Commentary
991
2007-08-28
2007-08-14
Life insurance
By Joe Kapp and Nicholas Burkholder
Write Kapp and Burkholder with your personal
financial questions at yourmoney@planetoutinc.com .
Think you
don’t need life insurance? Think again. Although
typically associated with marriage, life insurance
also makes financial sense for gay couples. It
provides extra financial security for your partner upon
your death—and it comes with the bonus of not being
subject to income tax, which is especially useful to
gay people.
To take out a
policy, gay partners (no surprise) often need to prove
their “insurable interest” in one another,
unlike heterosexual married couples, who automatically
qualify for insurance based on tradition. Fortunately,
proof is often as easy as a mortgage statement or other
evidence of joint financial responsibility.
The tricky part
is when you consider how the insurance changes the value
of your estate—and whether, when your estate passes
to your partner, it will be taxed. Spouses can leave
an unlimited amount to one another without triggering
estate tax, but—thanks to our lack of federal
marriage equality—gay people can leave each
other only up to $2 million. At or above that amount,
your partner can be taxed a whopping 45%.
So if you
don’t think your estate will hit that threshold, you
can stop reading now. Just find an insurance agent and
buy a policy. But if your estate is already worth over
$2 million (or will be), make sure that your partner
purchases and owns a policy on you with him as the
beneficiary. That’s not the usual way to do it:
Agents will assume you want to buy and own the policy
on yourself, as is customary. But that makes the policy a
part of your estate and possibly subject to tax.
Cross-ownership
gets around that by keeping the policy out of your
estate. Say your partner buys and owns a policy on you to
the tune of $1 million with himself as the
beneficiary. When you die, he gets that money
tax-free. What about owning that same $1 million on
yourself? It’s factored into your estate and
taxed accordingly, leaving him with much less.
Beware of
pitfalls, though. Aside from possible gift-tax issues, the
obvious one is if Mr. Right becomes Mr. Wrong, you’ll
still own a policy on him. Don’t think forever
is in the cards? Draw up an agreement explaining what
will happen to the policies in the event of a split. It
may not be romantic, but it’s better than being
tethered to an ex for the rest of his life.
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Write Kapp and Burkholder with your personal
financial questions at yourmoney@planetoutinc.com.
This article is for information only and is not
financial, legal, or tax advice. Readers should
obtain advice specific to their situation before
making any financial, legal, or tax decisions.