I'm looking for someone to point me in the right direction for more information. Here's the story:
My wife's step mother recently passed away. She was survived by her husband (my wife's dad, my father-in-law). My father in law is the beneficiary on a life insurance policy. The amount of the benefit is on the order of $120,000. He has mentioned that he is considering keeping $20K for himself and splitting the remaining $100K between his two daughters. Assuming that he follows through on this idea, how can he do it so that we all pay the least amount of taxes? My wife suggested that instead of giving us $50K outright, he pay off our home equity loan (which is about the same amount). She believes that this path will help him avoid gift taxes. She has also mentioned that since it is a life insurance benefit, gift taxes don't apply. I'm skeptical and concerned. I'd rather not suffer a big tax bill, but more importantly I'd rather my father-in-law not suffer tax penalties for making an unwise/poorly planned move. Any advice? Where can I get more information?