Do I need to pay taxes when I receive a life insurance payout?

Submitted by ThrowawayWillRI t3_10b54p5 in RhodeIsland

Hello, I am a regular contributor to this subreddit but on my main account. I chose to use a throwaway so I don't get begged in DMs forever for money.

I had a relative pass away in Canada who left 1/3 of his life insurance pay out to myself (and my 2 siblings). It's not clear exactly how much everyone is getting yet, but it should be north of 15k each. His bank account had 15k in it already and we think his life insurance was 30k. No funeral, no burial. Just cremation in the cheapest urn.

The executor of the will is imploring us three siblings, who live in Ohio, California, and RI (myself) to figure out how much tax liability we each will have so if the total amount will be over the threshold, they can send it in two separate checks. I figured it would be just way easier to ask reddit than find the specific policy online myself.

TL;DR: Will I need to pay taxes on a life insurance pay out? If so, are there loopholes? Thank you!

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ScottCold t1_j48d7v5 wrote

First, condolences on your loss.

I’m not a financial advisor or estate planner, but if this is truly a life insurance payout, it does not affect the estate or the executor of the will. A life insurance policy will operate directly between the insurance company and named beneficiaries once the company is aware of the death.

Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received. See Topic 403 for more information about interest. - Source

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[deleted] t1_j4886xk wrote

[deleted]

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ThrowawayWillRI OP t1_j488vw4 wrote

Well, when my grandfather passed away in 2011, his estate was split 4 ways between my 3 aunts and my mother and they reportedly needed to receive it in multiple different checks lest they want to pay taxes on it. My father, divorced from my mother, just passed in November and we're just getting around to settling his affairs. It's hard with the way of the world right now and us 3 living in wildly different locals and time zones and just want to do it right and get back to our lives. We're cordial and polite, we just don't have that sibling bond that most people do.

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pewpewacct t1_j487c5l wrote

It’s $15k not $15M, you’ll be fine either way

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ThrowawayWillRI OP t1_j488ez8 wrote

I've never inherited money from anyone before. My grandfather passed away and his estate went to my 3 aunts and mother and they reportedly needed to pay taxes on the earnings in Vermont, New York, and Connecticut. I'm not too close with them either, but it's what I heard. So with my father passing, I just wanted to make sure I wouldn't need to pay taxes on my part. 15k is a lot to me in my life right now. 15m would be the dream, though. Barely known family member passes and leaves you 15m, is that not what people fall asleep dreaming about?

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Proof-Variation7005 t1_j48r6t1 wrote

When I was much younger, I inherited like $25,000 Canadian from an aunt I never really met before and they let me keep all $478.60 of the money it came out to in US dollars.

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Emotional-Simple-478 t1_j4ab4ej wrote

Lol the way they made a separate account so they wouldn't get begged for money, I was thinking it was gonna be in the millions 🤣🤣🤣

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FAYCSB t1_j48krop wrote

Why is the executor of the will involved in the life insurance payout? Shouldn’t the insurance company be the one sending you the check?

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ThrowawayWillRI OP t1_j49e1x9 wrote

I'm not entirely sure how it all works in Canada. The policy is not with a proper insurance company, it's with a bank. The executor of the will has to meet with the bank to talk through stuff.

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LearnByDoing t1_j48xaze wrote

There is no "threshold" and there is no tax for beneficiaries who inherit bank accounts or the benefits from life insurance. If you were to inherit an IRA or other retirement plan then there could be income tax due. Some large estates can also be liable for estate tax but not the beneficiary.

TLDR: Life insurance and bank accounts are not taxable to beneficiaries.

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weaselpoopcoffee1 t1_j49fxx7 wrote

Worked in life insurance for many years. No tax on proceeds. You may receive a 1099 for any interest paid on the proceeds if they exceed 10 bucks.

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glennjersey t1_j4btw0w wrote

Sorry for your loss.

RI is unfortunately a blue state, and they haven't met a tax they don't like. We're one of the only states that taxes social security benefits.

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