Book Opener

Death and TaxesMost people own life insurance at some point in their lives. When a persondies, he or she often leaves the proceeds of a life insurance policy to asurviving spouse as beneficiary. The question then arises whether the proceedsof the life insurance policy are subject to estate taxes.Happily, the answer is no. Life insurance proceeds are not subject to theestate tax, also referred to as the “death” tax. The life insurance policy passesimmediately to the named beneficiary and does not become part of the estate.For this reason, this exemption from estate taxes applies when someone otherthan a surviving spouse is named as beneficiary.Conduct Research Visit the Web site of the Internal Revenue Service(www.irs.gov). Research the rules regarding estate taxation. What property leftto a surviving spouse is subject to the estate tax?774 Unit 7: Planning for the Futureit is called a noncontributory pension plan. Most employer pensionplans, however, are contributory pension plans financed by employeesalone or by the combined contributions of employers and employees.Under a 401(k) plan , employees agree to forgo a bonus or take asalary reduction to invest in a retirement plan. Employers sometimesmatch the amount contributed by employees. A similar plan for employeesof nonprofit organizations is known as a 403(b) plan. Funds in either planare not taxed until the money is withdrawn, but the money cannot be withdrawnwithout penalty before the age of 59 1 /2. Lower income workersare entitled to tax credits when they save for retirement.Defined-Benefit PlansDefined-benefit plans are the most common type of employer pensionplan. Under this type of plan, employees receive a definite, predeterminedamount of money upon retirement or disability. The fixedamount is based on an employee’s years of service; the amount of themonthly benefit is an amount of money fixed in advance for each yearof service. For example, a plan may pay $30 per month for each year ofservice. If you worked 20 years for the company, your pension wouldbe $600 per month. Payments may also be calculated based on a percentageof your wages over the years. The employer must contributenecessary amounts to ensure that benefits will be paid at retirement.