When three different parties are designated as the owner, the insured, and the beneficiary of a life insurance policy exposes the proceeds to gift taxation. (1) This so-called “unholy trinity” for example having the husband as the insured, the wife as the policy owner and the children as the beneficiaries. (see Goodman v. Commissioner, 1946)
To avoid this typically the owner and the insured are are same, for example the husband as the insured and owner with the child as beneficiary, or owner and beneficiary the same, for example the wife as owner and beneficiary with the husband as the insured, or an irrevocable life insurance trust (ILET) is set up, for example the ILET as the owner and beneficiary with the husband as the insured.
The current lifetime gift tax exclusion is $5.25 million. ($10.5 million for a married couple) (1)
The large gift tax exclusion means the Goodman Triangle may not be of significance to many individual policy owners but could still be a factor business life insurance policy owners with income tax consequences.
(1) Tax information is general and for information purposes only. Please seek professional advice for personal income tax questions and assistance.