Taxation of Life Insurance Proceeds; Foreign Stock Purchase Via Internet

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, October 18, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

Question: My father owned a life insurance policy that named his second wife as the primary beneficiary and me as secondary beneficiary. My father and his second wife died in a car accident, although she survived him for 15 days. Who receives the life insurance proceeds and how are the proceeds taxed?

Answer: A beneficiary usually receives life insurance proceeds income are tax-free. Since your father was the owner of the policy, the proceeds are part of his estate for estate tax purposes. Terms within his insurance policy determine the beneficiary.

According to Nancy Rowland, insurance agent with Northwestern Mutual Life Insurance, "Owners should check their life insurance contracts to determine who receives the proceeds. Our current Northwestern policy requires the beneficiary be alive when the proceeds are received."

If the second wife received the proceeds, the money would become part of her estate for estate tax purposes. To prevent a double-estate tax, her estate would be entitled to a 100% credit for the estate taxes paid by your father's estate which were attributable to the insurance proceeds.

Note: This credit varies with the time between each death. A full credit is available if the time is two years or less. This credit would apply to your estate if you died within two years of your father.


Question: As a Parisian interested in purchasing U.S. stocks via the Internet, how will I be taxed?

Answer: Non-U.S. residents and citizen investors, in general, do not pay U.S. taxes and cannot deduct losses on stock sales. Dividends, however, are usually taxed at a flat 30%, unless a lower treaty rate applies.

Remember, stock in a U.S. corporation is subject to estate taxes and as a foreigner your estate-tax exemption is limited to $60,000. Therefore, if you die owning U.S. stock worth more than $60,000, you could owe estate taxes. Generally, ownership of U.S. stocks through a foreign corporation will eliminate this potential tax trap.




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