Life Insurance Proceeds Might Be Taxable?

[William Brenner]

I am the owner and co-beneficiary (with my wife) of whole
life policies purchased in their infancy for my adult sons.

I read somewhere that insurance proceeds paid to an
owner-beneficiary are taxable income. Is that correct?

I hope to never be in that position, but feel that, if true,
I should transfer ownership to them. I realize that I would
lose control of the policies, but that's not a concern. It
is probably time to transfer the ownership in either case.

For many years, premiums have been paid by dividends, while
paid up benefits have increased considerably. If and when
they start a family, they will have free and growing
insurance coverage.

Afterthought: Is there a gift consideration regarding the
policy cash values?

Thank you.

Bill

 

[Stuart Bronstein]

I am the owner and co-beneficiary (with my wife) of whole
life policies purchased in their infancy for my adult sons.

I read somewhere that insurance proceeds paid to an
owner-beneficiary are taxable income. Is that correct?

Generally not. There are two exceptions I can think of, and
there may be others:

1. If the policy was originally purchased by and for a
business entity, and the premiums payments were deducted (is
that still even possible?) or

2. If someone has purchased the policy from the original owner.

Afterthought: Is there a gift consideration regarding the
policy cash values?

It depends on the situation. You really need to give us a
whole lot more information. But if it takes more than 50
lines, you're better off taking it to a local lawyer.

Stu

 

[Paul A Thomas]

I am the owner and co-beneficiary (with my wife) of whole
life policies purchased in their infancy for my adult sons.

I read somewhere that insurance proceeds paid to an
owner-beneficiary are taxable income. Is that correct?

No.

 

[David Woods, EA, ChFC, CLU]

I am the owner and co-beneficiary (with my wife) of whole
life policies purchased in their infancy for my adult sons.

I read somewhere that insurance proceeds paid to an
owner-beneficiary are taxable income. Is that correct?

Only if you bought the policies for consideration, which
clearly you did not.

I hope to never be in that position, but feel that, if true,
I should transfer ownership to them. I realize that I would
lose control of the policies, but that's not a concern. It
is probably time to transfer the ownership in either case.

For many years, premiums have been paid by dividends, while
paid up benefits have increased considerably. If and when
they start a family, they will have free and growing
insurance coverage.

Afterthought: Is there a gift consideration regarding the
policy cash values?

Yes, on the cash value.

 

[Corwin, Prince of Amber]

I am the owner and co-beneficiary (with my wife) of whole
life policies purchased in their infancy for my adult sons.

I read somewhere that insurance proceeds paid to an
owner-beneficiary are taxable income. Is that correct?

I hope to never be in that position, but feel that, if true,
I should transfer ownership to them. I realize that I would
lose control of the policies, but that's not a concern. It
is probably time to transfer the ownership in either case.

For many years, premiums have been paid by dividends, while
paid up benefits have increased considerably. If and when
they start a family, they will have free and growing
insurance coverage.

Afterthought: Is there a gift consideration regarding the
policy cash values?

IRC section 101(a)(1) provides the general rule applicable
here: death benefits are excluded from gross income. (No,
they're not taxable).

You probably read and are referring to this thing called the
Goodman Rule, or some other permutation, where the owner,
insured and beneficiary are all different people.

In that case, when the death benefit is paid to the
beneficiary, the insurance proceeds are considered a *gift*
(not income) from the policy owner to the beneficiary. But
that doesn't apply here.

You may also be thinking of some situations where if a
corporation owns a life insurance policy and receives the
death benefits, alternative minimum tax could be triggered,
and thus in some sense the proceeds would be taxable. But I
haven't looked at those rules in a while, and it doesn't
apply here anyway.

As far as gifting the policies to your children, probably
(but not absolutely) a good idea. Yes, you're making a gift
of the policy's cash value to your child. (More or less;
the specific valuation rule is a bit complicated. The
insurance Company can tell you for sure, but for our
purposes just using the policy's 'cash value' will be close
enough). Is the cash value greater than the annual gift tax
exclusion? So now this is an asset they own, which can be
sold (surrendered) just like any other asset. Is that good
or bad; I don't know, they're your kids. The policy's cash
value may also be attached by your children's creditors; or
by their spouse in a divorce action. If they own the policy
and then die and the death benefits are paid into their
estate, will that trigger state and/or federal estate or
inheritance taxes?

Rick Bryan
New York, NY

 

[Stuart Bronstein]

As far as gifting the policies to your children, probably
(but not absolutely) a good idea. Yes, you're making a gift
of the policy's cash value to your child. (More or less;
the specific valuation rule is a bit complicated. The
insurance Company can tell you for sure, but for our
purposes just using the policy's 'cash value' will be close
enough).

I believe it's called the interpolated terminal reserve.

Is the cash value greater than the annual gift tax
exclusion? So now this is an asset they own, which can be
sold (surrendered) just like any other asset. Is that good
or bad; I don't know, they're your kids.

If the insured dies within three years after making the
gift, the death benefit is still included in his estate for
estate tax purposes. If he lives for three years or more
after the gift, estate tax on that is avoided.

Stu

 

[Arthur Kamlet]

No.

A viatical arrangement allows you or a group of people to
buy the policy from the owner-insured and thus become the
owner beneficiary, who will get the death beenfits on death
of the owner.

In the case of such viatical arrangements, there is taxable
income involved, above the cost of the policy.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH

 

[David Woods, EA, ChFC, CLU]

William Brenner wrote:

Generally not. There are two exceptions I can think of, and
there may be others:

1. If the policy was originally purchased by and for a
business entity, and the premiums payments were deducted (is
that still even possible?) or

Not if the business directly or indirectly benefits from the
policy. Regardless, the proceeds would not be taxable.

2. If someone has purchased the policy from the original owner.

It depends on the situation. You really need to give us a
whole lot more information. But if it takes more than 50
lines, you're better off taking it to a local lawyer.

I disagree. We've seen all the information we need. Not
taxable.

 

[William Brenner]

Stuart Bronstein wrote, in part:

If the insured dies within three years after
making the gift, the death benefit is still
included in his estate for estate tax purposes.
If he lives for three years or more after the gift,
estate tax on that is avoided.

My sons are the insured, not I. I am the owner and
co-beneficiary of the policies. It is I who would be making
the gift of cash value to them by transferring ownership.

 

[Stuart Bronstein]

Stuart Bronstein wrote, in part:

My sons are the insured, not I. I am the owner and
co-beneficiary of the policies. It is I who would be making
the gift of cash value to them by transferring ownership.

Then in all probability I'd say a death benefit on your sons
would not be subject to income tax. But if you transfer the
policies to them, it will be subject to estate tax in their
estates should they die.

My suggestion would be, depending on your sons' financial
situations and family status, if you want to transfer the
policies to someone transfer them to trusts for your
grandchildren. Gifts into a trust generally do not qualify
for the $11,000 per year gift tax exclusion, however, so
there may, unless you are very careful, some gift tax
consequences if you do that.

Stu

 

[William Brenner]

Then in all probability I'd say a death benefit
on your sons would not be subject to income
tax. But if you transfer the policies to them, it
will be subject to estate tax in their estates
should they die.

My suggestion would be, depending on your
sons' financial situations and family status, if
you want to transfer the policies to someone
transfer them to trusts for your grandchildren.
Gifts into a trust generally do not qualify for
the $11,000 per year gift tax exclusion,
however, so there may, unless you are very
careful, some gift tax consequences if you do
that.

Their estates are currently a long long way from estate tax
peril.

They are both still single and to date there are no (known)
grandchildren.

My primary concern was the possible taxability of proceeds
paid to me as policy owner and co-beneficiary. The group
consensus is that there would be none.

Also, gifting the ownerships and their accompanying cash
values this year -- when added to previous gifts -- would
put me and my wife over the $22,000 free gift barrier for
each son. So I shall postpone doing so at least for now.

Many thanks to all for your opinions and advice.

Bill