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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My sister owned a $60,000.00 life insurance policy. In May

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My sister owned a $60,000.00 life insurance policy. In May 2009 she changed the beneficiary (with her husband's approval) to me and then on August 25, she changed the owner of the policy from herself to me. This was done so that I would have control of the policy and the proceeds in order to give her husband a monthly income after her death. He does not handle money well and knew he would spend or loan out all the money in a short time then be left with nothing to supplement his social security income. My sister died September 26, 2009. I have not filed a claim on this policy yet because I need to know the tax effect it will have on my income taxes if I do accept the entire $60,000.00 in my name. I do have the option of assigning the proceeds back to the husband. Thank you
Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.
Hello twister,

Life insurance proceeds are not taxable regardless of who the beneficiary is on the policy.

So this will not be a taxable event for you, and does not even need to be reported on your tax return.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you twister and let me know if you have more questions.





Customer: replied 4 years ago.
I had read elsewhere, which is why I was confused, that the changes on the policy have to be made during a certain time period - as in 3 years before. Also something about $11,000 or $13,000 being subject to givet tax.
Expert:  Merlo replied 4 years ago.
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.

If this was helpful please press the Accept button. Positive feedack is also appreciated.

Thank you twister

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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