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Reply to Does Wife Need to Waive her Right to Community Property?     
Old 07-25-2017, 06:34 PM   #21
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Does Wife Need to Waive her Right to Community Property?
This will affect very few people in the U.S.

As adjusterjack mentioned, the lifetime gift tax exemption is currently 5.5m. With portability, a husband and wife would theoretically have $11 million that they can pass to the next generation without gift or estate taxes.

As others mentioned, different states have different rules but from a federal perspective (which is likely the most onerous tax), this is a non-event for 99% of the population.
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Old 07-25-2017, 09:20 PM   #22
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by VolAgent View Post
Words matter.

It is not gift tax, but Federal Estate tax. In some states it is inheritance tax, which while similar actually works differently.

So again, when is a life insurance death benefit ever taxable as a gift to a named beneficiary?
It would be when the life insurance is inside a qualified plan. If they write off the premiums, the death benefit is taxable.
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Old 07-26-2017, 07:59 AM   #23
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by Tahoe Ray View Post
This will affect very few people in the U.S.

As adjusterjack mentioned, the lifetime gift tax exemption is currently 5.5m. With portability, a husband and wife would theoretically have $11 million that they can pass to the next generation without gift or estate taxes.

As others mentioned, different states have different rules but from a federal perspective (which is likely the most onerous tax), this is a non-event for 99% of the population.
Aren't there also annual limitations on gifts in relation to taxes?

I did not fully understand the transfer of ownership issues for life insurance policies as I was scanning internet searches and did not take the time to read more in depth. But I saw something in passing that compared transferring a single premium life insurance policy to transferring an annual payment policy and I think the article suggested that the single premium policy transfer could generate some gift taxes for the original owner while the annual payment policy transfer might not because of the difference in the amount of premiums involved. ($14,000 was the amount mentioned-but no idea if that is a current or an old number-my question is about the concept-not what might be specific current year amounts.) (And that also was a situation unrelated to VolAgents question to me since the gift tax is generated by a change in policy ownership, not the policy's death benefits.)

That scenario is one of the things that leads me to ask the question I asked above.

ie-what I took away from the brief amount of reading that I did is that the relationship between life insurance and gifts is complex and policy ownership issues may cause premiums or death benefits to be classified as gifts which then may or may not actually be subject to tax.

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LD is a Life Ins. & Medicare Supplement Consumer learning about Medicare

"...no space of regret can make amends for one life's opportunity misused..."
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  Reply With Quote to Does Wife Need to Waive her Right to Community Property?
Old 07-26-2017, 08:30 AM   #24
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by LGilmore View Post
It would be when the life insurance is inside a qualified plan. If they write off the premiums, the death benefit is taxable.
Not sure how the death benefit would be taxable in that situation. I suspect either as income or capital gains. I couldn't readily find something that said how beyond just taxable.

Also, it would incur taxes along the way. Both of the cash value and the economic benefit of the insurance, which again I believe would be income tax.

That would be a rather rare circumstance.

Just like transferring ownership of a policy can be taxable, but generally if transferred it is to the insured which is not taxable.

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Old 07-26-2017, 08:33 AM   #25
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Does Wife Need to Waive her Right to Community Property?
Originally Posted by LostDollar View Post

Aren't there also annual limitations on gifts in relation to taxes?

I did not fully understand the transfer of ownership issues for life insurance policies as I was scanning internet searches and did not take the time to read more in depth. But I saw something in passing that compared transferring a single premium life insurance policy to transferring an annual payment policy and I think the article suggested that the single premium policy transfer could generate some gift taxes for the original owner while the annual payment policy transfer might not because of the difference in the amount of premiums involved. ($14,000 was the amount mentioned-but no idea if that is a current or an old number-my question is about the concept-not what might be specific current year amounts.) (And that also was a situation unrelated to VolAgents question to me since the gift tax is generated by a change in policy ownership, not the policy's death benefits.)

That scenario is one of the things that leads me to ask the question I asked above.

ie-what I took away from the brief amount of reading that I did is that the relationship between life insurance and gifts is complex and policy ownership issues may cause premiums or death benefits to be classified as gifts which then may or may not actually be subject to tax.
Annual exclusions (the 14k you referenced) are different and if adhered to, do not reduce your lifetime exemption.

Again, there are very few people who will ever have a gift tax problem, and I would wager that those that do are not searching out advice on this forum.
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Old 07-26-2017, 08:48 AM   #26
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by Tahoe Ray View Post
Annual exclusions (the 14k you referenced) are different and if adhered to, do not reduce your lifetime exemption.
Thank you for the additional information.

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LD is a Life Ins. & Medicare Supplement Consumer learning about Medicare

"...no space of regret can make amends for one life's opportunity misused..."
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  Reply With Quote to Does Wife Need to Waive her Right to Community Property?
Old 07-26-2017, 09:43 AM   #27
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LGilmore on Does Wife Need to Waive her Right to Community Property?
 
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by VolAgent View Post
Not sure how the death benefit would be taxable in that situation. I suspect either as income or capital gains. I couldn't readily find something that said how beyond just taxable.

Also, it would incur taxes along the way. Both of the cash value and the economic benefit of the insurance, which again I believe would be income tax.

That would be a rather rare circumstance.


Just like transferring ownership of a policy can be taxable, but generally if transferred it is to the insured which is not taxable.
Yes, it is rare, but benefit would be taxable. Cash values along the way wouldn't be taxed, same as any other deferred choice. Been a very long time since I looked into it as the idea of making the benefit taxable to save a little bit on premiums didn't make sense to me. I can look later today and pull the info up. I remember it from one of the CHFC classes from long ago.
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Old 07-26-2017, 12:42 PM   #28
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by LGilmore View Post
Yes, it is rare, but benefit would be taxable. Cash values along the way wouldn't be taxed, same as any other deferred choice. Been a very long time since I looked into it as the idea of making the benefit taxable to save a little bit on premiums didn't make sense to me. I can look later today and pull the info up. I remember it from one of the CHFC classes from long ago.

This is correct. On the rare occasion you find a policy within a Qualified Plan, the Premiums were paid pre-tax, and the DB will be taxable as income.

If I remember correctly, the Plan is usually the Beneficiary of the Policy, and the DB just becomes part of that Participant's Account Value. It is then Distributed in whatever manner the Plan allows and the Participant's Beneficiary chooses.

You dont care about the taxes on the DB because in theory, even after taxes the DB is still higher than just normal accumulation values of equities or other non-life insurance funding.

If I remember correctly, after the Plan receives the DB, it acts just like normal Qualified Funds would at death. So a Spouse can actually do a Qualified Transfer Funds to an IRA or Qualified Plan. (deferring the taxes on the DB and other funds within the Plan)


Also, you can Transfer the Policy out of the Plan while the Client is still living if its a 401k. They are only taxed (as income) on the Surrender Value upon Transfer.
The benefit of this is that you can take a WL paid at Base Premiums, transfer it out with minimal CSV, and then start maxing out PUAs once it is individually owned (and taxed normally at that point). Same can be done with a UL/IUL that has really high Surrender Charges for the first 15 years. Or if DB is the only goal, then you could use a GUL. Only the "Base Premium" can be paid pre-tax. That can be an issue with using UL (other than GUL) with this method.


** Consult with your advanced planning dept before attempting any of this in the field. And you must be the Adviser on the 401k Plan to sell an insurance policy within that Plan. So this is not something you can use when prospecting individuals. Also the Plan Documents must allow life insurance to be used within the Plan.
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Last edited by scagnt83; 07-26-2017 at 12:58 PM.
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Old 07-26-2017, 12:50 PM   #29
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VolAgent on Does Wife Need to Waive her Right to Community Property?
 
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
Originally Posted by scagnt83 View Post
This is correct. On the rare occasion you find a policy within a Qualified Plan, the Premiums were paid pre-tax, and the DB will be taxable as income.
Thanks. That is what I thought, it would be subject to income tax, not gift tax or estate tax.

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Old 07-26-2017, 04:24 PM   #30
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LGilmore on Does Wife Need to Waive her Right to Community Property?
 
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Does Wife Need to Waive her Right to Community Property? Re: Does Wife Need to Waive her Right to Community Property?
So I don't have to look it up now? Great.

It's payables day and that always makes me grouchy.

Payables day is where we realize we're all just pass through corporations.
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