Life Insurance Proceeds: Taxable In Georgia?

Life insurance is often seen as a reliable way to provide for loved ones after death. One of its biggest advantages is the tax relief it offers. Typically, the death benefit your beneficiaries receive isn't taxed as income, meaning they get the full amount to use for expenses like paying off debts, covering funeral costs, or securing their future. However, there are a few situations where taxes could come into play, and it's important to know when that might happen. For example, if your loved ones choose to receive the life insurance payout in installments instead of a lump sum, any interest that builds up on those payments could be taxed. This leads to the question: are life insurance proceeds taxable in Georgia?

• If the beneficiary receives the benefit after a period of interest accumulation, they must pay taxes on the interest.
• If the policyholder names their estate as the beneficiary, the person(s) inheriting the estate may have to pay estate taxes. | | How to avoid paying life insurance taxes | - Choose a competent adult/entity to be the new owner of the policy.
• Transfer ownership of the policy to another person or entity.
• Create an irrevocable life insurance trust (ILIT). |

Interest on life insurance proceeds is taxable

While life insurance proceeds are generally not taxable, there are certain situations where interest on life insurance proceeds is taxable. This typically occurs when there is a delay in the benefit payout, and the money is held by the life insurance company for a period of time, allowing interest to accumulate. In such cases, the beneficiary may have to pay taxes on the interest generated, even though the death benefit itself is not taxable.

For example, if a death benefit of $500,000 earns 10% interest for one year before being paid out, the beneficiary will owe taxes on the $50,000 growth. This is because income earned in the form of interest is usually taxable, and life insurance is no exception. Therefore, when a beneficiary receives life insurance proceeds after a period of interest accumulation, they must pay taxes on the interest accrued, rather than on the entire benefit.

It is important to note that the taxation of interest on life insurance proceeds is not limited to a specific state, such as Georgia, but rather, it is a general rule that applies across the United States. However, it is always advisable to consult with a tax professional or financial advisor to understand the specific tax implications based on your location and individual circumstances.

To avoid paying taxes on the interest of life insurance proceeds, beneficiaries should consider opting for a lump-sum payout instead of installments. By choosing a lump-sum payout, the death benefit remains tax-free, and there is no taxable interest to report. Additionally, proper planning and careful consideration of the ownership structure and beneficiary designations can help minimize potential tax liabilities.

Estate tax

While life insurance proceeds are generally not taxable in Georgia, there are certain scenarios where estate taxes may apply. Here are some detailed explanations and instructions regarding estate taxes on life insurance proceeds:

The federal government imposes an estate tax on the transfer of property upon death if the value of the estate exceeds a certain threshold. For 2024, the basic exclusion amount for an estate is $13.61 million, meaning estates valued below this amount are typically exempt from federal estate taxes. However, it's important to note that this threshold can change from year to year, so it's important to stay informed about the current exclusion amount.

Naming the Estate as Beneficiary:

One important consideration to avoid estate taxes is to refrain from naming your estate as the beneficiary of your life insurance policy. If you do so, the proceeds will be included in the value of your estate, potentially pushing it above the exemption threshold and triggering estate taxes. Instead, consider naming specific individuals as beneficiaries to avoid this issue.

Impact of Estate Taxes:

Strategies to Minimize Estate Taxes:

To minimize the impact of estate taxes on your life insurance proceeds, consider the following strategies:

• Irrevocable Life Insurance Trust (ILIT): By establishing an ILIT and transferring ownership of your life insurance policy to the trust, you can keep the proceeds separate from your taxable estate. Ensure that you meet the requirements, such as choosing a competent trustee and transferring ownership at least three years before your death.
• Ownership Transfer: Another option is to transfer ownership of the life insurance policy to another person or entity. This removes the policy from your taxable estate, potentially reducing the overall value and lowering or eliminating estate taxes. Remember to choose a competent adult or entity as the new owner and be mindful of gift tax implications.
• Proper Beneficiary Designation: Regularly review and update the beneficiaries on your life insurance policy. Ensure that you have named specific individuals as beneficiaries instead of your estate. Additionally, consider naming a contingent beneficiary to avoid any complications if your primary beneficiary predeceases you.
• Timely Planning: Engage in timely planning by reviewing your policy and making necessary changes as life circumstances evolve. This proactive approach will help you stay ahead of any potential tax complications and ensure that your beneficiaries receive the maximum benefit.

In conclusion, while life insurance proceeds are generally not taxable in Georgia, careful consideration of estate tax implications is essential. By understanding the exemptions, strategies for minimizing taxes, and the impact on your beneficiaries, you can make informed decisions to protect your loved ones' financial future.

Inheritance tax

While life insurance proceeds are generally not taxable, inheritance tax is a tax placed on the recipient for any inherited cash payouts, properties, and other assets. Currently, Iowa, Kentucky, Nebraska, New Jersey, Maryland, and Pennsylvania are the only states that enforce this tax.

If you are a beneficiary and receive life insurance proceeds due to the death of the insured person, this money is typically not counted as taxable gross income. However, there are situations where the beneficiary may be taxed on some or all of a policy's proceeds.

If the policyholder chooses to delay the benefit payout and the money is held by the life insurance company for a period of time, the beneficiary may have to pay taxes on the interest generated. When a death benefit is paid to an estate, the person or persons inheriting the estate may have to pay estate taxes.

In most cases, inherited money from a life insurance policy beneficiary is not taxed as income. However, a beneficiary may have to pay tax on any interest the policy accrued.

If the policyholder names an estate rather than an individual as a beneficiary, the person or people inheriting the estate may have to pay estate taxes. To avoid paying any taxes on life insurance proceeds, a taxpayer will need to transfer ownership of the policy to another person or entity.

To summarise, while life insurance proceeds are generally not taxable, inheritance tax may apply in certain states, and there are specific situations where taxes may be owed on the interest or other aspects of the proceeds.

Generation-skipping tax

In Georgia, life insurance proceeds are generally not taxable. However, there may be instances where the beneficiary is taxed, particularly if the cash value of the life insurance is particularly large. This is known as the generation-skipping tax.

The generation-skipping transfer tax (GSTT) is a federal tax on transfers of assets or property to individuals who are more than one generation below the transferor, such as grandchildren. This tax was introduced in 1976 to prevent wealthy families from avoiding estate taxes by transferring assets directly to their grandchildren, rather than their children.

The GSTT is imposed on three types of taxable events:

• Direct skips: transfers from one individual to a skip person, either outright or in trust. The transferor or their estate pays the tax.
• Taxable distributions: a distribution of income or principal from an irrevocable trust to a skip person. The GSTT is paid by the recipient.
• Taxable terminations: when an interest in property held in trust terminates, and there are no other non-skip beneficiaries. The trustee is responsible for paying the GSTT.

The GSTT exemption amount is $13.61 million per individual or $27.22 million for a married couple as of 2024. This amount is adjusted annually for inflation and is set to revert to the pre-2017 level of $5 million per individual in 2026 unless Congress changes the law. The tax rate is a flat 40%.

To avoid the GSTT, individuals can use dynasty trusts, which are designed to avoid or minimise estate taxes with each generational transfer. By parking assets in a dynasty trust and making specified distributions to each generation, the trust corpus is not subject to estate taxes.

Tax avoidance strategies

While life insurance proceeds are generally not taxable in Georgia, there are some instances where taxes may be incurred. Here are some strategies to help avoid or minimise taxes on life insurance:

• Choose the right policy type: Opt for permanent life insurance, which offers tax advantages such as tax-free cash value growth and tax-free death benefits for beneficiaries.
• Consider a maturity extension rider: If you have an older policy that matures at a specific age, you can add a maturity extension rider to continue the policy until your death, avoiding a taxable payout at a specified age.
• Name a person as the beneficiary: Instead of making the beneficiary "payable to my estate", name a specific person. This can lower the chances of increasing the value of your estate above the tax threshold.
• Irrevocable Life Insurance Trust (ILIT): Consider setting up an ILIT to purchase a permanent survivorship life insurance policy. This excludes the policy from your personal estate, and your heirs won't have to pay estate or income taxes on the death benefits.
• Choose the right beneficiary: If you're the policy owner and insured person, name someone other than yourself as the beneficiary to avoid taxes. If a third person is involved, they may be taxed.
• Avoid early withdrawals: Withdrawing money early from a cash value life insurance policy through loans or partial withdrawals can trigger taxes and reduce your benefits.
• Avoid selling or surrendering the policy: Selling your policy may result in income tax if the profits exceed what you've paid. Surrendering the policy will also make the cash value taxable.
• Seek professional advice: Consult a tax professional or financial advisor to review your specific situation and provide tailored strategies for tax avoidance within legal and ethical boundaries.

Frequently asked questions