Life insurance policy tax question.

My mother was divorced a couple of years ago (she didn't know it - she was in a nursing home with Alzheimer's) and as part of the settlement my former stepfather signed over a small life insurance policy to her. She died last summer so the policy has now passed to my brother and I. My brother said he found out that if we cash it in (value is close to the death benefit as it is an old policy) the proceeds will be taxable and suggested we wait and just collect when he dies since that would not be taxable.

Does anyone know if it makes it taxable to cash it in? I know life insurance proceeds are not normally taxable. I looked on the IRS site and couldn't find anything.

Taking the cash value out is sometimes taxable because the cash value increases with the inclusion of interest.

Death proceeds, however are not generally taxable.

If it's a "Death" Benefit under a 100 K limit, then check with your Tax Attorney - You should be clear as long as you declare it on your "taxable" invome.

Otherwise, I'm not sure. Life and Death Benefits aren't normally taxable until "you" invest and profit from them in one way or another in the long-term.

Enron worked the same way, but Dimbo and the Fastows had different ideas....

When I said small I meant small.

the second death.

Getting the money out before the second death means a surrender for cash value where your gain that is taxable is the dif between the payout and the sum of the premiums paid.

now you inherited the policy, so you get a step up in basis to market value since the estate tax on your mothers estate is now paid. your basis would be the value that you declared for the estate tax - or if you had no estate tax on your mother, the value at time of death. The increase in value since then, less any premium paid since her death, would be taxable to the current owners of the policy - you.

If you wait until your father dies, there will be no income tax, but the proceeds will not go to the owners - as in you - but will instead go to the beneficiaries (which probably is you).

While the policy will be excluded from income tax, an estate tax that would normally be payable, but this will not occur as you already own the policy.

So you do save a bit by waiting until death, but cashing out now should not be a huge tax problem.

I forgot about this:

While the policy will be excluded from income tax, an estate tax that would normally be payable, but this will not occur as you already own the policy.

In the industry we do our damnedest to avoid that situation.

I didn't know about that, but my Insurance Adjuster brother did and kinda paid for a seperate life policiy outside of the estate.

What can I say; my brother is a Dimbo Freeper....