Dear Dr. Don,
Are death benefits taxable? I’m the beneficiary on my dad’s life insurance policies. Must I tell my attorney about these policies? Do I really need an attorney or should I hire a financial planner?
— Nan Notify
As beneficiary on your dad’s life insurance policies, generally speaking, you won’t owe income taxes on the death benefits. Interest income is taxable if it’s accrued on the benefits from the time between when your dad passes and the benefits are paid.
IRS Publication 554, “Tax Guide for Seniors,” puts it this way:
Life insurance proceeds paid to you because of the death of the insured person are not taxable, unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.
Proceeds not received in installments.
If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are insured person’s death. If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.
The guide also spells out the taxation of proceeds received in installments, including installments for life.
I can’t figure out your motivation for keeping an attorney in the dark about these policies. If the attorney is working on an estate plan or a will, you’d want him or her aware of these proceeds.
To my thinking, it’s not an either-or decision when it comes to working with an attorney or a financial planner. Ideally, you’ll work with an attorney on your will and estate planning, a financial adviser on your financial goals and investments, and a tax professional in managing your taxes.
However, it is possible that one of those professionals wears more than one hat in advising you.