Life Insurance and Taxes

iiinycboi

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so a estate planning guy at a network meeting sparked a curiosity in me.

He says beneficiary have to pay tax based on this scenario

any product 1MM face value, owner is DAUGHTER A insured is MOTHER, beneficiary is DAUGHTER A B & C

so the estate planning tells me if there isnt 3 owners on the policy, when the benefit is paid out to 1/3 1/3 1/3 the daughter A has to pay a gift tax for giving the 2/3 to her 2 sisters.

the reasoning behind this is because the owner should have 100% beneficiary because he/she is the owner vs the other 2 beneficiary.

so it is essentially, the daughter A giving a gift to daughter b and c.

right or wrong? half true? completely true? completely false?

pretty interesting stuff.
 
Yep. Its seldom talked about or taught, but its true.

Usually its not hard to get around.
In your example; If the daughter wants to pay for the policy just make moms the owner/insured, and the daughter can send in all the premium payments she wants.

Its when the insured is unable to be owner that this can become an issue.... or when an agent doesnt know this law exists.. :1err:
 
Yep. Its seldom talked about or taught, but its true.

Usually its not hard to get around.
In your example; If the daughter wants to pay for the policy just make moms the owner/insured, and the daughter can send in all the premium payments she wants.

Its when the insured is unable to be owner that this can become an issue.... or when an agent doesnt know this law exists.. :1err:

Whoever is the owner has all rights to the policy. You can have some real fun times with the payor/beneficiary if mom gets a wild hair and does things without telling the daughter or even you.
 
Whoever is the owner has all rights to the policy. You can have some real fun times with the payor/beneficiary if mom gets a wild hair and does things without telling the daughter or even you.

Obviously.
Which is why in these situations the payor and insured are usually on the same page about things. Obviously things can change, but you can only make so much certain sometimes.

And in a situation like this, the insured usually cant afford the premiums. So if the daughter did find out about it (hopefully the agent is doing yearly reviews with both parties together) she can always stop paying.
Its not perfect. But it avoids the triangle and avoids a few grand + yearly fees for an ILIT.
 
so this is an issue, i never heard of it and a lot of other life agents i asked didnt even know what i was talking about.

But the only want to solve this if the owner has to be the daughter, is to add all the daughters on there?
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complicated stuff lol guess i will stick to p&c, just thought it was very interesting, because people around me didnt know about it.
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also what if they add the other 2 owners on at like year 10 what are the taxes then?
 
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OK, the situation is NOT a Goodman Triangle if the daughter is receiving all of the money and gifting to her siblings. Goodman Triangle only comes into play if the daughter names the siblings as beneficiaries. Then there is a situations of different owner, insured, and beneficiary. The tax is not gift, it's ordinary income to the non-owner beneficiaries.

As stated by the "estate planner" if the daughter receives the money and wants to distribute evenly among her siblings, there is a gift tax consideration beyond $13,000 per sibling (the gift tax exclusion).

The method around this is a trust, usually an Irrevocable Life Insurance Trust or ILIT. The trust owns the policy and the daughters are the beneficiary.

The easiest fix, if we're not talking estate taxes and mom has the money, Mom just buys the life insurance and owns it. She can then name as many beneficiaries as she wants and since she is both owner and insured, there is no Goodman Triangle.
 
Please note, in the given example all the daughters were listed as beneficiaries.

Now, I thought it was taxed as ordinary income if there was a Goodman triangle, but now it seems I may be mistaken and it is subject to gift tax instead?
 
Please note, in the given example all the daughters were listed as beneficiaries.

Now, I thought it was taxed as ordinary income if there was a Goodman triangle, but now it seems I may be mistaken and it is subject to gift tax instead?

No, the only gift tax issue would be if one person received the funds and tried to distribute it to other people. This would create a gift tax implication beyond the exclusion.

If the people are named beneficiaries where one kid owns the policy and siblings are named beneficiaries, then this would create a Goodman Triangle and the benefit paid to the non-owning beneficiaries would be income taxable.

This is a common estate planning stumbling block. Couples get the bright idea to simply have one child buy life insurance on them instead of paying for an ILIT. Bad idea.
 
No, the only gift tax issue would be if one person received the funds and tried to distribute it to other people. This would create a gift tax implication beyond the exclusion.

If the people are named beneficiaries where one kid owns the policy and siblings are named beneficiaries, then this would create a Goodman Triangle and the benefit paid to the non-owning beneficiaries would be income taxable.

This is a common estate planning stumbling block. Couples get the bright idea to simply have one child buy life insurance on them instead of paying for an ILIT. Bad idea.

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While I use to think it was income tax like you, it does appear the estate planner is right and it is gift tax that should be applied.
 
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