Taxation of Group Life Insurance

[KnightsPG]

Notecard 293 of GRASP

So let me get this straight. Death proceeds are tax free to the beneficiary. However, there will be an estate tax if there is no benefiiciary assigned or a gift tax if a beneficiary is assigned.

Did I understand this correctly? If so, why even say that death proceeds are tax free?

[micaelagb]

If death benefits go directly to the beneficiary, no tax.

If they go to the deceased's estate, there's an estate tax. And then there's a beneficiary of the estate. Who gets post-estate-tax proceeds. (I think.)

No one said tax laws made sense!! ;-)

Now, go assign your group life benefits to someone...

[The Head Detective]

I find this confusing too and the study note doesn't really help.

Here's how I understand it (or more accurately, here's how I'm trying to rationalize it):

a) The policy is either subject to the estate tax or the gift tax.
b) It is subject to the estate tax if the employee holds/controls the policy at the time of death. The estate tax applies once, when the benefit is paid.
c) It is subject to the gift tax if the employee transfers control of the policy to someone else. This tax applies annually while the policy is in place (i.e. before the employee dies).

Now, could someone clarify? I don't really know what I mean by "holding/controlling the policy" and "transfering control of the policy".

Also, on what amount is the gift tax calculated? The face value of the policy?

[The Head Detective]

If death benefits go directly to the beneficiary, no tax.


Estate Taxation
Group term life insurance is included in a deceased employee's estate at his or her death if the employee had any rights in the policy at the time of death, even when another person or a trust is the beneficiary of the life insurance. The IRS has ruled that an insured employee can remove the proceeds of group term life insurance on is or her life from the gross estate by absolutely assigning all of his or her incidents of ownership to another.


?

So what's the difference between "absolutely assigning all [] incidents of ownership to another" and just making them a beneficiary?

[micaelagb]

?

I think the study note's wrong. The end of that sentence should read "estate" instead of "life insurance."

Check out wiki (authority on everything, I know...): http://en.wikipedia.org/wiki/Life_insurance#Tax_and_life_insurance

[The Head Detective]

I think the study note's wrong. The end of that sentence should read "estate" instead of "life insurance."

Check out wiki (authority on everything, I know...): http://en.wikipedia.org/wiki/Life_insurance#Tax_and_life_insurance

Then what does the gift tax have to do with anything?

(Also, I beefed up my previous post a bit.)

[The Head Detective]

nevermind

[The Head Detective]

OK. I should have read the rest of the chapter.

Also from Page 20:
"Death Proceeds
The death benefit of any group life insurance is received by the beneficiary income tax free."

This is consistent with the all-powerful-wiki. And the wiki does not really get into details regarding the estate/inheritance tax. It mentions income tax here (http://en.wikipedia.org/wiki/Estate_tax_%28United_States%29#The_.22gross_estate .22) which leaves me to believe that the study note is correct as written.

Basically, there are three separate taxes being referenced: income tax (beneficiary), estate tax, and gift tax.

I would just like to better understand what it means to assign incidents of ownersip. Anyone?

[The Head Detective]

I don't think the horse is quite dead yet.

I think there are a couple mistakes on GRASP card 290 under "Taxation".
1. is OK
2. "employee" should be "beneficiary"
3. "insurer" should be "employer"
4. is OK

As always, it would be nice to get confirmation from someone who knows what they're talking about.

[micaelagb]

This is way crossing over from GH into ILA, but I would presume a gift tax would apply in a viatical (sp?) settlement, or something similar. Or perhaps if your individual life ins. becomes a Modified Endowment Contract. Not exactly sure.

For all intents and purposes, if you assign a beneficiary--> no taxes on benefit
If you don't and it's part of your estate-->estate taxes.

That sounds sufficient to me on this topic. For the rest, say "refer to the tax department"

[The Head Detective]

For all intents and purposes, if you assign a beneficiary--> no taxes on benefit
If you don't and it's part of your estate-->estate taxes.


I don't agree with this (based on the study note & minimal research, no real knowledge or understanding), but I do agree that this topic probably isn't worth spending a whole lot of time on. Especially when there's some Care Management stuff I haven't looked at in 6 weeks.