Disclaiming surprise inheritance
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Dear Tax Talk,
I received a letter from the IRS on April 12, 2010, regarding my 2008 taxes, stating I did not state interest earned from a life insurance policy. I was unaware of any such policy and contacted the company listed. I was told I indeed had a policy that was taken out on me when I was 8 years old by my mother. I am now 43 and my mother passed in 2003.
The life insurance company stated this policy automatically became mine when I turned 21 and there was a loan attached to this policy. They stated I had earned interest on the policy and that is why they reported the earnings. I requested they send me everything they had regarding the loan, policy wording and signatures. I received a copy of a certificate with no signature from my mother. Apparently she stopped making the payments in 1980 and something called automatic premium loan provision has been making the payments. I now owe the company $16,308.95 in premiums paid and the cash value of the policy is $17,207.
How can they do this? I am being forced to have this policy and be responsible for paying taxes on interest that is apparently being loaned to me to pay the premiums. They say I can cash this policy out, but I will be responsible for a net gain of $6,406.28 to be reported to the IRS with an actual net cash value of $899.
Shouldn’t they have tried to contact me somehow in all these years? I’m sure my mother thought the policy was canceled as she never mentioned this policy to me. I need help. I don’t know what to do about this and feel like there should be some cutoff at some point. I never agreed to anything and feel like I should not be held liable for something I had no say so in.
Thank you in advance.
You’re right in that there should have been some cutoff at some point and it shouldn’t have become this Catch-22. The insurance company should have done more to advise you of this policy. The automatic nature of the premium payments is odd to say the least, and that there should still be a net gain when there are so many years of nonpayment is strange.
An individual can disclaim an interest in a gift or inheritance. A disclaimer is used to avoid unintended tax consequences or to avoid losing property to a judgment. An unfair tax consequence would be something similar to your situation. For example, if an individual has a judgment against himself, he may disclaim an inheritance in anticipation of it going to another family member where it won’t be used to satisfy creditor’s claims.
For a disclaimer to be effective it usually has to be done in a timely manner, which would mean when you turned 21. I don’t know if you can effectively use a disclaimer at this point as it depends on your state statutes. You should consult the insurance company and an attorney to determine if you can use a disclaimer in this case.
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