The Family Divide: Policy Transfers Amongst Family
April 8, 2021
As life’s circumstances change, a family may one day want to transfer ownership of personally owned life insurance to another member of the family, such as a spouse or child. With an ownership change, the life insured remains the same, although the new owner may choose to change the beneficiary.
In some situations, transferring a life insurance policy can get a little tricky. However, when you are building your financial plans, having the ability to transfer life insurance to a family member on a tax-deferred basis can be quite helpful. In most cases, when you transfer assets, tax can arise on the disposition of those assets – and that includes life insurance. Luckily, certain income tax rules allow for something called “tax-deferred rollovers” which allow for transfers of life insurance to spouses (while alive or upon death), very similar to the rollover rules for the many other assets you would transfer to your spouse. The rollover is also available to former spouses in settlement of a marriage agreement. Having said that, life insurance cannot be transferred to a spousal trust, which is otherwise available for the rollover of other assets.
When it comes to intergenerational transfers – your children and grandchildren – rollovers are available in certain circumstances as well. If helping your children or grandchildren prepare for their future is top of mind, you are able to transfer life insurance on their life to them in the future. They can then use that policy for their own financial planning, including the ability to access any accumulations in the policy to fund any future expenses. Be warned that income tax can arise on the withdrawal of funds, however the income should not be attributed to you as long as the child is at least 18 years old. There are a few other requirements that should be considered in order to meet the standards for tax-deferment, which you can discuss with your Advisor.
Read What You Should Know Before You Transfer Life Insurance for more information on the tax rules associated with transferring life insurance in varying situations.