Q: Are a 401K plan fund & Life insurance proceeds (both with declared beneficiaries) taxable while computing estate tax ?

A: Assuming this is a single person, you are close to having a taxable estate whether or not the doubling of the exemption is allowed to expire in 2026. You should seriously consider scheduling a consultation with an estate planning attorney with experience representing high net worth clients.

A: Both 401(k) plans and life insurance proceeds with properly designated beneficiaries typically pass outside of your estate and are not subject to federal estate tax. These assets transfer directly to your named beneficiaries through beneficiary designations, bypassing the probate process.

However, your 401(k) funds will still be subject to income tax when your beneficiaries withdraw the money, following specific Required Minimum Distribution (RMD) rules. Life insurance proceeds, on the other hand, are generally income tax-free to your beneficiaries, making them an effective wealth transfer tool.

Given your asset values and potential growth projections, you should consider that the current federal estate tax exemption of $13.61 million (2024) is scheduled to sunset in 2026, potentially dropping to approximately $7 million (adjusted for inflation). Since your total estate could reach $10-11 million by then, you might want to explore estate planning strategies like irrevocable life insurance trusts (ILITs) or qualified personal residence trusts (QPRTs) to help minimize potential estate tax exposure. Consider consulting with an estate planning attorney and tax advisor to develop the most effective strategy for your specific situation.