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Is Life Insurance Taxable in Wisconsin?

In this video, Attorney Thomas B. Burton answers the following question:

"Is Life Insurance Taxable in Wisconsin?"

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Hello, I'm Attorney Thomas Burton, Estate Planning and Asset Protection Attorney here in Wisconsin. Today's question is the following:

“Is life insurance taxable in Wisconsin?”

So this is an excellent question, one you want to be aware of when planning for your own estate and the short answer is ‘no’, generally life insurance are the proceeds of a life insurance policy, are typically excluded from a beneficiary’s gross income. So you can use a trust and distribute life insurance policy proceeds to the beneficiary’s income tax free because the proceeds being excluded from trust taxable income will not generate any distributable net income.

So that's sort of a longish answer. But basically if you leave life insurance directly to a beneficiary, there's no tax, on that amount because it's a gift from you at death. Similarly, if you set it up to leave it through a trust, like for minor children or people with special needs, you can have the trust distribute the proceeds to the beneficiaries without income tax as well. Because again, it's a gift at death, not generating income generally each year. Now if you have the life insurance you can have the policy distribute the proceeds.

Now, if you put money in a trust and have it generate income each year, the trust might pay some tax on the income it generates each year. But in general, if you are just thinking about the $500,000 of life insurance that you bought, at your death, let’s say, you have $500,000 policy in your leaving it to your two children, they would receive that money tax-free upon your death and that's a great reason to use life insurance as part of your estate planning. It's a great way to leave a bequest at death and also leave it to your heirs, tax-free.

Additionally, it's a great tool to use for minor children as they touch down, you can set up a trust that your proceeds under your will or your trust. You can set up what we call a family pot trust, just for the minor children and have the life insurance pay to that trust and then your trustee can use the money to take care of your children until you reach the age as you choose and in Wisconsin, the age of majority is 18, but if you set up this family pot trust, you can choose an age older than that such as 21 or sometimes, some of my clients, what we like to do is we say they get some at 22, some at 25 and the rest at 28. So it spreads that out a little bit instead of someone at 18, walking into inheriting $250,000 or whatever it is.

So the great news is life insurance, the proceeds from life insurance, upon your death, are not taxable in Wisconsin and they're not taxable at the federal level and it's a great way to leave a bequest to someone at death or provide for your heirs after your death.

So great question and thank you for asking.

© 2020 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.


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