Hyden, Miron & Foster, PLLC Law Blog

Monday, August 24, 2015

Who Pays Taxes On Insurance Proceeds Taxable to the Estate?

Under Federal law, when a beneficiary of an estate receives insurance proceeds taxable to the estate, the executor of the estate may be entitled to recover the portion of the estate tax attributable to the proceeds. (IRC §2206)  But what happens if the beneficiary refuses to turn over the funds?  

The executor may sue the beneficiary for payment— but not until the taxes are paid, according to the language of the Internal Revenue Code. One cannot force payment for taxes that are still owed.  The executor must first pay the taxes some other way and then try to get reimbursed from the beneficiary.       

Such a situation arose in a recent case, showing the perils of an estate plan involving warring siblings, where one was the executor of the estate and the other the recipient of insurance proceeds taxable to the estate.      

It is, of course, impossible to plan for every eventuality, but careful preparation may help avoid such problems. Here are several ways to minimize the risk of conflict in the settlement of an estate and the use of insurance proceeds.     

  • Choose executors and trustees who will be fair. While it is tempting to name your oldest child or a close relative, it may be safer to opt for professionals who stand above the fray and are able act impartially.
  • Talk to your heirs in advance.  It may be helpful to make your wishes clear, whether they involve an insurance policy or a sentimental object.   
  • Work closely with counsel. In confidential, private talks with your attorney, you may be able to address problems that would be difficult to discuss in the open.   
  • Revisit your estate plan periodically. It is important that your estate planning documents stay up-to-date on your financial situation and family dynamics.        

With effort and forethought, you may be able to prevent many disputes. Skilled counsel will help you identify potential problem areas.  The experienced estate and tax planning attorneys at Hyden, Miron & Foster, PLLC know that every family is unique.  We are committed to understanding your needs and helping you plan effectively.  Contact us at (501) 482-1787 for a confidential consultation. 

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