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Question for the Money Doctors

Question submitted on Mar 24, 2012.

Question

A parent owns a life insurance policy with their child as the insured. THe policy is a modified endowment contract (MEC). At the death of the parent, the ownership of the policy tranfers to the child (the insured), automatically or through a contingent owner designation. Is this a taxable event, considering the MEC rules (ie - is it a distribution?). If it''s a distribution, does the estate of the parent pay the taxes due, or is the child that pays the taxes?

Answer

Thanks for the question.  I believe that this would not be a taxable event (a distribution) since the cash value remains in the policy.  You are only changing ownership of the policy.  However, this is a complicated matter, so you should seek personal advice before executing this transaction.  Visit www.findapfs.com to connect with a CPA/PFS in your area.

Thank you,

Cory S. Colquette, MBA, CPA/PFS 


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