Is the IRS able to seize benefits received from life insurance?
UPDATED: Jan 14, 2013
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Asked January 14, 2013
Once a person is deceased, the Internal Revenue Service must relinquish any claims to monies owed by them. This means that the IRS cannot seize the benefits of a life insurance policy to pay the debts owed by the deceased. On the other hand, if the beneficiary of the policy owes back taxes or fines, the IRS has every right to garnish the money acquired through the policy in order to satisfy the debts of the beneficiary.
Life insurance agents typically advise people to name a trust as the beneficiary of their policy. This prevents the lump sum of the benefits from being taxed as part of the estate. The drawback is that the money will be paid out of the trust in accordance with the wishes of the deceased, typically resulting in small payments received at intervals until the benefits are exhausted. This is a good way to avoid having a life insurance policy taxed outright, but it does not affect the status of the money once a payment is made.
If the beneficiary of the policy owes back taxes, the IRS can seize the proceeds to pay off the debt. Even if the benefits are spaced out by payments made from a trust fund, the IRS can seize all or part of the payments. They do not have the authority to seize the trust fund outright, but any payments made are considered income and can be seized the same as any other income.
If you owe back taxes and are expecting to receive a life insurance settlement, the best course of action is to get your tax situation resolved before the benefits are awarded. You can do this by setting up a payment plan, typically with the assistance of an attorney specializing in tax law. By having this agreement in place before the life insurance policy has been settled, you can limit the amount of money the IRS can take from you at a time, giving you some control over the money you expect to receive by making regular fixed payments of an agreed amount.
Answered January 14, 2013 by Anonymous