May 18, 2024
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May 18, 2024
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The Truth About Life Insurance and Your Estate Plan

It’s that time of year again. A time of year to reflect on our lives. The good things we did. The not-so-good-things we did. And everything in between.

As we start to look at our lives, we realize how important it is to plan. Plan for the present. Plan for the future. Plan for what happens after we are gone.

One of the best ways to plan for the future is through life insurance. Have no fear—I don’t sell life insurance and I’m not going to sell you on life insurance (although I do think life insurance is fantastic and we all need it). But many of us currently have life insurance and it’s important to talk about the effect of that life insurance on your estate.

In the last article we talked about the New Jersey estate tax. As a brief recap, in New Jersey, estates over $675,000 are subject to estate taxes. The good news is that there is a marital deduction, and so transfers between American citizen spouses are generally not subject to estate taxes. However, when wealth transfers from one generation to the next, New Jersey imposes estate taxes for any estate over $675,000.

You might be thinking, “Okay, I’m in the clear. I only have a house, a little money in the bank, and some life insurance policies. I know life insurance policies are tax free!”

I hear this all the time from my clients. The problem is, if that’s what you think, then you’re only half right. Yes, life insurance is not subject to income tax, and if paid to individuals it is not subject to New Jersey inheritance tax, but life insurance IS subject to estate tax. Therefore, if you die, and you leave your life insurance policy to your children, they will probably have to pay estate taxes if you live in New Jersey.

Let me give you an example. Harry and Wendy are married and live in New Jersey. They have two lovely children, Ruben and Simon. Harry and Wendy are very excited because they are about to take a flight to Los Angeles to embark on a fun cruise to Alaska to protest President Obama’s renaming of Mount McKinley to Denali.

On the flight to LA there are complications and tragedy occurs. Harry and Wendy die in the plane crash. In their wills, Harry and Wendy left their entire estate (valued at $1,350,000) to their children, and two $2,000,000 life insurance policies in trust for Ruben and Simon (we’ll talk about why “in trust” as opposed to “outright” in another article).

Thus, Ruben and Simon are about to inherit a $5,350,000 estate.

Enter New Jersey estate tax. Assuming Harry and Wendy had wills, and in those wills they gave options for the executor to create certain kinds of trusts, so that Harry and Wendy were able to shield $1,350,000 of their estate from estate tax, that would leave $4,000,000 ($5,350,000 – $1,350,000) in life insurance subject to New Jersey estate tax. The total New Jersey estate tax would then be approximately $306,800.00. I’m sure Harry and Wendy wanted that money to go to their children, and they did not want $306,800.00 to go to New Jersey’s budget, some of which is going to Chris Christie’s security detail in New Hampshire.

Lest you think Harry and Wendy are powerless to the New Jersey estate tax, there is a way out, specifically through an Irrevocable Life Insurance Trust (ILIT). Many of my clients use them to save New Jersey estate taxes. Most recently, James Gandolfini of Sopranos fame created an ILIT and funded it with a $7,000,000 policy for his son Michael. As a result, Michael did not have to pay any federal or New York estate taxes on that money.

In our scenario, if Harry and Wendy had their life insurance policies in an ILIT, their combined $4,000,000 in life insurance and $1,350,000 in other assets would have passed to their children completely free of any estate tax, and the $306,800 that otherwise would have gone to the State coffers would pass to Ruben and Simon instead.

In our next article we’ll talk about how an ILIT works, and about how it can save you and your family thousands of dollars. Happy New Year!

Alec Borenstein, Esq., an estate planning attorney, is a Teaneck resident with offices in Springfield and Brooklyn. His firm’s website is If you’d like a free estate planning consultation in the comfort of your own home or office, please email [email protected].

By Alec Borenstein

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