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Life insurance proceeds
Posted by: Barbjones, March 12, 2013 06:57PM
My husband and I are traveling with our only child, who is also the only beneficiary on our life insurance and retirement accounts totaling $1.3 million. We wanted to name a contingent beneficiary, just for the time we are all traveling together. Our thought is to pick one person and give them a list of who we would like the proceeds to go to, with the cash amounts. Is there a way to do this without the contingent beneficiary incurring a tax liability? The life insurance are term policies.

Also, if the contingent beneficiary gifts the amounts to the listed recipients who is taxed?

Is there a better way to accomplish this? We are only traveling together foe 14 days.

Thanks for any information you can offer.

Re: Life insurance proceeds
Posted by: Bill Brown, March 13, 2013 01:03PM
Having your estate be the contingent beneficiary with a well written will seems better to me. That friend might be a choice as executor.

Re: Life insurance proceeds
Posted by: Sven, March 13, 2013 02:43PM
Do not take any balloon rides or Nile River cruises in Egypt or go on any Carnival Cruise lines boats together. So-called "common disaster" clauses in wills are what generally cover your concern. I agree with Bill the will is probably the best way to go, with the estate being the contingent beneficiary.

But you do have to have the contingent beneficiaries properly designated and would need to do a will, or a codicil if you already have a will. You would add a clause saying who gets what if you all go down in flames together over Luxor. You could change that list from time to time but it would take a Codicil to do that.

Skip any and all scenic helicopter rides. I believe an engineering analysis of one of those contraptions will conclude it should not be able to fly.

Re: Life insurance proceeds
Posted by: Barbjones, March 13, 2013 09:26PM
Thanks for the information. It is very helpful but brings up a question. If the proceeds go to our estate won't they automatically be subject to probate?

Also, will the recipients then have to pay Estate tax?

Re: Life insurance proceeds
Posted by: Sven, March 14, 2013 02:55AM
Let's do the easy one first. "Recipients" do not pay estate tax. Neither is anything they inherit "income", so there are no "income tax" issues for them. In a few states people get whacked with inheritance taxes.

As you know, estates, if they are large enough, pay estate taxes, both federal and state, if the state has one. Many do not. At the moment all Americans can have $5,250,000 before you would have to pay any federal estate tax problem, and for couples the number is double. States with estate taxes don't let you have anywhere near that much money, however. There are wide amount differences between states.

Given the numbers you have given us I think you can be pretty comfortable there are not going to be many tax issues for any beneficiary who winds up with something because the three of you bought it in a balloon crash.

Insurance gets trickier if the estate is the beneficiary and receives the insurance proceeds. If you main goal is avoiding probate, then you are going to have some issues with making your estate the contingent beneficiary. Not all fear of probate is justifiable, depending on where you live. Where might that be? It's also a bit more complicated than that, given the two of you and are planning against the very remote possibility of all of you dying at the same time. This is not the time or place to discuss the ins-and-outs of "common disaster" situations. A decent lawyer usually will make sure "common disaster death" language is flexible enough to deal with you all dissapear over the Pacific on the way to China when the plane goes down to the car crash situation, where somebody dies instantly and the second and third linger for days or weeks, etc. Don't wanna scare you but who dies in what order can be pretty important.

Re: Life insurance proceeds
Posted by: Barbjones, March 14, 2013 12:35PM
Sven, Thank you for taking the time to offer advice. I live in Florida. We are taking a trip to Italy and no extreme sports are planned...

I know the chance of something happening is very remote but I have a Husband that is agonizing over this issue and I was trying to give him some alternatives to think about so he can actually enjoy his trip.

Thanks again for taking the time to ponder and answer.

Re: Life insurance proceeds
Posted by: Sven, March 14, 2013 02:47PM
Bon Voyage!

Re: Life insurance proceeds
Posted by: Bill Brown, March 15, 2013 02:17PM
If the life insurance policy is owned by the decedent, the value of that policy are in the decedent's estate no matter who the beneficiary is.

Re: Life insurance proceeds
Posted by: Sven, March 15, 2013 04:13PM
Thanks, Bill. I should have mentioned that. With the current federal estate tax amount at $5,250,000 owning the policy when you die should be less of an issue than in the past. But depending on your state insurance proceeds being included in your taxable estate could be a problem. Not for the poster, who lives in Florida, however. If you live in NJ, where the estate tax starts to kick in at $675,000, it could be.

Re: Life insurance proceeds
Posted by: dcd0c, March 16, 2013 01:29AM
Don't your respective wills (is the "child" too young to have one?) and life insurance policies make clear who would inherit, making it unnecessary to do anything in anticipation of your trip together? Why would the provisions you want only be for the duration of your trip? Are the three of you never altogether in a car together creating the possibility of a "common disaster" at those times?

If for some reason it is all about the 14 days that you will be traveling in Italy together, you might be able to buy trip insurance covering one or more lives of those traveling together for a price less than what drafting will codicils would cost.

Re: Life insurance proceeds
Posted by: Sven, March 16, 2013 03:27AM
Common disaster stuff usually is family specific, which is why it is hard to comment in the abstract.

My wife and I both are only children. We are out of living parents and have three adult sons without progeny we know about. If the five of us perish on the next Carnival Cruise Lines boat that has an incident rather than have a bunch of cousins we have not seen in eons have the three sevens come up on the great slot machine of life we'd prefer that others get our money. So we covered that in a common disaster clause. Mostly colleges and a couple of people who would have to survive us to inherit.

The changes of the five of us all going at once is virtually zero at this stage in our lives but the consequences, if things went terribly wrong, is totally unacceptable. So we've said what we want to avoid the risk of an unacceptable outcome.

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