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Life Insurance Trust Tax Implications

BIGI_logo_askExpert.pngThis question was posted to our Ask an Expert Service, a members' only benefit of the Big "I" national which is staffed by more than 50 volunteer industry experts:

I sold a life insurance Trust UL policy many, many years ago. The Doctor recently died.  He had Option B (option 2). The face amount was $500,000 however it had built us $67.000. in cash value and the Trust was paid the total $567,000.  They are asking if the cash value portion is taxable. I read where the $500,000. is not taxable but what about the cash value?  The banks CPA didn't know.  Can you help me with this question?

Big "I" VU Faculty Responses:

This isn't an insurance question; this is an accountant question. I suggest you not advise on any question outside your licensure.

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Why are you answering tax questions?  The insured's family surely has an attorney and a financial advisor, and that question should have been turned over to them.  Knowing what NOT to answer (anything outside of your licensed area of expertise) is not just wise but necessary.

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Contact the IRS and a very competent Tax attorney. Make sure you have EVERYTHING in writing.

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This is a CPA question.

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I know nothing about life insurance and my guess is you need advice from a CPA or tax expert, not P&C insurance coverage nerds.

Google your question and you'll get stuff like this:

https://www.daveramsey.com/blog/is-life-insurance-taxable

That being said, I wouldn't rely on any of this. The beneficiary should be seeking this advice from a qualified expert. I doubt an agent's role involves giving tax advice and your E&O policy might take that position as well.

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I certainly am not qualified to opine on a tax-related question. Assuming that the doctor had a CPA, they should be the ones to determine any tax liability and to act accordingly, in conjunction with whatever attorney is involved. It's definitely not an insurance coverage issue.

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The Trust should review that with its CPA not with an insurance agent who typically is not qualified to give tax advice.

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NOTE: Agents should never attempt to answer questions outside their licensure and training; this recommendation applies to more than just this specific question. Agents have a strong desire to help their clients in any way possible, and that's one of the best qualities of an independent agent; however, sometimes the best way to help a client is to point them to the correct professional. “I don't know" is an acceptable answer to some questions.

Last Updated:  July 27, 2020
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