09 Apr Will my daughter have to pay taxes on my life insurance?
Q. I transferred ownership of my life insurance policy to my daughter. She is, along with another daughter and my son, beneficiary of the policy. Does this then make her liable for taxes on her part of the proceeds of the life insurance policy?
A. The tax treatment of life insurance can get tricky.
The transfer-for-value rule says that if a life insurance policy is transferred for something of value, a portion of the death benefit is subject to income tax, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.
He said there are some exceptions, such as when a policy is transferred to the insured, a partner of the insured or to a company where the insured is an officer or stockholder.
In those cases, the policy does not lose its income tax-free status.
In your example, you transferred ownership to your daughter.
“Even if there was no material value paid, when transferring your life insurance policy to her, a beneficiary, tax authorities may regard the transaction as a gift,” Gaelick said. “Under current gift tax rules, if you transfer a policy with a present value of more than the gift tax exclusion, gift taxes will be assessed upon your death.”
So you’d need to get the fair market value of the policy from the respective insurance company, he said.
The type of policy — term, whole life — will play a role in determining the present value. So in your case, maybe there would be no income tax to the beneficiaries upon your death but possibly a gift tax, Gaelick said.
You should speak to your tax preparer before making a move so you know what will happen for your specific policy.
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This story was originally published on April 8, 2020.
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