Question: I received non-taxable life insurance proceeds, valued at $80,000 and want to share it with another sibling. Will my sibling have to pay taxes on the money?
Amy’s situation raises a good question about gifting to another individual in general, and it highlights a common misconception many people have about the tax ramifications in general.
Life Insurance death benefit proceeds are paid to the beneficiary, income tax-free, assuming the life insurance policy was paid for by “after tax” premiums.
There’s an assumption, in the question, that it’s the recipient who would be responsible for the taxes on the gift. Under our transfer tax system, it’s generally the donor who is responsible for any gift tax that would be due.
There is an annual gift exclusion of $14,000 per recipient, per year, according to IRS regulations. In other words, you could give multiple siblings $14,000 each and not have to file any additional tax paperwork, nor would anyone be responsible for any taxes on that gift. As a note: An individual has “unlimited” gifting to a current spouse, who is also a U.S. resident.
The situation gets a little more complicated if you want to split the $80,000 with a brother or sister. Still, even though more tax paperwork is involved, there’s a good chance that your generous gift could be given without a tax penalty.
If Amy gives $40,000 to the sibling, $14,000 is the exclusion, which means she (the donor) would have to file IRS form 709, a gift tax return. It’s a taxable gift, but there actually may be no tax due on it.
In addition to the $14,000 exclusion, there also is a lifetime, $5.49 million, gift tax exclusion (the same threshold as the estate tax for 2017). So the first $14,000 of the $40,000 gift would be covered by the exclusion; the remaining $26,000 would count toward the lifetime exclusion.
Amy can give the entire $80,000 away, assuming she hadn’t already given away $5.49 million.
The $14,000 limit doesn’t apply to gifts between spouses, and spouses can jointly gift $28,000 ($14,000 each).
Documentation of gifts larger than that would have to be filed individually, as there is no joint gift tax return. If you want to split the $80,000 evenly with your sibling and don’t want to deal with the hassle of filing gift tax forms, you could parcel out the money over the course of a few years, $14,000 at a time.
There are a few notable exceptions to that $14,000 annual limit. If you want to pay for someone’s tuition or medical expenses, you can do so without limits and without incurring a tax. The caveat here is the funds have to be paid directly to the institution or provider; in other words, you couldn’t write your nephew a check to cover his college bills, but you can make the payment directly to the college without any tax consequences.
You could also pay an insurance company, directly, for Long Term Disability and Long Term Care for that nephew, or child. Make a “gift” of Long Term Disability and Long Term Care to your child and then, you might not have to have them move in with you if they get disabled or need care.
We can help you walk through these issues and direct you to competent legal counsel to assist with the necessary documents, if necessary, and certainly if you plan to use a trust (we will deal with Trusts in another discussion).
Call me if you want to see what might be available to you or I can help you in your planning process.