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Any tax/insurance experts?
Old 08-09-2017, 10:40 AM   #1
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Any tax/insurance experts?

I have gotten good guidance from the folks on these boards in the past so I am fishing again for any wisdom that may be out there about the following situation:

My father (may he RIP) bought whole life insurance policies for my sons. (He was under the impression this was a great way to save for their college education). Regardless, my son is through college and we never tapped the insurance. The policy has a nice cash value and I Believe could be put to better use. It is currently owned by me- so if I cash it I Pay taxes at my tax rates on the gain. I am going to give the money to my son. (Less the taxes and in such a way over tie to avoid gift taxes--
If I give him the policy instead of the money -
A) will I have to pay gift tax on the full value of the policy that exceeds $14,000?
And
B)will the gain be taxed at my son's rate?
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Old 08-09-2017, 02:00 PM   #2
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My thoughts. But first, who is the insured? How old is the insured and how is their health? Who are the beneficiaries?

You would not pay gift tax but if the value exceeds $14,000 then you would need to report it and file a return.

Your son's basis in the policy would be your adjusted basis so any gain would be taxed at your son's rate if he cashes it in. Is he in a lower tax bracket than you?

YMMV. Also see https://www.irs.gov/help-resources/t...le-of-home-etc

A better alternative might be to take out a policy loan and then gift the money to your son after making him the beneficiary. Then when the insured dies he will t any excess of the cash value over the loan balance and the whole thing would be tax free. You could even gift your son $14k a year for a number of years to avoid having to report the gifts (or $28k a year if he is ... happily....married).
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Old 08-09-2017, 03:10 PM   #3
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I would say cash it.
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Old 08-09-2017, 04:31 PM   #4
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Ok- some clarity-- THE INSURED is my son. Very healthy 23 year old who does not need life insurance--certainly not whole life.. Currently the premiums are paid by the dividends and the cash value of the policy as tapped as needed to supplement that.
I agree it should be cashed out... The question is HOW to best do that.

I have since learned that the owner of the policy is not me--it was my father's revocable trust when he was alive. Since he died, I am not clear on what happens with ownership, but I am trying to get that answer. I believe it remains owned by the Trust and governed by the new Trustee(s) (?my mother and older brother?) If they transfer it to my son does that exceed the gift amount and generate a taxable event on the whole value-- If so it seems it would be better for the Trust to cash it and GIFT him the proceeds less the taxes due- after paying taxes on the gain only....with the gift spread out over two or more tax years as needed to avoid the $14000 excess rule on gifts.
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Old 08-09-2017, 05:42 PM   #5
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Done right, you can gift 56K a year without filing a return
You give your son $14K
Your wife gives your son $14K
You give your son's wife $14K
Your wife gives your son's wife $14K
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Old 08-09-2017, 07:43 PM   #6
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Quote:
Originally Posted by urn2bfree View Post
Ok- some clarity-- THE INSURED is my son. Very healthy 23 year old who does not need life insurance--certainly not whole life.. Currently the premiums are paid by the dividends and the cash value of the policy as tapped as needed to supplement that.
I agree it should be cashed out... The question is HOW to best do that.

I have since learned that the owner of the policy is not me--it was my father's revocable trust when he was alive. Since he died, I am not clear on what happens with ownership, but I am trying to get that answer. I believe it remains owned by the Trust and governed by the new Trustee(s) (?my mother and older brother?) If they transfer it to my son does that exceed the gift amount and generate a taxable event on the whole value-- If so it seems it would be better for the Trust to cash it and GIFT him the proceeds less the taxes due- after paying taxes on the gain only....with the gift spread out over two or more tax years as needed to avoid the $14000 excess rule on gifts.
I'll play devils advocate. If your dad bought this policy around when your son was born then it may have some attributes that are worthwhile. back then many policies had minimum guaranteed interest rates of 4%.

Since you are using dividends to pay premiums, how much did the cash value increase during the last policy year? My guess would be close to 4%. Where can you son find a high quality bond with NO interest rate risk that pays almost 4%? Unless you son is desparate for the money, keep it and let it grow.

While you son currently does not need life insurance, he may someday and this would provide a death benefit for his beneficiaries. Also, there is some chance that something could happen where you son would be precluded from purchasing life insurance in the future and this would be there.

If your son needs the money, once he owns the policy he could take out policy loans to get cash. I wouldn't be in such a hurry to cash it in.

While I wouldn't advise a 23 year old to go out an buy whole life insurance, an established policy has its best years ahead of it. I have a whole life policy that I bought as a 22 year old... it provided guaranteed insurability for me if something had happened to me, was a part of the life insurance protection that our young family needed and is now part of my "bond" portfolio and pays me ~4% with no interest rate risk and minimal credit risk.

But all that is here nor there........ most trusts have specific provisions as to how trust assets are to be used and the co-trustees should abide by those provisions.
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Old 08-09-2017, 11:43 PM   #7
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Thanks pb4uski- I appreciate your thoughts. The policy is accumulating at about 2.5-3%. Not 4%. The purpose of the policy was to pay for college tuition. Not the best way to do that, but that is what the guy sold my father on (the agent denies this- but I know what my father's impression was, he shared it with me when he was alive). It is not that my son needs the money...it is that if he suddenly had this money he would not be investing it in this or anything like it. So he does not see why he should not put it to more desired use. I cannot disagree.
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Old 08-15-2017, 01:49 PM   #8
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A). If over 14k, file a gift tax return on excess.

https://www.irs.gov/instructions/i709/ch01.html

B). He will pay taxes at his marginal rate when he surrenders the policy. At 23, he probably doesn't have a bunch of savings. Even growing 2.5% to 3%, that's not a bad rate for an emergency fund. He could probably cash it out and receive the funds in a week or two.
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Old 08-16-2017, 10:33 AM   #9
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Who are the beneficiaries of the trust? That will have a bearing on what the trustees can do with the policy.
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