Life Insurance with only beneficiary of a living trust where beneficiaries are listed...

Forum|Forum|1 year ago
June 13, 2024
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Our mother passed away leaving a living trust that contained many things in 2003 when it was last updated but 8 of the 9 items listed in Schedule A have long been liquidated or closed. The only item that was still there was a $100,000 life insurance policy with policy number and specific distribution directions.

The life insurance policy had only one beneficiary which was the living trust (now irrevocable). I have worked through the EIN and setting up the trust bank account. The life insurance company and bank have both reviewed the trust documentation allowing for the death benefit of the life insurance to be wired to the trust bank account. I opened the bank account with $1000 from my personal checking just to get something in there when opening the account. So far, everything is very clean it seem.

Understanding that our mother paid a significant premium for 32 years on this life insurance with post income tax money of course, I want to confirm that as I write the disbursement checks to the other siblings as per the specific instructions in trust document that I can assure them that they will not be taxed on the disbursement but I am not finding any way to fill out the 1041 / K-1 forms that specifically explains that this is NOT income disbursements. As the trustee / fiduciary, I'm very concerned that I have not been able to get a confirmation on how to fill these forms out to make sure they do not get a huge tax burden in early 2025.

Had the beneficiaries been directly listed on the life insurance policy there is no doubt it would not be taxable. It makes no sense that a trust that essentially contains ONLY this life insurance policy with beneficiaries listed there instead of directly on the life insurance policy itself should not turn this from nontaxed inheritance to taxable income or something is very wrong with our tax system. My gut tells me that not even the IRS is this terrible but I cannot seem to find the method to fill out the final 1041 and issue the K-1 to the beneficiaries as principle distributions rather than "income".

Any help is welcome here. I will be paying for the desktop business edition of TurboTax next year so I can do these forms.

Thank you in advance for all input for us and more than likely others that have this exact scenario also.

Best answer by dmertz

"So far, everything is very clean it seem."

Except that it seems that there was no reason to deposit $1,000 of your own money into the estate account. That $1,000 should probably come back to you.

If your mother was the insured and the policy is paying the death benefit, there is no taxable income to pay to the beneficiaries, so no taxable income from this insurance payout to enter as Other income (Form 1041 line 😎 or to report on Schedules K-1. Only the taxable amount shown in box 2a of the From 1099-R would be entered as Other income. There would only be taxable income from this if the money earned interest while in the estate account.

dmertzAnswer

Employee

"So far, everything is very clean it seem."

Except that it seems that there was no reason to deposit $1,000 of your own money into the estate account. That $1,000 should probably come back to you.

Scott G1Author

I agree that the best / cleanest way to handle this would have nothing but the Life Insurance Benefit money in the Trust account but that was not really possible or offered by the bank when opening the account. Effectively, the Life Insurance company required verification of a valid "trust bank account" before they would even begin processing the claim. The bank required a minimum of $600 or more to open the account and to open the account, they too had to review the trust documentation as well as the newly created EIN. Rather than try to convince a bank to open an account with no money, I just pulled $1000 of my own money out in cash to open it with cash (I have receipts for both transactions). Hopefully that $1000 account opening money will not be a huge issue.

dmertz

Employee

I don't see the $1,000 as being a problem. I just seeing it as meaning that you are a creditor with respect to that amount and should be reflected in the accounting.