Are Insurance checks paid to an estate via unclaimed funds taxable?
My Aunt died in 1998. She was unaware of a life insurance policy that her late husband purchased. Her estate was resolved of all activity by teh year 2000. As the executor of the estate, I was notified in 2015 (by an assets locator) of unclaimed funds (John Hancock policy) via the Pennsylvania Dept. of Treasury in her name. The check is now in my possession. Her will does have a beneficiary for the life insurance policies. Before I distribute the funds to the beneficiary, I need to know if there are any tax liabilities.
Generally speaking, life insurance proceeds are income tax free. If the estate was large and estate taxes were due on the value of the estate, and money is owed, then the life insurance proceeds might need to be used to satisfy any estate taxes owed.
The beneficiary listed on the life policy supersedes what the Will dictates as well.
If the life insurance was owned by an irrevocable life insurance trust and not by an individual, it might not be counted toward the total estate value.
If a lawyer was involved in settling the estate you may want to reach out to them to make sure the estate wasn't subject to any estate tax.
In most cases, life insurance proceeds are income tax-free to a beneficiary whether direct or through an estate. However, there could be estate taxes due if the death benefit put her estate over the threshold for the estate tax for the state in which she lived. That will require looking at her estate tax return (assuming one was done). If the death benefit is payable to her estate and not to a named beneficiary, then you might have to reopen her estate. I would consult with an estate attorney on that aspect.
Let's begin with the basics. Life insurance proceeds are not taxable to a beneficiary. However, it is often the case that from the date of death to the time the insurance company issues the check there is some interest earned. As an example, let's say that the policy had a face value of $25,000 and the beneficiary receives $25,030. The $25,000 is received tax-free to the beneficiary and the $30 would be reported by the beneficiary as interest income. From the estate point of view, when your aunt died in 1998 had you known about this policy, it would have been included in her estate for tax purposes. Offhanded I do not remember what the exemption was in in 1998, but I would not be overly concerned at this point in time this many years later. I hope this helps and good luck.