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Life Insurance

Personally owning life insurance or naming you or your estate as beneficiary could cause the inclusion of the life insurance in your estate assets for federal and/or state estate tax calculation purposes. If your taxable estate value (including the life insurance) exceeds the estate tax exemption amount1, federal and/or state estate taxes may be imposed on the property that you own at your death. This tax is due in cash and must be paid by your estate within nine months of your death.

On the other hand, if your estate's taxable value (including the life insurance) is under the estate tax exemption amount1, the ownership or beneficiary designation may have no tax impact on your estate. Our Estate Tax Calculator can help you estimate if your estate might be subject to estate taxes.

When estate taxes are a primary concern, many individuals relegate ownership and beneficiary designation for their life insurance to a third party, such as an irrevocable life insurance trust (ILIT) or adult children. Either may avoid inclusion of policy proceeds in your estate. Meanwhile, third-party owners may be able to lend these proceeds to, or purchase assets from, your estate to provide cash to satisfy your estate tax liability. (If you make your spouse the owner of a policy on your life, you should ensure that, if your spouse dies before you, you will not end up owning the policy either through a provision in your spouse's will or a living trust.)

Even where the owner is a third party, if the beneficiary dies before you (the insured), the proceeds may be paid to your estate. Naming a contingent beneficiary to the policy will ensure that the proceeds will go directly to that person, thus avoiding probate and estate taxes. The "Rule of Two" holds that a policy should always have at least two contingent beneficiaries in order to avoid such problems.

You should remember that any gift of life insurance to a third party (except to your spouse) may carry with it gift tax consequences2. Additionally, if you fail to survive your gift by three years, the policy may be brought back into your estate. Because of these potential pitfalls, you should always seek tax and legal advice prior to any transfer.  

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1 According to the American Taxpayer Relief Act of 2012, the federal estate, gift and generation skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%.

2 As of January 1, 2013, the annual gift tax exclusion is $14,000 per donee (indexed for inflation). For more information on this subject, and professional guidance in selecting the right kind and amount of insurance coverage, contact your life insurance producer.

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any fixed subaccount crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company, but they do not protect the value of the variable investment options. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Variable insurance products are distributed by Pacific Select Distributors, Inc., (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company, and an affiliate of Pacific Life & Annuity Company, and are available through licensed third-party broker-dealers.

Pacific Life is located in Newport Beach, CA.