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Question for the Money Doctors

Question submitted on Sep 17, 2012.

Question

My Mother just passed away. She had 2 life insurance policies in the State of Minnesota. My 2 sister's and I are the beneficiaries on both policies. Mom''s wishes were to have one of the policies divided among the 6 grandkids. One sister has 3 kids,the other has 2, and I have 1. That means that I have to split my childs check in half and give the funds to my nephew. No problem with that. During the life of both policies the owners name had been changed and beneficiaries were also changed, while Mom was still alive. I have no knowledge why these changes were made by my sisters. Will I have to pay taxes on both of these checks?

Answer

Life Insurance proceeds are tax free with rare limitations (Corporate owned policies are taxed unless a form is signed by the insured).  There may be a gifting issue. I am unclear as to the payee of the checks.  If the grandchildren were not named beneficiaries, and you are honoring your mother's verbal wishes, and the check was made out to you, then the transfer of the money from your account to your children's account is a gift. If the beneficiaries were correctly reflected, and the check was made out to your children, then there would not be a gift involved.  In either case, the proceeds received should be income tax free.  The proceeds, however, may not be estate tax free, depending on what the value of the estate is and who owned the policies.  For this year, a little over $5M of estate value is not subject to estate taxation. 


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