I have an existing mortgage on my home. Can I name the bank as beneficiary to my life insurance policy?
Total Comments: 28
Posted: Mon Apr 08, 2013 12:28 pm Post Subject:
No, it's not a gift, it's the death benefit. No one pays income tax or gift tax on that. But the estate value has instantly increased by the amount of the proceeds, just as if it were owned by the now deceased insured. That's the point InsTeacher was making.
How does a man with so much knowledge make so many errors?
There are only three options. This shouldn't be difficult for you.
1)Owner and insured are the same person.
2)Owner and beneficiary are the same person and insured is someone else.
3)Owner, beneficiary, and insured are all different. (InsTeacher's example)
At the death of the insured, the money from an estate and gift tax standpoint belongs to the owner of the policy.
Therefore:
In #1, it is part of the insured's estate.
In #2, it is not part of the insured's estate. The owner is making a "gift" to the beneficiary. However, since the owner and the beneficiary are the same person and one can't gift to themselves, it is not a gift and there are no gift or estate tax consequences.
In #3, it is not (one exception) part of the insured's estate. The owner is making a "gift" to the beneficiary. The death benefit is a gift from the owner to the beneficiary. This gift is only part of the insured's estate if the beneficiary is is the estate of the insured.
Max, you should know that the death benefit is a gift when the owner, the insured, and the beneficiary are all different.
Posted: Mon Apr 08, 2013 12:30 pm Post Subject:
This is terrible advice and should not be followed.
I am in complete agreement with this statement. skt1234 is not a licensed insurance agent and should not be posting like this.
Posted: Mon Apr 08, 2013 12:35 pm Post Subject:
that the death benefit is a gift when the owner, the insured, and the beneficiary are all different.
You're so full of crap on this one.
I've never seen someone's employer, as the owner of a policy, charged with a gift tax liability for the death benefit paid to the beneficiary of an employee, whether it was a $10,000 or a $10,000,000 policy. And I've never seen grandma charged with a gift tax liability for the death benefit of a Gerber Baby Life policy she owns on the baby and paid to the parents she has named as beneficiaries.
Your statement does not wash.
It would be a gift, subject to taxation, if the owner received the death benefit proceeds and turned around and gave that money to someone else other than a charity. But when the money goes from the insurance company directly to a named beneficiary, it's not a gift in any sense of the word.
Posted: Mon Apr 08, 2013 01:18 pm Post Subject: afmvarum
The employer situation isn't the same. The employer does not have the right to name anybody that they would like as beneficiary. If the death benefit of the policy is greater than $50,000, the employee is going to have imputed income.
Gerber baby policy? Are you serious? You haven't seen this issue? Of course, you haven't seen this issue. It would take a dead kid, the grandparent to name a third person as a beneficiary, and a big enough policy for it to be a gifting issue.
Are you sure that I'm so full of crap? Different owner, insured, and beneficiary isn't a Goodman triangle? The owner has to receive the death benefit?
Max, this is one of those times, again, that you should just man up and admit that you are wrong.
Posted: Mon Apr 08, 2013 01:29 pm Post Subject:
At the death of the insured, the money from an estate and gift tax standpoint belongs to the owner of the policy.
This is your error. It's not the "money" that belongs to the owner of the policy, it's the "value of the policy" that belongs to the estate of the owner (or the owner if other than the insured, and living). The owner's estate will eventually have pay tax on that value unless he can figure out a way to spend down money he does not have -- he has the value but not the money. I don't think you can distinguish the difference in that statement, because you've made the same mistake previously.
26 USC 2042 (IRC Sec 2042) states:
The value of the gross estate shall include the value of all property—
(1) Receivable by the executor
To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent.
(2) Receivable by other beneficiaries
To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent. As used in this paragraph, the term “reversionary interest” includes a possibility that the policy, or the proceeds of the policy, may return to the decedent or his estate, or may be subject to a power of disposition by him. The value of a reversionary interest at any time shall be determined (without regard to the fact of the decedent’s death) by usual methods of valuation, including the use of tables of mortality and actuarial principles, pursuant to regulations prescribed by the Secretary. In determining the value of a possibility that the policy or proceeds thereof may be subject to a power of disposition by the decedent, such possibility shall be valued as if it were a possibility that such policy or proceeds may return to the decedent or his estate.
Notice that the word "money" never appears.
In a third-party ownership scenario involving a natural person (as opposed to a business/corporation or trust, which are forms of non-natural persons), that person will be saddled with the value of the life insurance policy and have no ability to spend-down its value unless there are other cash/liquid assets that could be spent down as representative of the insurance value.
In other words, A owns a $1,000,000 life policy on B, and C is the beneficiary. A is B's brother. B dies in January 2013 and C receives the death benefit proceeds. A receives the value of the policy into his gross estate, which includes $4,500,000 of other assorted property. Before his death in 2013, A fails to dispose of $250,000 of his property, and his estate owes tax on the excess of his $5,250,000 gross estate valuation (assuming no deductible expenses for purposes of this illustration). It doesn't matter that he did not receive any of the life insurance money, his estate owes tax on the value. There is no gift tax liability to A for the life insurance proceeds paid to C -- that money was not his, it was the insurance company's and the insurance company deducts that payment as a business expense offsetting any revenue it had in 2013, but the value of the money belongs to A's estate. Had A reduced his gross estate by any lawful means by $250,000 or more before his death, there would be no estate tax liability. A did not make a gift to C with the insurance company's money, so there is no gift tax liability.
Posted: Mon Apr 08, 2013 01:47 pm Post Subject:
In other words, A owns a $1,000,000 life policy on B, and C is the beneficiary. A is B's brother. B dies in January 2013 and C receives the death benefit proceeds.
A is alive. I don't care about his subsequent death. We are talking about what happens when B dies. It is a classic Goodman Triangle. A has made a $1,000,000 gift to C.
Posted: Mon Apr 08, 2013 04:54 pm Post Subject:
Please don't do that. It's not at all a good idea to name your bank as beneficiary.
Posted: Tue Apr 09, 2013 01:25 pm Post Subject:
Max,
Why is it so hard for you to admit when you are wrong?
Posted: Mon Apr 08, 2013 12:28 pm Post Subject:
No, it's not a gift, it's the death benefit. No one pays income tax or gift tax on that. But the estate value has instantly increased by the amount of the proceeds, just as if it were owned by the now deceased insured. That's the point InsTeacher was making.
How does a man with so much knowledge make so many errors?
There are only three options. This shouldn't be difficult for you.
1)Owner and insured are the same person.
2)Owner and beneficiary are the same person and insured is someone else.
3)Owner, beneficiary, and insured are all different. (InsTeacher's example)
At the death of the insured, the money from an estate and gift tax standpoint belongs to the owner of the policy.
Therefore:
In #1, it is part of the insured's estate.
In #2, it is not part of the insured's estate. The owner is making a "gift" to the beneficiary. However, since the owner and the beneficiary are the same person and one can't gift to themselves, it is not a gift and there are no gift or estate tax consequences.
In #3, it is not (one exception) part of the insured's estate. The owner is making a "gift" to the beneficiary. The death benefit is a gift from the owner to the beneficiary. This gift is only part of the insured's estate if the beneficiary is is the estate of the insured.
Max, you should know that the death benefit is a gift when the owner, the insured, and the beneficiary are all different.
Posted: Mon Apr 08, 2013 12:30 pm Post Subject:
This is terrible advice and should not be followed.
I am in complete agreement with this statement. skt1234 is not a licensed insurance agent and should not be posting like this.Posted: Mon Apr 08, 2013 12:35 pm Post Subject:
that the death benefit is a gift when the owner, the insured, and the beneficiary are all different.
You're so full of crap on this one.I've never seen someone's employer, as the owner of a policy, charged with a gift tax liability for the death benefit paid to the beneficiary of an employee, whether it was a $10,000 or a $10,000,000 policy. And I've never seen grandma charged with a gift tax liability for the death benefit of a Gerber Baby Life policy she owns on the baby and paid to the parents she has named as beneficiaries.
Your statement does not wash.
It would be a gift, subject to taxation, if the owner received the death benefit proceeds and turned around and gave that money to someone else other than a charity. But when the money goes from the insurance company directly to a named beneficiary, it's not a gift in any sense of the word.
Posted: Mon Apr 08, 2013 01:18 pm Post Subject: afmvarum
The employer situation isn't the same. The employer does not have the right to name anybody that they would like as beneficiary. If the death benefit of the policy is greater than $50,000, the employee is going to have imputed income.
Gerber baby policy? Are you serious? You haven't seen this issue? Of course, you haven't seen this issue. It would take a dead kid, the grandparent to name a third person as a beneficiary, and a big enough policy for it to be a gifting issue.
Are you sure that I'm so full of crap? Different owner, insured, and beneficiary isn't a Goodman triangle? The owner has to receive the death benefit?
Max, this is one of those times, again, that you should just man up and admit that you are wrong.
Posted: Mon Apr 08, 2013 01:29 pm Post Subject:
At the death of the insured, the money from an estate and gift tax standpoint belongs to the owner of the policy.
This is your error. It's not the "money" that belongs to the owner of the policy, it's the "value of the policy" that belongs to the estate of the owner (or the owner if other than the insured, and living). The owner's estate will eventually have pay tax on that value unless he can figure out a way to spend down money he does not have -- he has the value but not the money. I don't think you can distinguish the difference in that statement, because you've made the same mistake previously.26 USC 2042 (IRC Sec 2042) states:
The value of the gross estate shall include the value of all property—
(1) Receivable by the executor
To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent.
(2) Receivable by other beneficiaries
To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent. As used in this paragraph, the term “reversionary interest” includes a possibility that the policy, or the proceeds of the policy, may return to the decedent or his estate, or may be subject to a power of disposition by him. The value of a reversionary interest at any time shall be determined (without regard to the fact of the decedent’s death) by usual methods of valuation, including the use of tables of mortality and actuarial principles, pursuant to regulations prescribed by the Secretary. In determining the value of a possibility that the policy or proceeds thereof may be subject to a power of disposition by the decedent, such possibility shall be valued as if it were a possibility that such policy or proceeds may return to the decedent or his estate.
Notice that the word "money" never appears.
In a third-party ownership scenario involving a natural person (as opposed to a business/corporation or trust, which are forms of non-natural persons), that person will be saddled with the value of the life insurance policy and have no ability to spend-down its value unless there are other cash/liquid assets that could be spent down as representative of the insurance value.
In other words, A owns a $1,000,000 life policy on B, and C is the beneficiary. A is B's brother. B dies in January 2013 and C receives the death benefit proceeds. A receives the value of the policy into his gross estate, which includes $4,500,000 of other assorted property. Before his death in 2013, A fails to dispose of $250,000 of his property, and his estate owes tax on the excess of his $5,250,000 gross estate valuation (assuming no deductible expenses for purposes of this illustration). It doesn't matter that he did not receive any of the life insurance money, his estate owes tax on the value. There is no gift tax liability to A for the life insurance proceeds paid to C -- that money was not his, it was the insurance company's and the insurance company deducts that payment as a business expense offsetting any revenue it had in 2013, but the value of the money belongs to A's estate. Had A reduced his gross estate by any lawful means by $250,000 or more before his death, there would be no estate tax liability. A did not make a gift to C with the insurance company's money, so there is no gift tax liability.
Posted: Mon Apr 08, 2013 01:47 pm Post Subject:
In other words, A owns a $1,000,000 life policy on B, and C is the beneficiary. A is B's brother. B dies in January 2013 and C receives the death benefit proceeds.
A is alive. I don't care about his subsequent death. We are talking about what happens when B dies. It is a classic Goodman Triangle. A has made a $1,000,000 gift to C.
Posted: Mon Apr 08, 2013 04:54 pm Post Subject:
Please don't do that. It's not at all a good idea to name your bank as beneficiary.
Posted: Tue Apr 09, 2013 01:25 pm Post Subject:
Max,
Why is it so hard for you to admit when you are wrong?
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