Is There Inheritance Tax on Life Insurance?

Inheritance taxes may be levied against your life insurance proceeds depending on where you live. States with inheritance tax policies take several factors into consideration when determining who is responsible for paying inheritance taxes and how much. If you’re a family member receiving life insurance benefits, there’s a chance you may not owe inheritance taxes.

Difference From Estate Tax

Inheritance and estate tax are not the same, although you may see both commonly refer to as each other. The similarity exists because your property is taxed by both types. However, inheritance tax is levied against the property value you transfer to someone else after any estate taxes have been accounted for. For the record, there is no federal inheritance tax: states impose inheritance tax.

Who Pays Inheritance Taxes

State inheritance taxes are generally not applied to life insurance proceeds if the beneficiary is any of your linear family members. This includes your spouse, children, grandchildren, parents, brothers and sisters. Nonlinear family members, such as nieces and nephews, brothers/sisters-in-law and cousins, may have to pay inheritance taxes on the life insurance proceeds if any are the beneficiary. Those who are not considered family members typically pay the top inheritance tax rates.

State Inheritance Taxation

Only eight states as of 2012 impose inheritance taxes on eligible estates. There is no uniform tax rate; states set their own rate as well as exemption amounts. For instance, Kentucky has a top inheritance tax rate of 16 percent and exemption amount starting at $500. Iowa has a top inheritance tax rate of 15 percent but no exemption limit.

Considerations

If you owe inheritance taxes, the time frame to pay them differs from each state. In Nebraska, you have 12 months to pay what you owe or interest may be applied to your balance. In Tennessee, you have nine months. States may grant extensions to give you extra time to pay inheritance taxes if you file the proper paperwork prior to the due date.

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