Death Insurance

[Snaggletooth]

Actually, the question concerns Life Insurance (which is actually "Death" Insurance).

Mortimer has two children, a fiscally conservative, honest, and intelligent daughter, and a frivolous, churlish, wasteful son. He has a $200,000 life insurance policy, and suffers a sudden and tragic death, dying without a will.

He has some realty, personalty, and investments in the estate created by his death. However, we find out that the only beneficiary of his life insurance policy is his daughter. Many times in recent years, he told his daughter that if anything should happen to him, she would be the sole beneficiary, as he knew she would split everything with his less-than-frugal son.

I see two possible problems, and I'm asking for help and comments:

1) By making his daughter sole beneficiary, the life insurance proceeds have by-passed his estate, and are NOT a part of his estate. That means if daughter shares with son, there may be gift tax, as title is passing from one family member to another. Can this be avoided by having the daughter disavow the proceeds? This might be more of a legal question than a tax question, but it has obvious tax implications.

2) There is a mortgage against the realty in the father's estate, such that if the estate does not have access to the life insurance proceeds, it will otherwise be insolvent. Does this necessity provide an avenue for the daughter to share the life insurance with the estate?

This situation might best be addressed to attorneys in the domestic state, but I'll bet some of you can help, if you will.

Thanks, Ron Jordan

[Bees Knees]

1) Need proper terminology. The life insurance proceeds ARE part of his taxable estate for estate tax purposes, but are NOT part of his probate estate for probate purposes. That being said, you are correct in that when you have one person inherit all the stuff, and that person is supposed to be the responsible party and divvy up the stuff with the irresponsible kid, you do have a gift tax issue. Yes, the daughter can disclaim the inheritance, in which case it would revert to the estate. But if the daughter disclaims the inheritance, how can she then all of a sudden want half of it back? I don’t know the legal ramifications for doing that. The daughter could be a jerk and say she wants her money and shouldn’t be responsible for any gift tax consequence, so she will take the money and gift the annual gift tax exclusion each year until the irresponsible one gets all his money. Probably would do the kid good, since if he got it in one lump sum, he’d just blow it.

2) By saying the real estate is the only probate asset and it has a mortgage, thus, the estate is insolvent, I take that to mean the mortgage exceeds the fair market value of the real estate. If that is the case, why worry? It will cost more than what its worth to inherit it. Why pay more for it than its worth? Let the bank repo it. Who cares about the decedent’s credit rating anyway?

[John of PA]

Life Ins

As a general rule (as Bees ... pointed out) Life Insurance is taxable for Federal purposes for the Fed 706 estate tax; who the beneficiary is has no effect on this. In PA, if an estate is insolvent and cannot pay it's taxes; the estate has legal recourse to any life insurance proceeds, even if the estate is not the benficiary.

[Snaggletooth]

Taxable Life Insurance

I guess I'm really showing my ignorance here, but are we sure life insurance proceeds are taxable for estate tax purposes? I know several people who have invested in life insurance so they won't have to pay estate tax on the proceeds. What's going on?

In other words, for Johnny Carson fans, just how dumb am I?

[jimmcg]

Taxable Life Insurance

There are circumstances where, with proper planning, life insurance can escape Federal estate tax. As I recall these would include situations where the insured's estate is not the beneficiary and more specifically the policy is "owned" by someone other than the insured, either directly or in trust. Ownership would include certain rights such as the ability to make changes to the policy, etc.........That's all that I can recall from memory. Additional facts can be found in IRS Sec2042.........Perhaps someone else can add to my limited recollection.

[John of PA]

Life Ins

the proceeds from life insurance are not taxes on the beneficiary's income tax return, nor is it taxed on the estate income tax return (1041). It is taxed on the 706 estate tax return as part of the value of the estate. If a life insurance trust is set up, then the value of the life insurance is not taxed to the estate becasue it goes into the trust. You probably have heard of people funding a life insurance trust. Hope this helps.

[dmj4]

Life Ins

Proceeds of Life Insurance Policies

The gross estate (Form 706) includes the proceeds of life insurance on the decedents life if:
1. The proceeds are receivable by the estate, or
2. The proceeds are receivable by another for the benefit of the estate, or
3. The proceeds are not receivable by, or for, the benefit of the estate and the decedent possessed incidents of ownership in the policy.

I guess to number three you could say unless:
If a decedent made a completed gift of a life insurance policy on his or her own life within 3 years of death, the proceeds of the life isurance policy are included in the gross estate (form 706) of the decedent. Therefore, if the decendent assigned all rights to the insurance policy more than 3 years before death, the proceeds are not included in the gross estate.

***Life Insurance Proceeds on the decedents life are not claimed on the 1041 return.

[Snaggletooth]

Thanks to Everyone

Yes, thanks to Everyone who straightened me out. Obviously, I leave most estate work to attorneys -- easy to figure that out by reading my posts.

John of PA, I believe you might be new to the board, so welcome. We appreciate your help and invite you to the smorgasboard of expertise. Go Phillies and Eagles?

[dmj4]

John of PA

I have read many posts by John of PA. He is very helpful, we are lucky to have him here.

[John of PA]

Thank You

Thank you for the kind words. Tax Professional should help one another on boards like this. I believe when you help others, support comes back to you. When you don't, then a lack of support comes back to you. Thanks again.

[Unregistered]

I have been dealing with a similar situation where a piece of property was held by one sibling with the understanding that on the death of the mother it would be sold and the proceeds split equally among all of the siblings. In order to avoid gift tax, the proceeds will be paid out over several years in amounts below gift tax reporting requirements.