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Old 10-22-2011, 07:21 AM
 
Location: SoCal desert
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Quote:
Originally Posted by Wilson513 View Post
Life insurance proceeds payable to a named beneficiary and owned by the decedent (99% of all insurance fits this description) are includible in the gross estate and taxable just like the other estate assets. And, worse, the tax comes out of the estate and the benefits are not paid to the estate so the estate beneficiaries are the losers.

The means around this is an irrevocable life insurance trust whereby a trust is formed, the grantor gives a gift equal to the insurance premium to the beneficiaries, who decline it in favor of the trustee who then pays the premium. When the grantor dies, the insurance is paid to the beneficiaries and not includible in the gross estate.

From IRS Publication 525:
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
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Old 10-22-2011, 08:15 AM
 
Location: Near a river
16,042 posts, read 18,973,893 times
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Quote:
Originally Posted by Gandalara View Post
From IRS Publication 525:
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
If the policy on the insured individual is not owned by him/her but by someone other, what is the deal in terms of taxes?
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Old 10-22-2011, 08:52 AM
 
10,139 posts, read 23,289,182 times
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Quote:
Originally Posted by Gandalara View Post
From IRS Publication 525:
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
The reason we get the big bucks is that this stuff is complicated.

Go back to Mitch's post. He was addressing the "estate tax" not the "federal income tax." Nothing (except IRD items) are taxable in an estate under the income tax. He was referring to the "estate tax." You quoted a provision of the income tax code, wholly irrelevant to the subject Mitch was addressing. Sorry.

Here is the estate tax provision that shows that life insurance is in fact taxable under the estate tax:

26 USC 2042 - Sec. 2042. Proceeds of life insurance

US Code - Title 26: Internal Revenue Code
Linked as:

Text

"The value of the gross estate shall include the value of all property - (1) Receivable by the executor To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent. (2) Receivable by other beneficiaries To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person.

For purposes of the preceding sentence, the term ''incident of ownership'' includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.
. . . . ."
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Old 10-22-2011, 08:56 AM
 
10,139 posts, read 23,289,182 times
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Quote:
Originally Posted by newenglandgirl View Post
If the policy on the insured individual is not owned by him/her but by someone other, what is the deal in terms of taxes?

That is the reason that the irrevocable life insurance trust works. As you can see from Section 2042 quoted above, if the decedent had any incidents of ownership at the time of his death, the proceeds are includable in the gross estate. So if the policy is owned by someone else and the decedent has no rights, it is not includable in the decedent's gross estate.
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Old 10-22-2011, 03:04 PM
 
Location: Near a river
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Quote:
Originally Posted by Wilson513 View Post
That is the reason that the irrevocable life insurance trust works. As you can see from Section 2042 quoted above, if the decedent had any incidents of ownership at the time of his death, the proceeds are includable in the gross estate. So if the policy is owned by someone else and the decedent has no rights, it is not includable in the decedent's gross estate.
Yes but if the policy on the insured individual is owned by someone other than her/him, and the said owner is the beneficiary, is the payout taxed?
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Old 10-22-2011, 03:11 PM
 
10,139 posts, read 23,289,182 times
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Quote:
Originally Posted by newenglandgirl View Post
Yes but if the policy on the insured individual is owned by someone other than her/him, and the said owner is the beneficiary, is the payout taxed?
Nope! But what happens if the policy owner predeceases the insured? Or changes the beneficiaries against the desires of the insured? Ergo, the irrevocable life insurance trust.
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Old 10-31-2011, 11:09 PM
 
Location: Washington County, ME
1,549 posts, read 2,389,523 times
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I dont have any life insurance... I dont have any loved ones (haha).

No really... my loved ones are mostly quite a bit older than me. I dont have children. I am either going to pre-pay my cremation expenses etc., or make sure money is someplace for it - that wont get 'frozen' if i die. (My parents both pre-paid for their funerals/burials.)

My house is paid for, so if someone has to bury me, they'll get their money back. I dont have anyone to provide for.

I had a policy when i was working, becuz it was free. When i retired you had to start paying. I declined it.
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Old 11-01-2011, 04:26 AM
 
Location: The Triad (NC)
28,496 posts, read 62,152,821 times
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Quote:
Originally Posted by Wilson513 View Post
But what happens if the policy owner predeceases the insured?
Or changes the beneficiaries against the desires of the insured?
The policy will/should pass outside of probate regardless of beneficiary.
Unless "the estate of X" is the beneficiary... the proceeds from the policy will/should pass outside the trust as well.


hth
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Old 11-01-2011, 02:18 PM
 
10,139 posts, read 23,289,182 times
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Quote:
Originally Posted by MrRational View Post
The policy will/should pass outside of probate regardless of beneficiary.
Unless "the estate of X" is the beneficiary... the proceeds from the policy will/should pass outside the trust as well.


hth
The policy benefit passes outside of probate but is still taxable as included in the estate if the policy was owned by the decedent and the taxes are still an obligation of the probate estate.

The specific question I was addressing that you responded to has nothing to do with your response. But, to emphasize my response, let me reiterate that ownership of a policy on the life of the decedent by some third party who is a natural person is a poor substitute for an irrevocable life insurance trust for the reasons I stated.
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Old 11-08-2011, 08:59 AM
 
Location: Northern panhandle WV
3,007 posts, read 2,170,636 times
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I have a 300K life insurance policy on my husband which I own. I got it about 20 years ago. I was a stay at home mom and since kids have been gone I have been disabled, but due to not working and husbands income I do not qualfy for any kind of disability.
I have kept this policy going as my husband has gone from job to job, which have additional group life, I always max that too or at least as many times of income as they will allow without medical exam. He Has diabetes, as do I along with several other things. But the 300K I have kept.
He is currently 61 the policy runs to 85. He will be doing the Register and Reserve with SS when he is 66 but if he can will keep working. We have no savings and big mortgage. If he were to die tomorrow, I would have the life insurance to live on until I would turn 66 which is 6 1/2 years from now. So I will be keeping my policy for as long as I can. It has a little bit of cash value built up which will probably go to lowering the rising cost, till I just can't do it anymore.
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