How can I use survivorship life insurance to lower my estate tax?

Survivorship life insurance, also called second-to-die life insurance, cannot per se lower federal estate taxes. It is, nevertheless, widely used in estate planning as a tool for providing liquidity when needed.

According to one of the survivorship life provisions, if a husband and wife share a survivorship policy, the entire estate of the deceased can be left to a surviving spouse free of any federal estate tax. However, when the second spouse dies, a considerable federal estate tax may be due. This is where survivorship life insurance comes into play to provide liquidity when money is needed to pay estate taxes.

Who Owes Federal Estate Tax

First of all, it is very unlikely that you will owe any federal estate tax. Only the richest two percent of all American citizens will have to pay estate tax, with the amount of property exempt from it being $3,500,000 in 2009. In 2010 the federal estate tax will be repealed altogether until the Congress decides what to do with it in the future.

In the case of insurance proceeds, only when the insured has had ownership interest in the policy at the time of death and unless the insured has assigned the policy at least three years prior to death, are the policy proceeds included in the gross estate which is taxable.

How to Estimate Your Federal Estate Tax

1. Add up the market value of everything you won or you have interest in, including real estate, cash, insurance, business interests and any other assets applicable.
2. Deduct from the gross estate all your liabilities, such as funeral expenses, any form of debt, gift taxes paid on taxable gifts after 1976 and money donated for charity.
3. You can reduce your net estate by the marital deduction.
4. Any unified credit available is then deducted from the taxable estate.

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