As part of AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March 2012, we are partnering with our Summit Business Media sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format. In this, the seventh article, we look at life insurance proceeds and federal estate tax.
When can a beneficiary of life insurance proceeds be held liable for payment of federal estate tax falling on the insured’s estate?
The executor has primary liability for paying federal estate tax and is expected to pay it from the probate estate before distribution. Under IRC Section 2206, unless the decedent has directed otherwise, the executor ordinarily may recover from a named beneficiary such portion of the total tax paid as the proceeds included in the gross estate and received by the beneficiary bear to the taxable estate.
In the case of insurance proceeds receivable by the surviving spouse and qualifying for the marital deduction, IRC Section 2206 applies, if at all, only to proceeds in excess of the aggregate amount of marital deduction allowed the estate. Most states also have apportionment laws under which life insurance beneficiaries share the estate tax burden with estate beneficiaries.