When Priscilla Presley challenged her late daughter’s will recently, it raised the prospect of a family rift and a messy legal battle over who would guide Elvis’ big estate. But legal experts say Elvis’ former wife and Lisa Marie Presley’s mother has a strong case.
Nonetheless, court battles over estates can be costly and protracted and aren’t limited to celebrities. How can you prevent your heir and other survivors from fighting over your assets once you are gone? There are steps you can take now to help avoid your estate–and family–from being pulled apart over an inheritance or control of your legacy.
Think about taxes in naming a beneficiary. The main purpose of life insurance is to provide financial support to your loved ones after your death so you want to be sure you don’t create a tax burden for the recipient. Name a real person, not your estate, as the beneficiary, which could subject the policy to the probate process. In addition, leaving items to your estate increases the value of the estate and could subject your heirs to high estate taxes.
Proceeds from a life insurance policy aren’t taxable, right? Generally, that’s right. Beneficiaries don’t have to report the payout as income but there are some exceptions: 1) if the insurance company issues the death benefit in installments instead of in one lump sump and 2) of the death benefit becomes part of your estate (see above.) Most estates fall below the $12.92 million (in 2023) amount that is excluded before the estate becomes taxable.
How much must an estate be worth before it becomes taxable? For estates inherited in 2023, the first $12.92 million in value is not taxable, so no taxes will be owed on most estates.
PRO TIP: Review your account beneficiaries with a financial advisor to review any of the changes enacted by the Tax Cuts and Jobs Act, which are set to expire at the end of 2025.
Know some key definitions. A death benefit is the amount of money payable to a designated beneficiary upon the death of the insured person. The benefit itself ix tax exempt but any interest earned on the benefit once the insured person has died is subject to tax.
A life insurance beneficiary is a person or an entity named as the recipient of a policy’s death benefit. It can be anyone the policy holder chooses or an entity such as a church, a charity or an educational institution.
What about inherited life insurance money? You do not have to pay taxes on inherited life insurance money, unless the life insurance benefit accrued interest. If that happens, you may have to pay taxes on the interest.
What if my estate exceeds the $12.92 million excluded amount? You can likely reduce the amount of the taxable estate by maximizing gift-giving and transferring policy ownership whenever possible at little or no gift tax cost. The catch–you need to live at least three years after the transfers in order for your estate to be sheltered from taxes.
If I want to leave my entire estate to my spouse, should I leave my 401(k) plan and IRA director to my spouse? Or do it through my revocable estate? It depends. Naming your spouse directly is simpler but there are some advantages to trusts. They can provide greater creditor protection, can help if your spouse becomes incapacitated after you die and can preserve funds not needed by your spouse for your children. If you live in a state with a low-threshold estate tax, a trust may protect your from being taxed upon the death of the survivor of yourself and your spouse. Before you name a trust as the beneficiary, you should discuss it with a lawyer who is familiar with trust laws and estate planning.
Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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