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Spouse beneficiary, rollover of life insurance proceeds


Guest John Nelson
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Guest John Nelson

Participant under profit sharing plan owns life insurance policy in his individual account. Policy is whole life and has a cash surrender value. Participant designates spouse as beneficiary under insurance policy and under the plan. Participant dies; death benefit under policy is payable to the spouse.

Can the spouse rollover the death benefit to her IRA?

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The way that I would look at it, the trust owns the insurance contract and the proceeds are payable to the trust, which then pays the benefit to the spouse as a death benefit. The spouse can roll over a death benefit to an IRA.

I seem to recall that some have taken the position that the insurance policy pays out to the spouse directly, so that the spouse is not taxed at all on the payment, but I don't know the basis for that theory - it doesn't seem correct to me.

Is it somehow based on the fact that the participant was taxed on the cost of the term insurance coverage?

Is there a distinction between the part of the insurance death payment that is attributable to term insurance coverage, and the part that is attributable to the cash value? [in my non-expert terminology the whole life policy consists of 1. "pure" insurance, or term insurance, and 2. the cash buildup, or cash value.]

If there is an argument that the spouse is paid directly by the insurance and is not taxed, I would be interested in knowing what it is.

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If the proceeds are payable to the beneficary, the amount of the death benefits (proceeds minus the cash value) are excluded from income tax under IRC 101(a) if the employee was taxed on the PS 58 cost of the insurance or paid for the premium with a/t dollars. The cash value is a distribution from the plan which can be rolled over. Reg. 1.72-16©.

mjb

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I agree with Mbozek, but the accumulated PS-58 costs should be tax free as well as the amount at risk.

Locust, the plan/trust SHOULD BE the beneficiary of the policy, but the post says the spouse was. I don't think that's relevant to the taxation issue, but it raises questions about the process. Suppose the plan bene and the policy bene aren't the same (and we don't know that that's not the case here). The insurance co. shouldn't pay to the policy bene, but I don't know what you have to do to convince them that their designation on file is invalid.

Ed Snyder

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  • 2 years later...
Guest andrei.dana@yahoo.com

Well that's an interesting issue to discuss, I think this insurance term needs to be discussed prior the spouse death, I am not sure there is a specific rule for this movement. In normal conditions there shouldn't be problems.

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