Estate Tax
What Does Estate Tax Mean?
Estate tax is levied on the transfer of the net value of a decedent’s assets to the estate’s heirs. However, this tax does not apply to transfers made to a surviving spouse. Nevertheless, upon the death of the surviving spouse, the beneficiaries will incur the estate tax. In the context of insurance, a life policy purchased by the decedent can ensure that their heirs receive a value equivalent to the estate while avoiding the estate tax that would be incurred during the transfer of assets.
Insuranceopedia Explains Estate Tax
Estate tax is imposed differently across states and varies according to state laws. For example, some states levy the tax when the heirs receive the estate rather than at the time of transfer from the decedent. The tax applies once a minimum threshold, known as the exclusion limit, is surpassed. This limit also varies based on the net value of the estate at the time of the insured person’s death.
A life insurance policy owned by the decedent attracts estate tax. However, if the policy is owned by the beneficiaries, no tax is levied on it. The policy can also be transferred from the insured person to the beneficiaries directly before death, or an irrevocable trust can be established with the insured transferring ownership to the trust. In this manner, the policy does not incur estate taxes upon the insured’s death.
