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Term life ownership & estate planning

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mrfatboy

Junior Member
What is the name of your state? California

I currently own a Term life insurance policy. My girlfriend and I have been living together for 17 years and she is the beneficiary.

I have just realized that if I die, the term life will pay out to her and she will not have to pay tax on it. However, the payout will be part of my estate (which she is the beneficiary thru a living trust) and be subject to estate taxes.

Will transfering ownership to my girlfriend invoke a gift tax? I know that universal and other insurance does because there is a value at transfer. But what about term life?
 


BlondiePB

Senior Member
After 17 years, why don't you just marry her so that she has little problems with the numerous survivor benefits that are not available to non-married persons.

Someone else will have to answer your stuff about gift tax. Perhaps you should post in the Tax section of this forum. Be sure to tell the nice folks that answer in the tax section you were sent there so you don't get scolded for double-posting.
 

efflandt

Senior Member
Life insurance with named beneficiaries (real people) is paid directly to those beneficiaries "outside" of the estate with no tax. What makes you think life insurance payout never in your estate would suddenly become part of your estate?

See http://www.irs.gov/faqs/faq4-9.html

It would be different if no beneficiary was listed or you made your estate or trust the beneficiary (which is why that is NOT recommended).

There are also tax and distribution advantages of naming real people as beneficiaries of retirement accounts (if proper rules are followed handling the accounts afterwards).
 
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mrfatboy

Junior Member
Life insurance with named beneficiaries (real people) is paid directly to those beneficiaries "outside" of the estate with no tax. What makes you think life insurance payout never in your estate would suddenly become part of your estate?

See http://www.irs.gov/faqs/faq4-9.html

It would be different if no beneficiary was listed or you made your estate or trust the beneficiary (which is why that is NOT recommended).

There are also tax and distribution advantages of naming real people as beneficiaries of retirement accounts (if proper rules are followed handling the accounts afterwards).

There are no taxes for the beneficiary when the life insurance policy pays out. however, if you are the owner, it does become part of your estate and subject to Estate taxes.

See this link.
http://www.nolo.com/article.cfm/objectId/1FA0B427-B3A6-4957-94720E9FAE7B273F/309/140/ART/


The smart this do to is open a life ins trust or transfer ownership. the question is when you transfer ownership does the term life policy trigger the gift tax like universal or whole insurance does?
 

efflandt

Senior Member
Since I see so often that insurance is passed untaxed to beneficiaries outside the estate, it never dawned on me that insurance could still be considered part of your gross estate for estate tax purposes if the deceased owned or had any control at all over the policy. IRS form 706 instructions shed some light on that, but not the value of a term insurance transferred before your death when its intrinsic value is $0, but extrinsic value could be more (in stock option terms).

My employer's life insurance could even affect my gross estate, since I am allowed to set beneficiaries. Hopefully that will not affect 401k's and IRA's with named beneficiaries (which substitute for most insurance at this stage of my life). But something to be aware of depending upon the size of your estate, estate tax, and unified exclusion at the time of your death.
 

ShyCat

Senior Member
Hopefully that will not affect 401k's and IRA's with named beneficiaries (which substitute for most insurance at this stage of my life).
IRAs and 401(k) accounts are included in the gross estate for estate tax purposes, regardless of beneficiary designation.
 

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