Does Wife Need to Waive her Right to Community Property?

Discussion in 'Life Insurance Forum' started by sam816, Jul 25, 2017.

  1. Tahoe Ray
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    Tahoe Ray Well-Known Member

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    This will affect very few people in the U.S.

    As adjusterjack mentioned, the lifetime gift tax exemption is currently 5.5m. With portability, a husband and wife would theoretically have $11 million that they can pass to the next generation without gift or estate taxes.

    As others mentioned, different states have different rules but from a federal perspective (which is likely the most onerous tax), this is a non-event for 99% of the population.
     
  2. LGilmore
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    LGilmore Well-Known Member

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    It would be when the life insurance is inside a qualified plan. If they write off the premiums, the death benefit is taxable.
     
  3. LostDollar
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    LostDollar Well-Known Member

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    Aren't there also annual limitations on gifts in relation to taxes?

    I did not fully understand the transfer of ownership issues for life insurance policies as I was scanning internet searches and did not take the time to read more in depth. But I saw something in passing that compared transferring a single premium life insurance policy to transferring an annual payment policy and I think the article suggested that the single premium policy transfer could generate some gift taxes for the original owner while the annual payment policy transfer might not because of the difference in the amount of premiums involved. ($14,000 was the amount mentioned-but no idea if that is a current or an old number-my question is about the concept-not what might be specific current year amounts.) (And that also was a situation unrelated to VolAgents question to me since the gift tax is generated by a change in policy ownership, not the policy's death benefits.)

    That scenario is one of the things that leads me to ask the question I asked above.

    ie-what I took away from the brief amount of reading that I did is that the relationship between life insurance and gifts is complex and policy ownership issues may cause premiums or death benefits to be classified as gifts which then may or may not actually be subject to tax.
     
  4. VolAgent
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    VolAgent Well-Known Member

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    Not sure how the death benefit would be taxable in that situation. I suspect either as income or capital gains. I couldn't readily find something that said how beyond just taxable.

    Also, it would incur taxes along the way. Both of the cash value and the economic benefit of the insurance, which again I believe would be income tax.

    That would be a rather rare circumstance.

    Just like transferring ownership of a policy can be taxable, but generally if transferred it is to the insured which is not taxable.
     
  5. Tahoe Ray
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    Tahoe Ray Well-Known Member

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    Annual exclusions (the 14k you referenced) are different and if adhered to, do not reduce your lifetime exemption.

    Again, there are very few people who will ever have a gift tax problem, and I would wager that those that do are not searching out advice on this forum.
     
  6. LostDollar
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    LostDollar Well-Known Member

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    Thank you for the additional information.
     
  7. LGilmore
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    LGilmore Well-Known Member

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    Yes, it is rare, but benefit would be taxable. Cash values along the way wouldn't be taxed, same as any other deferred choice. Been a very long time since I looked into it as the idea of making the benefit taxable to save a little bit on premiums didn't make sense to me. I can look later today and pull the info up. I remember it from one of the CHFC classes from long ago.
     
  8. scagnt83
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    scagnt83 Well-Known Member

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    This is correct. On the rare occasion you find a policy within a Qualified Plan, the Premiums were paid pre-tax, and the DB will be taxable as income.

    If I remember correctly, the Plan is usually the Beneficiary of the Policy, and the DB just becomes part of that Participant's Account Value. It is then Distributed in whatever manner the Plan allows and the Participant's Beneficiary chooses.

    You dont care about the taxes on the DB because in theory, even after taxes the DB is still higher than just normal accumulation values of equities or other non-life insurance funding.

    If I remember correctly, after the Plan receives the DB, it acts just like normal Qualified Funds would at death. So a Spouse can actually do a Qualified Transfer Funds to an IRA or Qualified Plan. (deferring the taxes on the DB and other funds within the Plan)


    Also, you can Transfer the Policy out of the Plan while the Client is still living if its a 401k. They are only taxed (as income) on the Surrender Value upon Transfer.
    The benefit of this is that you can take a WL paid at Base Premiums, transfer it out with minimal CSV, and then start maxing out PUAs once it is individually owned (and taxed normally at that point). Same can be done with a UL/IUL that has really high Surrender Charges for the first 15 years. Or if DB is the only goal, then you could use a GUL. Only the "Base Premium" can be paid pre-tax. That can be an issue with using UL (other than GUL) with this method.


    ** Consult with your advanced planning dept before attempting any of this in the field. And you must be the Adviser on the 401k Plan to sell an insurance policy within that Plan. So this is not something you can use when prospecting individuals. Also the Plan Documents must allow life insurance to be used within the Plan.
     
    Last edited: Jul 26, 2017
  9. VolAgent
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    VolAgent Well-Known Member

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    Thanks. That is what I thought, it would be subject to income tax, not gift tax or estate tax.
     
  10. LGilmore
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    LGilmore Well-Known Member

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    So I don't have to look it up now? ;) Great.

    It's payables day and that always makes me grouchy.

    Payables day is where we realize we're all just pass through corporations. ;)
     
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