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  • Transfer Tax Implications of Life Insurance and GSTT
  • March 19, 2014
  • transfer taxBy

    To help look after future generations, many people elect to transfer property and/or life insurance policies by gift or at death to a person two more generations below himself or herself. Typically, this means grandchildren and great-grandchildren, also referred to as skip-persons. The goal is to have assets pass from grandparent to skip-persons without being taxed in the child’s estate.

    Typically, the transferer places assets in a trust to children for life, then to grandchildren. Or, the transferer gives property to grandchildren or places it in a trust for their benefit.

    Life insurance policies transferred to skip-persons such as grandchildren and great-grandchildren are also subject to the U.S. Generation-skipping transfer tax (GSTT). The GSTT imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated humans more than 37 and a half years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren or great-grandchildren.

    The IRS has a copy of the GSTT tax return form (Form 709) on their website.

    The GSTT can be expensive because it is applied in addition to federal estate or gift taxes. Also, life insurance could involve the payment of policy proceeds on the life of a relative who named a younger relative as beneficiary. The GSTT could be applied as a gift to the younger relative while the older relative is still alive. However, if the younger relative’s parents are deceased when the transfer occurs, the child could avoid having to pay the GSTT.

    “When dealing with estate tax, generation skipping taxes and other forms of estate tax planning, the professional should remember that the statue of limitations often works when the discovery of the mistake was made rather when the work was done,” said Gary B. Sutherland, CEO, CIC, North American Professional Liability Insurance Agency (NAPLIA).

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