Quick life insurance payout/tax question:
My FIL passed away last weekend. My MIL is the beneficiary of his life insurance policy. Her plan is to divide the proceeds between my wife and her brother, about $75,000 apiece.
I know that as the named beneficiary my MIL will not owe any taxes on the payout. That answer is everywhere on the internet. Great.
Here’s what I can’t find: when she cashes in that check and writes checks to my wife and my BIL, is that now taxable income to us?
Still no response? I’m guessing the answer is that at least a portion of it is taxible as a gift, but there may be allowances in the tax law for secondary inheritences.
Sorry for your loss.
Your MIL being the beneficiary and spouse, none of that money would be taxed to her. If If the MIL disperses those funds to others it would be taxed, because the FIL didn’t name any of the proposed recipients beneficiaries.
If I’m correct in what I said above, there are a few options. Have the MIL keep the money and leave your wife and her brother as the beneficiaries. When the MIL passes, that money will go to them untaxed. Meanwhile, make sure the money is invested wisely so it grows.
The other option to avoid paying taxes on the money, would be to have the money put on a gifting schedule. Currently the IRS gift limit for 2017 is $14K. This means, the MIL could write a check to each of you right now for $14K and none of you would have to pay taxes on it. This is per person. So the MIL could write a check for $14K to your wife, and another $14K check to you, and likewise to the brother and if the brother has a spouse. Then each year write everyone involved a check for $14K (or whatever the IRS limits on gifts without them being taxed might be changed to) until all the money has been disbursed. With the remainder of it being part of the estate of the MIL.
Of course, I don’t know you or anyone’s financial situation here. But I would make sure the MIL has all her finances in order so she doesn’t have to worry about paying bills and has money available in the event of any emergencies like needing a new roof on your home, etc.
Again, sorry for your loss, and I hope this has been helpful to you. I think it would be wise to meet with a CPA or attorney to discuss this, because I am neither of those things.
Thank you for the info.
My MIL does not need the money (hence, her redistributing it to us). We don’t need the money for anything right away. My BIL upgraded to a bigger house at the beginning of the year and had twins just 10 days ago, so he might need the money to be liquid immediately, but that’s his problem.
We were planning to meet with a financial planner and come up with a plan to invest our portion, but I just wanted some info to go in to the whole thing with. We’re probably still a couple weeks from having to figure it all out.
Not only is there a yearly exclusion for gifts from taxation, there is a lifetime exclusion. Gifts in excess of the yearly exclusion, reduce your lifetime exclusion from the current $5.45 million. So if you both received $75,000. $14,000+14,000 = 28,000 would be excluded by the annual exclusion, and the donor’s estate limitation would be reduced by $28,000 from its original %5.45 million.
And of course this could all change with changes in the tax law.
Finally gift tax is owed by the donor. It is not part of income to be taxed on your 1040.
Just remember gifts are not taxable to the recipient but to the giver. So your MIL would be taxed on the gift, not you and your wife.
Has she already received the proceeds? Depending in your state’s probate law, she may be able to disclaim the money in which case it passes to the next heir(s) in line. As far as I know this has no tax consequences, but I’m not a tax expert nor is this my field of law.
She has not. Frankly, I don’t even know that my wife is not a named beneficiary, she may well be, which would of course greatly simplify everything for everyone; we don’t yet know the exact details of the policy (MIL does, but we’ve not had a chance to go over it with her yet).
Fortunately no one is desperately in need of the money and there aren’t any other relatives to come out of the woodwork to cause trouble, so we’ll get it worked out eventually. I just wanted some basic info to try and be ahead of things, mentally.
One thing I heard of years ago - one of my divorced co-workers got life insurance as an employee benefit (remember those?) and was told she could only designate one beneficiary. She ended up picking the elder daughter, with instructions to her that the proceeds must be divided equally with the younger daughter. And, they did not want to allow (?) the estate to be the beneficiary.
Is this still a problem with life insurance?
Given the lifetime exclusion on gift taxes, it is unlikely that any taxes will be owed down the line.
But gifts over the annual limit do require the proper forms are filled out that have to kept around until the MIL passes and her estate is wound up.
Keep in mind: the MIL owes no taxes now. (Unless big gifts are involved.)
It is probably much simpler to have the MIL give up to the limit each year until the desired total is reached.
Keep in mind there are gotchas. E.g., the MIL gives away all her money. Too soon she goes into a care home and gets Medicaid support for that. Medicaid comes after you for reimbursement.
That had to be a weird restriction because it was a free employee benefit. Any policy you pay for will allow you to select multiple beneficiaries, contingent beneficiaries, etc.
It may still be a problem with that carrier. It’s a rather unusual requirement, though. Insurers typically want multiple beneficiaries named so they don’t have to faff around with probate issues if the named beneficiary predeceases the insured.