AboutWillard R. Brumbaugh, LUTCF, CSFP Expertise I can handle questions concerning life insurance, it`s tax implications, how to determine what is appropriate, and how it fits in one`s estate and retirement planning.
Experience For 2 1/2 years I was an expert on AskMe.com, where for most of that time I was ranked #1. I have been a moderator (instructor) for the Life Underwriters Training Council. I have been licensed since 1969.
Organizations I belong to: National Association of Insurance and Financial Advisors - California
and the Inland Empire Estate Planning Council.
I hold the professional designation of Life Underwriters Training Council Fellow.
Question My father passed away a few months ago and named me as a benefactor in his life insurance through his work. He told me the amount of money I would receive and that it was split four ways. The other three people are my two siblings and my mom. I have yet to receive anything from the insurance company after my signature, but my mom assures me it is on its way. I got a call from her saying that she wanted us all to tell the insurance company to send her the money and then she would write us a check for the amount we were supposed to receive to save us from paying taxes. Does this sound a little odd to you? I was not aware that taxes had to be paid on a life insurance payout. Also, the fact that I have personally received nothing from the insurance paper stating anything about the amount left to me also strikes me as strange. Any help you could offer would be great.
Answer Dear Bella,
It is as you have said. There would be no income tax on the life insurance policy. However, of this policy is part of a pension plan, there could be taxation of the "cash value" of the policy. This tax would be the result of the policy having been funded with untaxed earnings. This may have come about by a practice that was popular in the past. The employees may have had the option of deferring income through the life insurance policy and being taxed on only the term cost in the policy. The remainder of the premiums, which would have built up the "cash value" of the policy, would have been tax-deferred just like an IRA.
An illustration of what I mean would look like this.
An employee commits to contribute $200 per month into a life insurance policy for $300,000. Each year he is taxed on an average of $500, the remaining contribution is tax-deferred. Twenty-five years down line he passes away. At that time the "cash value" of the policy is $75,000. Of the $300,000, $225,000 would go to the beneficiaries income tax free. The remaining $75,000 would be subject to income tax. In this scenario there is only one way to avoid the income tax. Give the money to charity.
I would hate to think that your mother is trying to get all the proceeds for herself. It may be that she is just confused. The fact of the matter is that if one person is the named beneficiary, and if that one then gives more than $13,000 to any other person, the one giving the money would be subject to a gift tax on the amount given in excess of that $13,000.
Thus, if she were to receive the entire amount and then pay the rest of you your share in excess of the $13,000, she would be paying a gift tax on all the "gifts" in excess of the $13,000 resulting from the redistribution of the insurance proceeds.
I think it would be wise to contact the insurance company to determine the status of the claim.
Willard R. Brumbaugh, LUTCF
www.willardbrumbaugh.com
