What are the tax ramifications, if any, on either side of the following transaction?: Parents buy whole life insurance policy on child’s life. They pay into it over the years. Now child is an adult. Parents would now like to get rid of the policy and have adult child take the cash value (as a gift or whatever)
I know someone that had the exact same transaction in 2014. I'm no expert on the matter, but the accountant handled it as following:
Knights of Columbus (who the policy was with) sent paperwork (with the cash-out check) that showed the "surrender value" ($979.60), the "cash value of Paid-up Additional Insurance" ($554.60), which added to a "total surrender proceeds payable" of $1,534.20. This $1,534.20 was the amount of the check received.
There was also a final line item at the bottom stating "Taxable amount of this distribution that we are required to report to the I.R.S. $25.70".
The accountant put the $1,534 on line 16a of Form 1040 ("Pensions and annuities"). And put the $26 ($25.70 rounded up) on line 16b of Form 1040 ("Taxable amount").
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Short answer: Very small tax ramifications in their experience. $26 increase in Total income, versus the $1,534.20 check received.
This whole life policy had been in place for about 20 years, I believe.
Hope that helps a little, and hope that someone more knowledgeable can chime in...
