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Situation Updated

  • A sibling died.
  • There are several heirs.
  • One heir was named the sole beneficiary of a life insurance policy, who received and deposited the check.
  • There is no will or other document that states how the deceased sibling hoped that the insurance proceeds would be used or otherwise distributed.

Question: Must the sole beneficiary reveal to the other heirs any of the facts about the policy, such as the existence of the policy, the amount of the policy, or anything else?

Clarification Added The beneficiary of the life insurance policy wants to keep it private to avoid family dramas (jealousy, hurt feelings, etc.). Assume that the beneficiary will talk to a CPA about any federal or state obligations (so taxes are not an issue).

  • When I first posted, taxes were not on the radar. Though not originally stated, the issue was to avoid family dramas. To that point, ohwillike's comment comes closest about"probably" no required affirmative action to reveal the receipt of the insurance proceeds comes closest to answering the question. However, because the thread is now focusing on taxes--and because it has so many helpful answers about taxes--I edited the title of the question to reflect that. The answers have also caused me to rethink the question, and that may lead to a new question in a different post. – RJo Feb 16 at 20:53
7

NO

In most cases there is no tax owed by the beneficiary and it has, in any case, nothing to do with the estate.

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    This is mostly true, but not completely accurate. The insurance payout could have something to do with the estate if estate taxes are owed, or if the estate is insolvent. The executor probably has a right to inquire and get truthful answers, but there is probably not an affirmative duty to proactively disclose it, especially in estate taxable estates well under $11M where the probate estate is not insolvent. – ohwilleke Feb 14 at 22:40
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    Is this a state issue? The IRS FAQ on life insurance proceeds seems to say no tax due unless the payment is not a lump sum and three is interest. irs.gov/faqs/interest-dividends-other-types-of-income/… – George White Feb 14 at 23:45
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    Except in extraordinary circumstances (a purchase of a life insurance policy on a third party's life as a viatical settlement investment), there is no income taxation of life insurance proceeds which is what the link in your comment pertains to. The tax exposure is for estate taxes payable on IRS Form 706, which are independent of income taxes. Life insurance proceeds on the decedent's life which he owned prior to death (or in certain other circumstances, the main exception being life insurance in certain irrevocable life insurance trusts) are part of the taxable estate on Form 706. – ohwilleke Feb 15 at 0:49
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Apparently the executor needs to list all insurance proceeds on an IRS form. But it is only part of the taxable estate if it pays to the estate or u see a complicated second case

“Insurance receivable by beneficiaries other than the estate. Include on Schedule D the proceeds of all insurance on the life of the decedent not receivable by, or for the benefit of, the decedent's estate if the decedent possessed at death any of the following incidents of ownership, exercisable either alone or in conjunction with any person or entity. Incidents of ownership in a policy include the following.

The right of the insured or estate to its economic benefits. The power to change the beneficiary. The power to surrender or cancel the policy. The power to assign the policy or to revoke an assignment. The power to pledge the policy for a loan. The power to obtain from the insurer a loan against the surrender value of the policy. A reversionary interest if the value of the reversionary interest was more than 5% of the value of the policy immediately before the decedent died. (An interest in an insurance policy is considered a reversionary interest if, for example, the proceeds become payable to the insured's estate or payable as the insured directs if the beneficiary dies before the insured.)”

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    In practice, this means almost all life insurance not in an irrevocable life insurance trust at death (and not transferred to such as trust more than three years prior to death) are included in the taxable estate on IRS Form 709. Form 709 only has to be filed in estate with assets (before considering debts) in excess of about $11M (it is inflation adjusted and there are also other adjustments up and down). There is also a provision for insolvent estates under Utah's probate laws to recover funds needed to pay debts from non-probate transfers such as life insurance benefits. – ohwilleke Feb 15 at 0:55
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Yes

While the insurance payout is not part of the estate and passes directly to the beneficiary, there are tax implications for the estate. Most likely, the insurer will advise the executor.

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    This is not wrong. The insurance proceeds are part of the "taxable estate" of the decedent for estate tax purpose, even though it is not part of the probate estate. If the taxable estate including probate and non-probate transfers at death and during life exceed about $11M+ the information is needed. Also, if the probate estate is insolvent, creditors of the decedent can sometimes have a claim against a decedent's non-probate transfers under Utah probate law. But, I'm not aware of any affirmative duty to disclose insurance payout if one is not asked about it by the executor. – ohwilleke Feb 14 at 22:38
  • In the case of the original post, there is no connection between the executor and the insurer; i.e., someone else (possibly the employer of the deceased) notified the insurance company because the deceased bought the policy through the company's benefits program. The insurer notified and paid the beneficiary. Also, the appointment of an executor is pending; no one has yet been named (there was no will, so the court will appoint an executor). – RJo Feb 16 at 21:08

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