Some life insurance money can be given without tax implications

Oct 06, 2011

For a grieving family, it's important to know the rules and regulations of life insurance policies and taxes.

In a Q-and-A post on the Smart Money blog, a question posed to the website asked whether a person's mother would be able to give her two children each $50,000 from their deceased father's life insurance policy. The question revolved around possible tax implications on this money.

In response to the question, Jilian Mincer said the death benefit for an individually-owned life insurance policy is typically tax-free, according to James R. Allen, director of MetLife Investors Wealth Advisory Group. In this case, the money was left to the mother, so she would not have to pay taxes on the policy.

With this case, Mincer said the mother could give each of her children a cash gift of $13,000 per year with no tax consequences. The next $37,000 to each sibling would be applied against the lifetime gift-and-estate tax exemption, the amount of money a person can give away or leave to heirs before taxes are owed. This exemption is $5 million for individual givers and $10 million for married couples.

Pacific Life's website said life insurance policies can be used to pay estate taxes post-death if it is owned by the deceased party. The website said that to maximize the money from a plan, it should be owned by someone else, such as a spouse. This will lessen the amount of taxes taken. 

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