Hello again twister,
What you read about the 3 year rule pertains to ownership of the policy, but this will not be an issue for you unless your sister's estate was subject to estate taxes
. In order for her estate to be subject to estate tax, her entire estate would have to be valued at $3.5 million or more.
Just to try and explain briefly how this affects policy ownership -- when someone takes out a life insurance policy, the proceeds of that policy are not actually taxable to the beneficiary. However, if the person who takes out the policy has a large estate, when that person dies, the value of the life insurance is included in the value of their estate if they are also the owner of the policy. So if your sister had a large estate and she also had life insurance policies where she was the owner of the policy, the value of that life insurance would be included in her estate valuation.
When you switch ownership of a policy to someone else, if the original owner of the policy were to die within 3 years of that change being made, the value of the policy is still considered to be part of their estate. Once 3 years has passed, the policy is no longer considered to be part of the estate and it is considered an asset
owned by the new owner to whom ownership was transferred.
So none of this would even apply except in cases where estate tax was an issue, on large estates of $3.5 million or more.
As far as the gift tax
-- life insurance is not a gift to you. Gifts would be when you give your own money to someone else. Under current law
you are allowed to give another individual
up to $13,000 each year without having to file a gift tax return
. Gifts below that amount do not need to be reported.
Once you receive these life insurance benefits
, that then becomes your money. If later you plan to give some of this money to your sister's husband, that will be considered a gift. If you give him more than $13,000 in any one year, you would then need to file Form
709 to report the gift given. But even if this were to happen, you would still not actually owe any gift tax. Under current law every individual is allowed to give gifts of up to $1 million in their lifetime before any gift tax actually becomes due. Gifts below $13,000 a year do not need to be reported. Gifts which exceed that amount must be reported on Form 709, and the amount you report then reduces your remaining lifetime exemption.
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Thank you twister