My client, Brandon, called me with news that his mother recently passed away from cancer. It had been a quick battle, from diagnosis to death was about 9 months.
She leaves behind 4 children, Brandon, his sister, and 2 college age sons. She also left behind a life insurance policy with a death benefit of $300,000. ( which by the way, your beneficiaries do not pay ANY income taxes on life insurance proceeds).
His mother designated the sister as the sole beneficiary. Luckily, the sister is going to equally share the proceeds, although she has no legal obligation to.
This is a blessing for my client, as next week, Brandon and his wife Jennifer are welcoming a new baby boy that they are adopting! Adopting can be expensive, and this life insurance will be able to cover the costs, give them some time off work, and start some college funds!!
One question Brandon's wife, Jennifer, had for me was related to gift taxes- is their share of the $75,000 going to be taxable?
The answer is NO.
For 2010, you can gift $13,000 without paying federal gift tax, which is always paid by the donor NOT the recipient, so it would be paid by the sister, not Jennifer. So the sister, can gift $13,000 to Jennifer and $13,000 to Brandon. If the sister was married, she'd be able to gift split with her spouse and give $26,000 to Jennifer and $26,000 to Brandon but she's not married.
Since they will be receiving $75,000, the sister can gift more than $26,000 in 2010, because we all have a $1,000,000 lifetime gifting maximum. So she can give the extra $49,000 this year, it will just be deducted from her $1m lifetime exclusion and she will have to fil form 709 at tax time. But no taxes will be due.
Another strategy for the sister is that she could write a check directly to let's say " Florida Prepaid" for the new babies education and there would be no applicable gift tax or exclusion. She could also gift $13,000 to the new baby to a UTMA account and also be gift tax free.
