Make sure your policies are up to date

Dear Len & Rosie,

My husband recently passed away. I filled out the form on the insurance company’s website to report a claim. My husband never updated his beneficiary form to my name - the beneficiary is one of his sisters. My fault because I never asked him if he updated, and he had cancer - I should have thought to ask him but didn’t. If the sister is willing to gift me more than the yearly gift amount - is that possible without tax consequences for both of us? I’m probably I am just out of luck.

Linda

Dear Linda,

One of the things we emphasize with our clients is that they need to update and verify all of their beneficiary designations on retirement accounts, insurance policies, annuities, and pay-on-death accounts. These assets normally do not get transferred into trusts as they already avoid probate. This means that a will or trust does not change an insurance policy’s designated beneficiaries. The only way your husband could have done this was through the insurance company’s own change of beneficiary form.

Clearly, your husband purchased this policy well before he met you and he named his favorite sister (maybe his only sister) as beneficiary. The policy could even have been a low value policy provided by your husband’s employer or union at no cost to himself. It’s easy for a modest insurance policy to become an afterthought.

In any event, you’re more or less stuck with your sister-in-law receiving the money unless you can show that he used community property to pay the policy premiums which could result in you getting half of it at most.

Assuming you made an effort to be on good terms with your husband’s family, his sister may be willing to give some or all of the money to you. The good news is that there shouldn’t be any tax problems resulting from this. The proceeds of the life insurance policy are tax-free, except for the modest interest applied to the policy between your husband’s death and the date the insurance company issues the check.

There are not likely to be any gift tax issues either, as the amount your sister-in-law may pass to others by gift or inheritance is $11,580,000 for 2020. If she’s so lucky enough to be worth that much, then maybe she should stick to giving you $15,000 a year ($30,000 a year if she’s married), assuming that she’s generous enough to do so.

For our other readers: Don’t rely on your recollection as to whom you have left your life insurance, annuities and retirement accounts. Verification is less costly than making a terrible mistake.

Len & Rosie