 Dear Tax Talk:
I am planning to turn over my ownership of a life insurance policy to my children. Will there be any tax consequences?
-- Sally
 Dear
Sally,
Turning over the ownership of life insurance to
your children is a good idea to avoid estate taxes,
if any, on the death benefit of the policy. If
you die owning a life insurance policy on your
life, the death benefit becomes part of your taxable
estate. If you exceed $2 million in taxable asset
value in 2007 or 2008, your assets can be subject
to estate taxes. If you turn over a life insurance
policy to your children so that they own the policy,
you can avoid having the death benefit included
in your taxable estate.
Most people turn over their life insurance policy in an insurance trust. A trust offers you certain options that would not be available to you by an outright change of the policy to your children's name. I would advise careful consideration of your family situation with appropriate legal and financial counsel.
Whether you use a trust or not,
you have to survive three years from the date
of ownership change for the policy's death benefit
to be excluded from your taxable estate. Additionally,
by using an existing policy, you are making a
taxable gift to your children equal to the cash
surrender value of the policy. The transfer of
the policy does not qualify for the annual $12,000
gift exclusion; however, paying gift tax could
be avoided by using your lifetime gift exclusion
of $1 million. If you make subsequent premium
payments these would also be gifts not subject
to the annual exclusion. However, loopholes exist
to allow for the annual exclusion if the premium
payments are properly handled. Again, since this
is a complex issue, you need to consult appropriate
counsel.
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