Life Insurance and Gift Exclusion


B

BobK

My father died in 2003. I have four siblings: 3 sisters
(Sister A, B, and C) and 1 brother (Bro).

After my father's death, we discovered he had an accidental
death policy listing my brother and me as beneficiaries.
This policy paid out $115,000 in 2004. Believing that dad's
intent was for this money to be shared by all, my brother
and I split the $115,000. From my share of the $57,500, I
kept $23,000, and gave Sister A $23,000 and Sister B
$11,500. Bro did the same, keeping $23,000, and giving
Sister B $11,500, and Sister C $23,000. All 5 siblings now
had $23,000.

Please tell me if the following assumptions are correct:

1) The $23,000 that I received under my father's life
insurance is not taxable to me.

2) The $23,000 that I gave Sister A must be reported as a
gift. For tax purposes, I can say that I gifted Sister A
$11,000, my wife gifted Sister A $11,000, and the leftover
$1,000 is taxable to my wife and me (married filing
jointly). We then file Form 709 and apply the Unified
Credit.

3) The $11,500 that I gave Sister B must be reported as a
gift. I gifted Sister B $5,750, and my wife gifted her
$5,750. None of this gift is then taxable. Thanks for your
patience and your attention to these questions.
 
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D

David Woods, EA, ChFC, CLU

BobK said:
My father died in 2003. I have four siblings: 3 sisters
(Sister A, B, and C) and 1 brother (Bro).

After my father's death, we discovered he had an accidental
death policy listing my brother and me as beneficiaries.
This policy paid out $115,000 in 2004. Believing that dad's
intent was for this money to be shared by all, my brother
and I split the $115,000. From my share of the $57,500, I
kept $23,000, and gave Sister A $23,000 and Sister B
$11,500. Bro did the same, keeping $23,000, and giving
Sister B $11,500, and Sister C $23,000. All 5 siblings now
had $23,000.

Please tell me if the following assumptions are correct:

1) The $23,000 that I received under my father's life
insurance is not taxable to me.

2) The $23,000 that I gave Sister A must be reported as a
gift. For tax purposes, I can say that I gifted Sister A
$11,000, my wife gifted Sister A $11,000, and the leftover
$1,000 is taxable to my wife and me (married filing
jointly). We then file Form 709 and apply the Unified
Credit.

3) The $11,500 that I gave Sister B must be reported as a
gift. I gifted Sister B $5,750, and my wife gifted her
$5,750. None of this gift is then taxable. Thanks for your
patience and your attention to these questions.
Correct on all counts.
 
G

Gene E. Utterback, EA

Correct on all counts.
I agree with my esteemed colleague. I would also like to
add what a fine and admirable thing you have done to share
the insurance proceeds with your sisters. You were under no
legal obligation to do so and could easily have kept all the
money and left you sisters out in the cold. I applaud your
actions.

Gene E. Utterback, EA
 
H

Harlan Lunsford

Gene E. Utterback, EA wrote:

(sbnipped to make response more on point.
I agree with my esteemed colleague. I would also like to
add what a fine and admirable thing you have done to share
the insurance proceeds with your sisters. You were under no
legal obligation to do so and could easily have kept all the
money and left you sisters out in the cold. I applaud your
actions.
Here's a similiar situation that might go awry.

Brother and Sister are joint legatees of mother's will.
Mother's assets consiste of about 25K$ in CD's and house.
Mother is in assisted living facility with prospects SOME
day of going into nursing home.

Mother's house is sold and all assets now are "given" to
family members, who in turn re-give to the sister for use in
paying expenses, this of course to be able to show that
mother had no assets within the statutory 36 months look
backperiod so that she can qualify for medicare provided
nursing home payments "if and when", and probably soon.

At this point, proceeds of all assets have been given to
the sister, right? And the mother dies. time for will to
be probated.

Here is the question, admittedly a legal question, but one
of interest for all tax pros on this board. Since the
sister has obtained all assets by gift, and since therefore
mother had no liquid or otherwise assets at time of death,
is sister under any legal obligation to split with the
brother?

ChEAr$,
Harlan Lunsford, EA n LA
 
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S

Stuart Bronstein

Harlan said:
Here's a similiar situation that might go awry.

Brother and Sister are joint legatees of mother's will.
Mother's assets consiste of about 25K$ in CD's and house.
Mother is in assisted living facility with prospects SOME
day of going into nursing home.

Mother's house is sold and all assets now are "given" to
family members, who in turn re-give to the sister for use in
paying expenses, this of course to be able to show that
mother had no assets within the statutory 36 months look
backperiod so that she can qualify for medicare provided
nursing home payments "if and when", and probably soon.

At this point, proceeds of all assets have been given to
the sister, right? And the mother dies. time for will to
be probated.

Here is the question, admittedly a legal question, but one
of interest for all tax pros on this board. Since the
sister has obtained all assets by gift, and since therefore
mother had no liquid or otherwise assets at time of death,
is sister under any legal obligation to split with the
brother?
There are two ways to look at this. First, the assets
weren't given to the sister to be her own personal property,
but rather for her to be the trustee of her mother's
property. Under this scenario the property continues to
belong to the mother even though the sister is the legal
title holder of record.

On the other hand, the siblings all have perpetrated this
fraud for the purpose of defrauding the government. So
after Mom dies and the other children want their share from
the sister, the law will say that, since the situation arose
due to illegal conduct of all of them, they will not be
allowed to obtain court assistance to help them retrieve
their share of ill-gotten gains.

Stu
 

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