new owner on life policy who pays taxes?
We wrote a life policy on a client and put the ownership under a trust per the attorney stating so back over 10yrs ago.
the client is now over 90 and the family is having a hard time paying the premiums so we checked into a life settlement company who is willing to pay all their premiums back to them for the payout later.
Problem: we found out that the attorney never drafted up a ILIT but only revocable trust in the will.
The only way the life settlement company will take over the policy is to have the ownership changed. (legal matters that make it have to make it this way)
so we are changing the name, which the life ins company is allowing us to do, since no ILIT was set up.
Question: when they pay the 275k (policy is worth $576k) to my client or the son (whoever we make owner) will either one have to pay taxes on that money?
is it better to have my client be the owner since she put money in the trust checking account to pay the premiums on the life insurance?
any help would be appreciated
Douglas
Permalink Submitted by James Magno on Fri, 2015-10-02 15:43
Generally the sale of a life insurance policy is taxable if the proceeds are greater than your investment in contract.Before you finish up this transaction, you really should meet with a tax advisor of some kind. I suggest that you need to now gather documentatiuon which supports the investment in contract. You need to understand what fair value is – not for tax purposes as much as for decision making purposes. If the poilicy is worth $576k, why would you only be gettuing compensated for $275,000? Perhaps there is a market discount involved(of course) but fair market value is $300k higher? Perhaps $576,000 is face/maturity value.You ask about ownership choices but if you are surrendering ownership why would that matter? Are you asking about identifying who the seller is and whether the proceeds should be payable to the ILIT?My point is that there is too much at stake in terms of taxation and who is the seller etc – go see a tax advisor !