Life insurance proceeds, if includable in the insured’s gross estate, will generate federal estate taxes if the insured is not survived by a spouse and/or does not wish to leave the insurance proceeds in a manner that will qualify for the estate tax marital deduction. Who will pay this tax? Should it be paid by the beneficiaries out of the proceeds or by the heirs of the probate estate? Should it be apportioned between them? The answer, of course, should only be given by the client.
The problem can, and should, be addressed by the planner drafting the client’s will and irrevocable trust. The insured decedent’s executor or administrator has the legal right to recover from the beneficiary of the insurance proceeds any estate taxes attributable to the inclusion of those proceeds in the insured’s taxable estate. On the other hand, if the proceeds were not taxable (for example because they passed outright to the insured’s surviving spouse or to a charity), the beneficiary has no liability for their payment.17 The Internal Revenue Code allows the insured to specify, by an allocation clause in his will, who will bear the burden of any estate tax.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM