MISTAKE #1: Creating a "three on a policy" (designating separate parties as owner, insured and beneficiary). This can result in gift tax at the death of the insured.
MISTAKE #2: Failing to designate a successor policy beneficiary. In the event the beneficiary predeceases the insured, the proceeds will be paid to the insured's estate, subjecting the policy to creditor claims, probate and, potentially, more tax.
MISTAKE #3: Creating a three-party corporate problem. As with the above three on a policy, three parties on a business policy can result in proceeds being classified as dividends or compensation upon the business owner's death. Result: Gift tax.
MISTAKE #4: Failing to comply with IRC section 101(j) provisions respecting employee notice and consent. Unless a contract falls within certain expectations, then a portion of the death proceeds will be subject to income tax.
MISTAKE #5: Failing to consider the 3-year estate tax inclusion rule. A violation of the rule will keep a policy gifted by the insured in his or her estate.
MISTAKE #6: Violating the transfer-for-value rule. A transfer of a policy in exchange for value will subject a portion of the death proceeds to ordinary income tax, except where the transfer is to one of five statutory exceptions.
