Definition - What does Estate Tax mean?
Estate tax is levied on the transfer of the net value of assets of a decedent to the heirs of the estate. The tax, however, does not apply to an estate transfer to a surviving spouse. Nevertheless, upon the demise of the surviving spouse, the beneficiaries incur the estate tax. In terms of insurance, a life policy purchased by the decedent can ensure their heirs receive a value equivalent to the estate while avoiding the estate tax incurred during a transfer of assets.
Insuranceopedia explains Estate Tax
Estate tax is imposed differently and varies according to state laws. For example, some states impose the tax upon the receipt of the estate by the heirs, instead of the transfer from the decedent. The tax is applied once a minimum threshold referred to as the exclusion limit is surpassed. This limit also varies based on the net value of the estate upon the death of the insured person.
A life insurance policy taken on the estate attracts an estate tax if the decedent owned the policy. However, if the policy is owned by the beneficiaries, there is no tax levied on it. The policy can also be transferred from the insured person to the beneficiaries directly before death, or an irrevocable trust can be created with the insured transferring ownership to the trust. This way, the policy does not incur estate taxes upon death of the insured.