Gift and Estate Tax Considerations when Group Life Insurance Policy Benefits are Paid

Proceeds of group term life insurance are includable in the insured’s estate if they are payable to or for the benefit of the insured’s estate, or if at death the insured holds any incident of ownership regardless of who is named as beneficiary. Incidents of ownership include the right to change the beneficiary and the right to assign the policy or revoke an assignment. The proceeds of group term life may be removed from an employee’s estate if certain requirements are met.

A gift is made from the covered employee to the assignee when an absolute assignment is made of the employee’s rights under group term insurance. A further series of gifts is made by the covered employee to the third party assignee when the employer makes each additional premium payment. Table I rates are used if the group term plan was nondiscriminatory or if the covered employee was not a key employee. If the plan is discriminatory and the covered employee is a key employee, the actual cost allocable to the employee’s entire insurance coverage must be used (unless Table I costs are higher). Depending on the facts and circumstances, those gifts may or may not be present interest gifts qualifying for the gift tax annual exclusion.

Group term life insurance may result in a taxable gift where it passes to someone other than the primary beneficiary and it was not disclaimed in a timely manner.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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