How to Report Life Insurance Proceeds Transfer for Value
Life insurance can be used for more than just paying a death benefit to heirs. Whole and universal life policies that accumulate cash value are used as assets that can be transferred. As such, the owner can sell or gift the asset and transfer the benefit proceeds to a new owner. According to the Transfer for Value Rule in IRS Section 101(A)(1), the tax-exempt status is lost in a transfer unless the transfer goes to the insured, his spouse, a partnership where the insured is full partner, or a company where the is an officer or stockholder.
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Instructions
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Determine the relationship between the existing owner, "the grantor," and the new owner. If the new owner is the spouse, insured or a company that qualifies for an exempt transfer, the grantor will not be assessed taxes.
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Determine the amount of the transfer. Call the insurance company to obtain the total amount of premiums paid and all interest accumulated in the policy cash value. According to Section 101(a)(2), the exclusion from gross income includes the death benefit less the actual value (premiums paid and interest).
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Calculate ordinary income and capital gains on the transfer. Ordinary income is calculated by the cash value less the premiums paid into the policy. So if the cash value is $60,000 but you paid only $55,000 in premiums over the years, the income is $5,000. A capital gain is assessed if you sold the policy at a premium (more than the present cash value). Calculate capital gains by subtracting the cash value from the sale value. So if you sold the same policy for $70,000, there would be a $10,000 capital gain on the transfer.
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Complete the transfer between the grantor and new owner. This includes payment for the policy and filing a change of owner with the insurance company.
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File the transfer value as an income amount or a gift on IRS Form 1040, Schedule 1 or 1040A, Schedule A. If the grantor receives a monetary value, the amount is considered a sale and included on federal income taxes. If a transfer takes place with no money exchanged, the value is treated as a gift and subject to gift taxes.
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Tips & Warnings
Consult a tax advisor with questions about transfer values, exempt transactions and filing issues.
References
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