Life Insurance and Tax Implications

[gillmn]

HELP!

My brother died last April following a transplant. Prior to the transplant we (myself and two other brothers) put together a list of questions regarding assets, life insurance, bank accounts, etc. He completed most of these questions including beneficiary information from a life insurance policy. In this document, he indicated the beneficiary was divided into thirds - across his three siblings ($150K total - $50K each).

Following the death and contacting the Life Insurance company, it turns out that I am the ONLY DESIGNATED beneficiary. The plan was to get a beneficiary checking account set up and write a check to each of my brothers for their portion. HOWEVER....

We have been informed that, from an IRS perspective, writing a check for more than $10000 falls under "gifting" rules. Further, any amount over that would be taxable! How is that possible? It has always been my understanding that life insurace proceeds were not taxable!

Any reliable information would be GREATLY appreciated!

Thanks!
Pat

 

[Michael Wechsler]

Originally posted by gill_mn:
HELP!

My brother died last April following a transplant. Prior to the transplant we (myself and two other brothers) put together a list of questions regarding assets, life insurance, bank accounts, etc. He completed most of these questions including beneficiary information from a life insurance policy. In this document, he indicated the beneficiary was divided into thirds - across his three siblings ($150K total - $50K each).

Following the death and contacting the Life Insurance company, it turns out that I am the ONLY DESIGNATED beneficiary. The plan was to get a beneficiary checking account set up and write a check to each of my brothers for their portion. HOWEVER....

We have been informed that, from an IRS perspective, writing a check for more than $10000 falls under "gifting" rules. Further, any amount over that would be taxable! How is that possible? It has always been my understanding that life insurace proceeds were not taxable!

Any reliable information would be GREATLY appreciated!

The information you received is true with regard to federal tax for "gifts" of amounts that are greater than $10,000. I'm not sure how tax rules would apply here (which is what this case will require) but the distribution might not constitute a gift but a mere distribution of proceeds. You can take positions with regard to the tax law and explain, if need be, why your distribution would not qualify for gift tax. It is best to confirm with your accountant the details of conducting such a transaction. Below is the area of the IRS Code that deals with Gift Tax and points you in the direction of research...

TITLE 26--INTERNAL REVENUE CODE
Subtitle B--Estate and Gift Taxes
CHAPTER 12--GIFT TAX
Subchapter A--Determination of Tax Liability
Sec. 2501. Imposition of tax

(a) Taxable transfers
(1) General rule: A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or nonresident.