Deadly Sin #3: Not structuring life insurance properly will create a taxable gift
When it comes to life insurance, there are three people every client should consider when structuring and signing a life insurance application with your financial advisor. The policy owner, the insured, and the beneficiary. The last thing you want to do is create a taxable gift to your beneficiaries, as you will see with Judy and Larry.
Larry was a VP, who contributed the maximum amount of $18,000 to his 401 (K). His advisor suggested that Larry should only contribute what his employer would match to his 401 (K), 5%. With the remaining after tax dollars, his advisor recommended Larry to invest in life insurance as additional investment for retirement. This gave Larry the option to take tax free withdrawals, along with continued tax deferrals and the flexibility to take early pension prior to 59 1/2. Larry followed through with suggestions and signed the application.
Two years into the policy, Larry realized there were tax consequences with the way he structured his original policy. Normally, life insurance proceeds are tax free, however this was not the case for Larry and Judy. When Larry opened his life insurance policy, he had his wife Judy own the life insurance policy because she handled all of the bills. Larry wanted to leave his life insurance policy to his daughter Karen (from his previous marriage), who he had listed as the primary beneficiary. Little did he know this would create a taxable gift liability for his wife Judy if Larry were to pass away.
In most situations, this can be avoided by having the husband own the life insurance policy and remain as the insured. This can become more complex if you reside in a community property state. Please consult with your financial advisor to conduct a policy review to make sure your life insurance is structured properly
No comments:
Post a Comment