Life insurance from a parent

[TilliamWe]

My wife's father informed her today that he has made her a secondary beneficiary on his life insurance policy. His wife (my wife's mother) is still the primary beneficiary and she is still alive, obviously. Since this policy will be paying out in the very near future, she is wondering how much of the money she is going to get. She's wondering about how much tax will be due and if there are any ways to "invest" or "spend" the money without paying any taxes on it. So what say ye financial advisors out there?
We are both residents of Illinois, are in the process of selling one house to buy another, and have a 3 year old child.

 

[rogerwa]

Re: Life insurance from a parent

The primary would get the payout unless she dies before he does, unless there is an instruction in the will to divvy it up. That would be my guess.

 

[roscoe]

Re: Life insurance from a parent

For the most part, insurance proceeds are not taxed, but look for the politicians to change those laws.

 

[QC]

Re: Life insurance from a parent

Agree, not taxable . . . yet.

 

[TilliamWe]

Re: Life insurance from a parent

For the most part, insurance proceeds are not taxed, but look for the politicians to change those laws.

Thank you for the information (and you too QC).

So is it wrong to ask him to die before the guy he voted for gets into office?

(I know that it's wrong, I am just trying to make a joke about a sad situation for my wife and son)

As far as the will, it's not in the will, cause my wife has a copy. He merely said he changed the beneficiaries on the life insurance policy to pay a portion to each of his two daughters. But let's say that it does have to go to his wife, first. Then if she gives it to each daughter, would there be gift taxes involved? I am sure Illinois has some sort of "one time gift" thing, but I am not certain.


Thanks again.

 

[aspeck]

Re: Life insurance from a parent

If he changed the policy to pay some out to each of his 2 daughters, then they are also primary benies and no taxes would be paid, at this point ...

In your second scenario, if it goes to Mom first and she gives it out, then, anything over $11,000 (or is it $12,000 this year) would be taxable income. However, if your MIL doesn't have an estate over 3 mil, she would be advised to fill out the paperwork and put the gift against her estate, lessoning the amount of estate that can avoid federal taxes at her death, but making this part that avoids the federal death tax. This is all federal info and in no way effects the laws of your state or your state's tax code.

BTW, I did not stay at a Holiday Inn last night, so take it for what it is worth.

 

[JB]

Re: Life insurance from a parent

As I understand it, a secondary beneficiary only gets the payout if the primary beneficiary is dead. Joint beneficiaries split it up.

I don't think there is a Federal tax (yet) on insurance proceeeds. What Illinois does I have no idea.

There is a federal Income Tax on gifts over, I think it is still $10,000.

 

[Limited-Time]

Re: Life insurance from a parent

I believe JB is correct on the disbursement. Unless it's spelled out in the actual insurance policy, (amount or percent to each named beneficiary) or stipulated in the will. The entire amount goes to the primary beneficiary. As for the tax deal as long as the funds from the policy go directly to the beneficiary they are not taxable. However if the money is dumped into the Estate between pay out and disbursement it is subject to the Estate taxes.

 

[BoatBuoy]

Re: Life insurance from a parent

I believe JB is correct on the disbursement. Unless it's spelled out in the actual insurance policy, (amount or percent to each named beneficiary) or stipulated in the will.

The face amount of the life insurance, reduced by an amount of any loan against the policy, goes to the beneficiaries (primary, then secondary if the primary does not survive the insured) regardless of the writing of the will, unless the insurance beneficiary is designated as "My Estate". Then the will will determine the distribution.

Income taxes do not apply to any amounts specified to be awarded to any beneficiary designated in the policy, but may apply to any amounts awarded by the will, or given by the primary beneficiary as a gift.

BTW, I hope he lives to see the new President take office.

 

[TilliamWe]

Re: Life insurance from a parent

Thanks guys for all the responses. I now know what to have my wife ask him as far as how he designated beneficiairies.
No telling what Illinois will want. I mean, I thought I might offer it to the Governor for my wife to get the Senate seat?!
BoatBuoy, I hope he lives that long too, but I am getting a very bad feeling that he isn't planning on it.