Life Insurance Tax Consideration


R

Ray

I recently took out a life insurance (waiting to sign) in
$1mil, but want to consider the tax consequences before
signing. I am listed as the owner and the insured on the
policy. I have my wife and my son from a previous marriage
as the beneficiaries on the policy. The premiums for the
policy will be paid from the community assets. If I am both
the policy holder and the insured, will my beneficiaries be
subject to income or estate tax on the proceedings. One of
the reasons I chose to be the owner of the policy is that I
want to be able to control who the beneficiaries would be
(obvious reasons), but at the same time want to make sure
that my spouse and my son won't be subject to unnecessary
taxes.

Any hints/ideas will be greatly appreciated.
 
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P

Paul

Ray said:
I recently took out a life insurance (waiting to sign) in
$1mil, but want to consider the tax consequences before
signing. I am listed as the owner and the insured on the
policy. I have my wife and my son from a previous marriage
as the beneficiaries on the policy. The premiums for the
policy will be paid from the community assets. If I am both
the policy holder and the insured, will my beneficiaries be
subject to income or estate tax on the proceedings.
The technical answer is no, and no. The beneficiaries are
not subject to income tax on any inherited asset (including
life insurance).

Nor are the beneficiaries taxed under the estate tax laws
(don't let Congress here you say anything about taxing the
beneficiaries) on their inheritances.

But, your estate may owe estate tax on your assetss, which
include the life policy.
One of the reasons I chose to be the owner of the policy is that I
want to be able to control who the beneficiaries would be
(obvious reasons), but at the same time want to make sure
that my spouse and my son won't be subject to unnecessary
taxes.
Have you discussed your estate issues with a competent tax
attorney?
 
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F

Frank S. Duke, Jr.

Ray said:
I recently took out a life insurance (waiting to sign) in
$1mil.... I am listed as the owner and the insured on the
policy.... If I am both
the policy holder and the insured, will my beneficiaries be
subject to income or estate tax on the proceedings. One of
the reasons I chose to be the owner of the policy is that I
want to be able to control who the beneficiaries would be
(obvious reasons), but at the same time want to make sure
that my spouse and my son won't be subject to unnecessary
taxes.
Life insurance proceeds are never taxable for income tax
purposes but they will be part of your estate if you are the
owner of the policy. In order to get the proceeds out of
your estate (and potentially subject to estate tax), you
must give up control of the policy. Exactly how this is
done is better answered by a lawyer. Your spouse and son
will not have to pay the tax, your estate will.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA
 
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A

A.G. Kalman

Frank said:
Ray at (e-mail address removed) wrote:
Life insurance proceeds are never taxable for income tax
purposes but they will be part of your estate if you are the
owner of the policy. In order to get the proceeds out of
your estate (and potentially subject to estate tax), you
must give up control of the policy. Exactly how this is
done is better answered by a lawyer. Your spouse and son
will not have to pay the tax, your estate will.
I know you really didn't mean to start your reply by saying
"Life insurance proceeds are never taxable for income tax
purposes... " Clearly they are not taxable in this instance
given the facts presented. However, under the right set of
circumstances they could be taxable. E.g., the policy was
transferred to the owner for consideration.
 
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