Law Office of Tillena G. Clark, LLC

Directions7315 Wisconsin Ave., Suite 400W
Bethesda, Maryland 20814

Tax Newsletter

When a Marital Settlement Agreement Requires Life Insurance

Many marital settlement agreements require one party to maintain a life insurance policy on his or her life naming the former spouse as the primary beneficiary. While this provides some financial security for the former spouse, it may also result in an adverse unintended tax consequence for the insured spouse’s estate.

For example, if the ex-husband is required to maintain a $1 million life insurance policy on his life, naming his ex-wife as beneficiary, on the ex-husband’s death his ex-wife will receive the $1 million face amount of the policy directly from the life insurance company. If the ex-husband was the owner of the life insurance policy and paid the premiums on the policy, the IRS will include the $1 million face amount of the policy in the ex-husband’s estate for the purposes of calculating the amount of estate tax owed by the ex-husband’s estate. If the ex-husband died in 2013 with a taxable estate of $5.25 million plus the $1 million in life insurance, the inclusion of the life insurance proceeds would result in a $400,000 increase in the estate tax owed.

The foregoing result may be avoided through the use of a tax-sensitive marital settlement agreement and an irrevocable life insurance trust. The ex-husband may still be required to maintain a $1 million life insurance policy with his ex-wife as beneficiary, but the life insurance policy would be owned by the trustee of the irrevocable life insurance trust. The ex-husband may transfer money to the trust for the payment of the premiums. Since the payments are required pursuant to a court order, the payments are not considered taxable gifts. Since the irrevocable life insurance trust, not the ex-husband, is the owner of the policy, the $1 million life insurance policy will not be included in the ex-husband’s estate for the purpose of calculating the estate tax owed.

  • Bankruptcy Discharge of Tax Obligations
    When you obtain bankruptcy relief, you are essentially receiving a financial benefit, because most, if not all, of your debts will be wiped away. The tax consequences of debt relief differ greatly depending upon whether the debt is... Read more.
  • Whether a Federal Tax Lien May Attach to Property Owned as Tenants by the Entirety
    There are several forms of joint ownership of property, some of which provide that upon the death of one owner, the property automatically passes to the joint owner(s) (i.e., by right of survivorship). These types of joint ownership may... Read more.
  • General Rules Regarding Gift Taxes
    A gift tax is a tax on the privilege of making gifts to others while the taxpayer is still living. The gift tax supplements the estate tax, which taxes gifts made upon death. The gift tax was created to frustrate the attempts of those... Read more.
  • Overview of the Delaware Series LLC
    Limited Liability Companies (“LLCs”) are a form of business ownership which is a separate legal entity much like a corporation. An LLC is treated like a partnership for tax purposes and like a corporation for liability... Read more.
Tax News Links
Share This Page:
Designed and Powered by NextClient

© 2006 - 2018 Tillena G. Clark, LLC. All rights reserved.
Theme WebExpress™ attorney website design by NextClient.com.