Tax Newsletter

• "Alimony" May Actually Be Considered Child Support
  Three major issues commonly resolved in a divorce decree or agreement are: alimony, or spousal support; division of property; and child support. Each has its own tax treatment and implications. In general, for federal income tax... Read more.
• U.S. Supreme Court Abandons the "Relation-Back" Rule for the Taxation of Back Wages
  The U.S. Supreme Court has ruled that awards of back wages to employees are subject to federal taxation according to the year in which the wages are actually paid, not the year in which the wages should have been paid or were actually... Read more.
• Recent Changes in Federal Estate Taxes
  Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The... Read more.
• Valuation of Contaminated Property
  The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) imposes liability for the investigation and cleanup of contaminated real property without regard to whether the landowner created or allowed the... Read more.

• The 8 Most Common 2019 Tax Return Questions, Answered by Experts
• Julius Baer pays $547m to settle tax evasion case in US
• The Top 10 Tax Court Cases Of 2018: When Is A Gift Not A Gift?
• Taxes 2019: When to file and what big changes to expect
• The Top Tax Court Cases Of 2018: Who Gets To Deduct Mortgage Interest?

Tax Consequences 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.

© 2019 NextClient.com, Inc. All rights reserved.