A recent Tax Court decision, Estate of Feder, T.C. No. 1628-10, T.C. Memo. 2012-10, January 10, 2012, shows advisors that the Tax Court had no trouble ruling that the taxpayer, Yulia Feder, received taxable income on the lapse of her old Northwestern Mutual life insurance policy despite the fact that she did not receive any cash from the policy at that time and intended to cancel it.
The numbers in the case above are small but many clients we deal with have significant life insurance policies in place for business, estate and Asset Protection planing purposes. Imagine if the policy had been funded with six or seven figures as we often see…
This article clearly shows the need to:
1. Work with experienced life insurance and tax advisors and to ask questions about exit and liquidity strategies and the tax implications of policy lapse and cancellation beyond just replacement and cash value;
2. Understand the formal process and paperwork involved as dictated by the policy itself, not just what you felt was adequate compliance;