insurance cashed in for parents

[WITAXLADY]

parents go to nursing home - state says children must cash in the policies the children hold in the parents name! for their care - now they have taxable values...

Couldn't part of the care be medical deductions? How to get out of taxable situation? Premiums paid over the years not taxable?

Any ideas please?

[Terry D EA]

The only part of this that maybe taxable is the amount received on the cash payout that exceeds basis. If the children are the policy owners and they cash it in, then any amount over basis would be taxable to them. I know medicaid rules are crappy at best but are the kids possibly beneficiaries and not the policy owners? If the parents are the policy owners then this would be a taxable event to them.

Edited March 26, 2015 by Terry D

[Cathy]

I believe the following from IRS Publication 525 will answer your question:

 

 

Accelerated Death Benefits

 

Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill.

Viatical settlement.   This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)( b ) of the Internal Revenue Code.

 

Exclusion for terminal illness.   Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.

 

Exclusion for chronic illness.   If the insured is a chronically ill individual who is not terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits, earlier.

 

Exception.   The exclusion does not apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured:

• Is a director, officer, or employee of the person, or

• Has a financial interest in the person's business.

 

Form 8853.   To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853 with your return. You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.

 

[WITAXLADY]

WAGE and account info from the IRS shows as Code 7 1099-R from Northwestern Mutual Life - does  this make a difference?

should I call life ins company?

Should they even been told to cash in?

[Terry D EA]

Yes they do have to cash it in. I have had personal experience with this. Medicaid does require the surrender of life insurance policies. Any amount that is in excess of the basis of the policy will be taxable but in your original post the owner of the policy is not clear. This is not a death benefit payout. The surrender value is the amount paid for the policy plus any interest earned minus fees for surrendering the policy. Medicaid wants the patient virtually broke and they cannot have more that 1500.00 in any kind of asset. When it comes to medicaid, anything of value is to be sold or liquidated down to 1500.00. If the family chooses to put funds at the nursing home for hair cuts; etc that amount is part of the 1500.00.

 

Whose name is the 1099R in? Code 7 is a normal distribution from an IRS, annuity etc. Some of this information seems unclear

[Cathy]

Excuse me while I step up on my soap box!

Did the state order the surrender of the policy? Or did the nursing home order it? Either way, if so, were accelerated death benefits even considered as they probably would have provided a greater return on the life policy. The fact that the parents are in the nursing home suggests that their health is extremely poor and may qualify for the accelerated benefits.

Are the parents' funerals paid for already? The family has the right to use proceeds from a life policy to pay for their funerals. If not, tell your clients to prepay their funerals with the money surrendered under the policy. And if given to the nursing home already, tell the social worker at the home that they were misled by him/her and/or the medicaid office.

Edited March 28, 2015 by Cathy

[WITAXLADY]

more info - so the parents were told to put the policy in the kids name  by ?

then the parents got sick and went to nursing home - have respiratory problems -I think both of them are still living - mom is for sure

nursing home said the policy had to be cashed in for their stay

Do I need Dr written proof of ill health - not terminal in months but not able to stay home and be cared for

Do I need written proof of nursing home requiring this?

 

And so they tell the social worker they were misled - they will give the $$ back? at least enough to prepay the funeral?

I feel they should not have been able to get anything  but maybe they turned it over in too short a time and it was part of a 5 year look back period - but then why would the 1099 come as code 7?

Should show up as part of parents cashing in - not the childrens!

How do you fight that - just write an explanation?

I usually use codes and regs...

Thank yyou for any further clarification or help

D

[B. Jani]

Let me chime in;

Would you please provide how the address info printed in the 1099R:

Example One : Mom - Dad , Main street, USA

Or

Example Two: Son name, Main Street, USA

If 1099R is showing Example One, Then 1099 R is correct. The policy made more in Interest/Dividend then the premium paid. Because even though the policy is on son name, mom or dad is owner and policy follows the ownership.

If 1099R is showing example two, then son will get the 1099R and not parents.

The way insurance industry works is that document will issued in the owners of the account name and not the insured.

Hope this helps.

[WITAXLADY]

THAT is the problem - it is in the son's name - so why did it have to be cashed in? if part of the 5 year look back period - shouldn't it still be part of the parents exemption and not taxable to the son?

and then is it taxable to the parent ?

And as above - only the part that is over the basis? And not for medical?

you would think most of it would not be taxable?!

 

However, if it went for funeral prepay - that would be taxable - wouldn't it?

 

Thx D

just beginning to work with this with my parents and clientele now...

[Terry D EA]

It seems this was part of the 5 yer look back. Some State laws state that even if the asset changed hands during that five year look back window, then it has to be cashed in and spent on person's care. Funeral expenses are only deductible on the 1041 and not on an individual return.

[JMovichEA]

Funeral expenses are only deductible on the 1041 and not on an individual return.

 

Terry, I think you mean form 706, not the 1041.

[joanmcq]

Terry, that's what the 5 year look- back period means; looking for assets transferred to impoverish the person in order to qualify for Medicare LTC.