Transfer and Tax Planning Presented By hannah lacey and alyssa magyar

Client scenario

Ray and Hazel are siblings. Ray purchased a whole-life insurance policy on Hazel that pays $500,000 to the named beneficiary upon Hazel's death. Ray names Caroline the beneficiary of the policy, and upon Hazel's death, Caroline receives the proceeds of the policy.

additional information

  • Caroline is a married adult
  • Caroline is Hazel's daughter
  • Ray has insurable interest in Hazel
  • Hazel is still alive


  • Payor: Ray
  • Owner: Ray
  • Insured: Hazel
  • Beneficiary: Caroline

Transfer tax implications

  • Ray pays a gift tax on the annual excess of $14,000
  • If Hazel were the owner of the policy, Ray would not likely have to pay taxes on the proceeds.
  • If Hazel becomes the owner and Caroline elected to receive the proceeds in installments rather than a lump sum, she would have to pay taxes on the interest she receives on the installments.


  • Listing of secondary beneficiaries due to the large amount of the policy
  • Hazel should become the owner of the trust rather than Ray in order for Ray to avoid paying the gift tax
  • Once Hazel is the owner, we would advise that the life insurance policy be placed in an irrevocable life insurance trust (ILIT). This avoids leaving a large lump sum to an irresponsible person, provides asset protection, and helps with estate tax considerations. It also avoids tax if the transfer makes the value of the estate go over $5.45 million (if over this amount the estate tax is applied)
  • However, if Hazel dies within three years of the date of transfer the amount of the policy (or trust) will be included in Hazel's taxable estate




Gift Tax Concerns When Transferring Life Insurance | (2016). Retrieved from

Huntley, C. (2016). Life Insurance and Gift Taxes. Retrieved from

IRS. (2016). Taxable or Non-Taxable Income? Retrieved from

Marquand, B. (2017, January 20). Life insurance tax surprise: The unholy trinity. Retrieved from

Transfer Your Life Insurance Policy to Lower Your Estate Tax - FindLaw. (2016). Retrieved from

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