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Be Like Mike |
Here is a situation that I could use some help with regarding being listed as the beneficiary on a relatives life insurance policy. The policy value is well into the 6 figures. I am currently listed as the beneficiary. However, the instructions from the relative are that the funds are to be then divided amongst a certain number of other relatives with me receiving nothing. Am I correct in assuming that I will pay no income tax on the amount that I receive but the relatives who the funds are destined for will have to pay income tax or a gift tax? I am not to my knowledge listed as the executor of this estate. --------------- "Structural engineering is the art of moulding materials we don't understand into shapes we cannot precisely analyze, so as to withstand forces we cannot really access, in such a way that the community at large has no reason to suspect the extent of our ignorance." Dr. A. R. Dykes | ||
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| Be not wise in thine own eyes  |
That’s crazy. If your the sole beneficiary your the sole beneficiary. If they want others to be beneficiaries, they need to be listed as beneficiaries. It’s simply a matter of the relative putting down names and percents desired for each. “We’re in a situation where we have put together, and you guys did it for our administration…President Obama’s administration before this. We have put together, I think, the most extensive and inclusive voter fraud organization in the history of American politics,” Pres. Select, Joe Biden “Let’s go, Brandon” Kelli Stavast, 2 Oct. 2021 | |||
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Lost |
Wow that's an interesting one. So you're listed as the sole bene, but you're under instructions to distribute the proceeds to other people? I too am wondering why those people aren't simply listed by percent as beneficiaries on the policy. Life insurance proceeds themselves are generally not taxable. But then you would be basically gifting the money to those relatives. Then the gift tax would apply, but note it is the giver who pays the gift tax, not the recipient. There is a $15,000 annual exclusion per recipient, which it sounds like you're over. However, there is also a lifetime exclusion, which is huge, like $11.7 million. So you would need to file a gift tax return, but the IRS would only log it and you wouldn't have to fork out anything. I used to sell life insurance, but am not a tax expert, and you should obviously check with one. I would be very interested to hear their take on this.This message has been edited. Last edited by: kkina, | |||
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Member |
Life insurance companies only write checks to beneficiaries on the policy. Whatever you do with that money once it's in your account, the insurance company is no longer involved. Once in a while an insured will list their estate as the beneficiary. But that just means the executor of the estate gets it. | |||
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| Member |
The list of people who don’t understand life insurance trudges on. Lol. Your relative has no clue. He/she has also put you in a ridiculous situation. The initial life insurance payment is non taxable. After that it gets murkier. You can’t just write a check for 25k dollars to someone without triggering tax implications. They also must trust you to the extreme. There is no scenario reasonably where they name you beneficiary that you would be forced to give that money to anyone. | |||
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| Gone but Together Again. Dad & Uncle  |
my recommendation would be to either: a) Have your relative update the beneficiary designation on the policy to include everyone at the pertinent percentages, or, b) create a trust, designate the trust as the beneficiary, and the trust then spells out all the beneficiaries at the pertinent percentages. I agree with the others above, your relative has unknowingly created a problem for you. | |||
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| Eschew Obfuscation |
FIFY.  This could turn into a major nightmare and financial liability. Are you sure this relative isn't trying to screw you from beyond the grave?  _____________________________________________________________________ “Civilization is not inherited; it has to be learned and earned by each generation anew; if the transmission should be interrupted for one century, civilization would die, and we should be savages again." - Will Durant | |||
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| Member |
There is no reason your relative can’t have this handled themselves. I only see this as being a major headache for you. I would politely tell them to screw off unless your getting a cut. | |||
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| Be Like Mike |
This is along the lines of what I was thinking their two main options would be. The relative’s heart is in the right place with what they are trying to do, I just had the suspicion that there was a better way to execute the plan than what is currently in place. --------------- "Structural engineering is the art of moulding materials we don't understand into shapes we cannot precisely analyze, so as to withstand forces we cannot really access, in such a way that the community at large has no reason to suspect the extent of our ignorance." Dr. A. R. Dykes | |||
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| Member |
No problem, all he has to do is keep all the money! | |||
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| Thank you Very little  |
My guess is one or more of the directed recipients have tax issues, liens, judgements, etc where the insured is concerned that the creditors will take the funds. Which if they receive direct funds from the carrier someone will attach the lien/judgement and they are trying to protect that person(s) or just don't know how to properly do this, or they are trying to circumvent running it through the estate and dividing it up in a will to avoid any probate costs. Which as a manner of the non taxable proceeds, isn't necessary. As such, life proceeds are not taxable to the beneficiary(s). As long the beneficiary has no liens with the IRS, other than that, the named beneficiary(s) will receive the proceeds without being taxed at the state, local or federal level. The funds will come to you untaxed but as others said, you will pay gift taxes on the distribution. If the insured wants this money to go to others, he/she needs to complete a COB (Chang of Benef) and assign percentages to each person they want paid from the proceeds. Legally once you get the money, it's yours to do with as you wish, morally you would be obligated to carry out those wishes. | |||
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Ammoholic |
Need to name a trust as the beneficiary instead or if it's four people or some other small number then name them all as beneficiesaries. Jesse Sic Semper Tyrannis | |||
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| Thank you Very little |
In this case, might be a good option if the insured refuses to name the individuals and pct each. If you feel compelled to do this and be named Trustee. But, it's completely unnecessary. Unless there is a specific reason for the Trust, then don't do this, Naming a Trust means the proceeds will be held until all the trust papers are submitted and can delay getting the proceeds issued. Generally don't name an estate unless it's absolutely necessary. And never name a minor as a beneficiary, ever, unless you like making lawyers money by forcing your family to go to to court. If you are unsure get legal advice first, but as a general rule, Estates and Trusts as beneficiary's are not wise unless its being used for a very specific reason. AND IMPORTANT! be sure you have the Trust properly setup, you'd be amazed at the number of people that list a Trust as the beneficiary, but didn't bother to get the trust established before passing. A trust is good in the case of proceeds being directed to a minor. Trust and Estate designations should only be used when those are either the only options, or you need the funds directed and managed post death for a specific reason. In a trust you'd do that because the person getting the funds is either a minor, disabled, mentally incapable, someone in need of full time care, or you just want control the money from the grave... Never leave the beneficiary line blank, it complicates things, if your primary passes before you, change it or be sure you have a contingent. Insurance contracts have default language that will direct payments in the case of no beneficiary, or a predeceased beneficiary to either the estate of the insured, or, order of precedence, which is Spouse, Children, Parents, Siblings, Estate. Proceeds should be directed to specific person, or persons by share. If you don't do this correct, you'll end up making survivors go to probate court, which if you have a will to probate, fine, then the estate gets the money and the executor does with it as instructed. Otherwise your relatives are looking to get a court ordered SEA or Order to Dispense without Admin. Both things that could have been easily avoided. | |||
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| Just because you can, doesn't mean you should |
If all this is as described, it sounds like your relative didn't involve an attorney in the will (or hasn't done one) or the attorney didn't explain it very well. I'm no expert but I've been the administrator of a few relatives estates. Many estate issues are state specific but I believe life insurance is normally tax free and distributed to named beneficiaries directly by the insurance company after notification and documentation is provided per the policy, not through the will/estate process. Also may be true on property, outside of probate, depending on how it's titled. If the relative has any significant assets, this all needs to be done before the need and while they are are legally competent to make agreements and sign documents. If done wrong it can be a real mess and it sounds like it will be your mess to deal with. Even beyond the technical and legal issues is the family and friends. People that claim they don't care about money or property get a sudden change of heart when there's money laying around that they think has their name on it. You need to have the relative be the one making those decisions as much as possible so you are just the clerical person, as much as possible. Also, don't let anyone tell you you need a trust until you've gotten honest, professional legal advice. This is also very state and situation specific. ___________________________ Avoid buying ChiCom/CCP products whenever possible. | |||
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| Thank you Very little |
Yes, that's correct, the application of estates and trusts as it relates to insurance are something that should be carefully approached and unless designed for a specific reason, avoided. If for example your friend wants to do this, and he has a will to probate, then he should name the estate the beneficiary and let the will direct the proceeds to each person. Then the estate will be the method by which the funds are distributed, the executor responsible, and you are not on the hook for any taxes, there won't be any gift tax restrictions etc. This only if he's insisting on doing it this way for some specific reason. Otherwise, if there is no will/estate to probate, and without some specific reason why, he should just name the beneficiaries on the policy and be done with it... | |||
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| No good deed goes unpunished  |
Laws vary by state. In my state, naming the estate as the beneficiary of life insurance makes the proceeds subject to creditor claims made on the estate. You could turn a safe asset into something the decedent's creditors can reach. Generally, naming an individual or a trust as beneficiary of the insurance prevents the estate's creditors from reaching the insurance money. Unless the OP has made over 11.7M of lifetime gifts, he would not owe any Federal gift taxes for making a gift of the insurance proceeds (but it's still a bad plan). No idea if state gift taxes could be an issue. The relative needs to find another way to distribute the insurance. If a potential beneficiary has judgment creditors or liens, leaving them assets in trust may protect their inheritance from their own creditors. In my state, the trust would offer excellent protection. Protection varies by state. The lesson here is don't take estate planning advice from strangers over the internet.  | |||
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| Member |
See a tax attorney in your state. I have used them in the past. They are worth the money. A mistake could be very costly. | |||
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| Member |
Did your relative put his wishes in writing or was this done by word of mouth ? | |||
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| Ammoholic |
It all depends. If all the beneficiaries are adults and not disabled, and they are not trying to direct any actions being taken or milestones being mey by the recipient then, naming them all as a beneficiary is the best route. There is no way for the insured to direct actions taken by the beneficiary, it's their money to do with as they wish. OP could get the check and decide to keep it all if he's the sole primary beneficiary. Or he could take the money and give it to some, but not feel others are deserving. With a trust you can keep a mess from happening with kids legally, you could also say they get the money as payments over time, you could say that it becomes theirs at 25 or completion of collage, or any other things. With a disabled child or adult being named you could remove means tested government aid if they are named beneficiary. There are good reasons to use a trust. But if it's simply give Johnny 20%, Bobby 20%, Bonnie, 20%, Betty 20%, and Mikey 20% and there are no directives attached to the money or complications like minors or disabled, then it would be stupid to put life insurance through probate or make it part of the estate. As set up it's a disaster and should be changed based on the individuals to receive the money and the wishes of the insured. Jesse Sic Semper Tyrannis | |||
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| Member |
Tell the insured you want no part of this scheme and to change bennies ASAP Fun family story just came to light. 1971. My brother is a newborn and the only of 4 kids eventually to be born in this generation; he and I, my 2 cousins. My uncle ( my cousins father) names my bro as a beneficiary of his employers life insurance death benefit was like 15k. Well he gets married and has kids and forgets about the insurance. Ends up naming his daughters husband (a financial planner) as his executor. Well ~50 years later my uncle dies suddenly of a stroke. My brother finally gets tracked down by the insurance company saying well we overpaid the estate on a few other policies but we need like 4K back from the executor to be able to pay you. OR have executor tell us he paid you the 4K and we can give you the difference. So my bro has has had to get kinda nasty with our cousins husband. Our aunt has no dog in the fight because they divorced 20+ years ago. Moral of the story ? Check and double check your beneficiaries especially when filling out forms at work or when you don’t have kids now but do later or change spouses. Etc. My bro would just as soon give equal amounts to my cousins and their kids If the executor would do the honourable thing. But now causing a family schism over a few thousand bucks. Imagine the war if it was 6 or 7 digits. | |||
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