Recipients of the death benefit can avoid estate taxes by establishing a trust supported by a Form 712, along with a gift of a life insurance policy. While the life insurance proceeds provide income free from taxes, they can also create complexities when filing an estate tax return.
Most people who own a life insurance policy will never understand the role that IRS Form 712 “Life Insurance Statement” plays. It contains critical information for individuals who are planning to bequeath a significant estate, and who own life insurance outside their taxable estate, or when changing the ownership of an existing life insurance policy outside of their taxable estate. Form 712 should be included with any Form 709 Gift Tax Return related to certain policy transfers during the insured’s lifetime to establish the value of the gift as well as with the Form 706 Estate Tax Return after death for all policies insuring the life of the decedent.
When assessing your financial and life circumstances, it is important to take into account several important factors in order to make the most sensible decision. Before submitting the alteration and completing the necessary paperwork within the designated deadlines, it is advisable for individuals to seek guidance from their advisors to ensure a clear understanding of the potential ramifications associated with such a modification.
If the life insurance is owned inside the estate at the time of the insured’s death, it may trigger estate tax issues.
Tax-free proceeds to the beneficiary
Taxpayers should consult with their advisors to determine if it makes sense to transfer ownership of any life insurance policy outside of the estate, as a trust can be created for this purpose. Once the estate reaches the threshold where the proceeds, including the death benefit, exceed the exemption limit, life insurance policies owned inside the estate may trigger estate tax issues. Currently, federal law exempts estates with a value of less than $12,060,000 from estate taxes. However, if the life insurance policy is properly administered and the beneficiary receives the death benefit as tax-free income, it can be a major benefit of life insurance.
Form 712 and the estate tax return
The U.S. 706 Form is not required to file a return for most estates that fall within the exemption amount, and the form is not automatically sent out to the estate beneficiary/estate. Instead, the insurance company needs to be asked to provide the 712 Form for each insurance policy that insures the decedent’s estate, ensuring that estates which do not require the filing of an estate tax return and fall within the exemption amount will need to ask the insurance company to provide the 712 Form for each insurance policy that insures the decedent’s estate.
If it aligns with your planning goals, it is crucial to address the planning early on and avoid delaying the early gifting of the life insurance policy due to the three-year timeframe. This timeframe allows the death benefit to potentially be included in the taxable estate and be subject to estate taxes. Both scenarios would apply regardless of whether the decedent had any ownership incidents or if they transferred the policies within the three-year period prior to their passing. The disclosed key information about nonowned policies includes the policy’s basis, value, and owner at the time of death. Whether the policies were owned within the estate or not, the value of all policies on the decedent’s life must be reported on the estate tax return using Schedule D in order to prepare the estate tax forms. Form 712 provides a report on the value of a policy.
Every policy must be acquired through an individual application, regardless of whether it is utilized to back up a gift tax return or an estate tax return, specifically Form 712. To meet the deadline for filing the corresponding return, it is crucial to request these forms as early as feasible to guarantee their timely provision, either on the transfer date for gifts or the date of death for an estate tax return.
Form 712 and the gift tax return
When a life insurance policy is given to a trust, the policy’s ownership is moved outside of the taxable estate, allowing the beneficiaries to receive the proceeds without any income or estate tax implications. To obtain this benefit, there needs to be an actual change in ownership of the existing life insurance contract, and simply giving the premiums is not sufficient. When the insured individual makes the gift, it must be reported on a Form 709 U.S. Gift Tax Return to the IRS. To complete the return, a Form 712 must be included for each transferred policy.
When a life insurance policy is gifted to a trust, the ownership of the policy is shifted outside of the taxable estate.
The form should be completed and authorized by an executive of the life insurance company at the earliest opportunity in order to provide sufficient time for its preparation and authorization by an executive of the life insurance company. Taxpayers should be aware that the form request can be swiftly processed. This is not a form that the insurance provider is capable of preparing.
Plan ahead
If it appears that your taxable estate might exceed the exemption, you should be working with your advisors to determine what steps you can take during your lifetime to minimize the impact of estate taxes on your heirs. Please contact Agency Insurance Moran Plante for more information on how to file Form 712 and learn about the choices available to support your estate planning.
If you are considering any ideas mentioned here, it is advisable to seek professional tax advice specific to your tax situation. The general tax advice contained herein is not intended to provide specific recommendations or advice for any individual, taking into account their individual financial situation, investment objectives, or needs. This article is solely intended for informational purposes and is provided solely as an incidental service to our business as securities brokers, investment advisors, financial planners, and insurance professionals.
Valmark Securities, Inc. Offers securities through its affiliation with FINRA and SIPC, serving as an independent broker-dealer for securities.