need to remain in business with your partner’s spouse when your partner dies, especially if you can’t afford to buy your partner’s shares in the business from his or her estate.
  • To pay any outstanding mortgages or maintain properties until other assets can be liquidated, in order to avoid having to sell the asset in a downmarket or in a “fire sale.”
  • To ensure that your beneficiaries have funds available to pay other potential future tax liabilities, such as estate, annual estate income or capital gains taxes.

Is life insurance taxable in your estate in New York?

Many people operate under the mistaken assumption that life insurance is not taxable in your estate. In the event that you own an insurance policy or have the incidents of ownership, i.e. the right to change the beneficiaries on the policy, then the entire insurance proceeds would be taxable in your estate when you pass on. A taxable estate includes both probate and non-probate assets. Assets that avoid probate do not necessarily avoid estate taxation. In addition to insurance owned by the decedent, IRAs and other retirement assets, annuities, joint bank accounts and other joint interests may avoid probate and pass directly to your beneficiaries. However, for estate tax purposes, the government includes them in the estate.

What should you do before buying a life insurance policy in New York?

Prior to purchasing a life insurance policy, you should carefully consider who you will list as the owner of the policy. If the insured individual owns an insurance policy or has control over it, the government will add the death benefit of the policy to the value of the insured individual’s estate. Therefore, the government may subject it to estate taxes. If someone other than the insured individual owns the policy, the government will not include the insurance proceeds in the insured person’s taxable estate.

Speak with our firm before you make any firm decisions.

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If you require an experienced team of attorneys, contact The Lauterbach Law Firm today to schedule a consultation.

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