How can you minimize taxes on life insurance payouts?

Life insurance payouts and settlements are generally nontaxable to the person receiving the settlement. The only time the taxpayer needs to report any taxes on a distribution is on the interest received if the payment is held in an interest-bearing account before it is distributed. Otherwise, the estate itself will pay any estate taxes on the value of the estate, which is over $12.92 million in 2023. The best way to avoid that is by making gifts or transferring assets outside of the estate before death. This will reduce the credit amount used to offset estate taxes for the estate, but it will also transfer the potential growth of any assets to others.