Life Insurance

Taxation of Life Insurance

For Federal Income Tax purposes, life insurance death benefits are usually tax free under the Internal Revenue Code Section 101(a)(1).  However, in some instances, a portion of the life insurance can be taxable.  Some examples where life insurance can be taxable include:  where the gross estate including life insurance proceeds is in excess of the unified credit against estate tax (even if the insurance proceeds transferred automatically to beneficiaries by designation), where the transfer of a life insurance policy for valuable consideration under IRC 101(a)(2), where an insurable interest was lacking based on Utah Code Annotated 31A-21-104, or where insurance is funded in excess of the premium contributions limits in IRC 7702.  Employers and business owners should also be aware of additional tax rules for employee or employer-owned, often called "split-dollar" life insurance.  Consult with an attorney to determine the appropriate treatment of life insurance proceeds

Request Information from a Carrier

Working with insurance carriers can be difficult unless the carrier has clear information evidencing the authority of the executor or trustee.  In many cases, the insurer will request that you provide then with information about the Executor's authority.

Distributing Insurance Proceeds

Once collected, insurance proceeds, like any asset of the estate, can be distributed.  However, as best practice, distributions of assets should only be made after receiving a receipt and release of liability and determining the trust income tax and transfer tax consequences.  Otherwise, after receiving distributions, a beneficiary has a lower incentive to provide receipt and release to the executor.  This can leave the executor feeling vulnerable.