Life insurance benefit/ gift

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?

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Reply to
james_garrideb
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The proceeds are not taxable to the father as the named beneficiary. Special rules apply if the proceeds are paid in installments or if the policy was sold prior to death, but it doesn't sound like there are any special circumstances. However, if he starts handing out money it's not going to matter to the IRS that it came to him as insurance proceeds. A gift to his daughters over the annual exclusion amount is going to be subject to gift tax. This is true whether the gift takes the form or cash or the form of a payment towards a loan for which the father is not responsible. On the subject of life insurance Pub 559 might be helpful. The discussion in that publication is a little longer and more detailed than the one in Pub 554. For gift taxes, you should refer to Pub 950. One way to work around the gift tax might be for the father to give his daughter $12,000 (the annual exclusion amount) and the same amount to you and to each of your children, if any. If you have a couple of kids, that's $48,000 tax-free. The father can give more and can give it all to his daughter and can avoid gift taxes if he wants to use his unified credit, but he might be required to file Form 709. All the pubs and forms are available on the IRS website at

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-Crystal

Reply to
pleasedontemailme

Just going through some old posts here... this comment brought to my mind a "well what if" question... if you folks don't mind... what if the father had cosigned the loan with his daughter and son in law? or to make things more complicated; what if the MOTHER had done the cosigning. would either of these circumstances cause you to change your response? Thanks, Shhhh

Reply to
Shhhh

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