goodman rule and an indexed ul on juvenile?

[123insure1900]

Would appreciate any help.

The situation is as follows:

Parents want to take out an indexed UL on their 15 year old son. They want to following setup.

Mother to be 50% joint owner of indexed UL
Father to be 50% joint owner of indexed UL

At some later date, when juvenile is older (at least 18+), mother and father to transfer 100% ownership interest to adult child.

For now, mother to be listed as 100% primary beneficiary and father to be listed as contingent beneficiary. Whenever adult child gets married, a change of beneficiary will likely be made and spouse will become 100% primary beneficiary.

This is the structure of how these clients would like to set up the policy.

Would this setup, now or in the future, violate the Goodman Rule? Parents have no interest in any sort of trust.

If this now or in the future would potentially violate the Goodman rule, would listing both parents as co-owners and 50%/50% beneficiaries prevent Goodman rule issues or would Goodman rule still apply? Would listing only the mother as owner and mother as primary beneficiary be a better route to go or would the Goodman rule still somehow apply? What would be the ideal setup?

Clients have networth of approximately 2 million and mother is 40 and father is 46.

 

[Tahoe Ray]

Clients have networth of approximately 2 million and mother is 40 and father is 46

So why are you worried about a Goodman triangle? I guess estate exemptions could go down enough and/or their assets could grow enough for this to be an issue in the future...

Anyway, to answer your question it would be much cleaner to just have mom be the owner and bene. You're still going to run into an issue down the road when you switch the spouse to the bene, unless they're also transferring ownership as well to the son.

A trust would probably be the ideal setup but you mentioned that they have no interest in doing that.

What are they trying to do here? Are they using the IUL for the cash in retirement? Is the death benefit the primary reason for the purchase?

 

[123insure1900]

Yes, their intention would be to transfer 100% ownership to the son (when he is 18+) and to have the spouse (assuming he is married) be 100% beneficiary. They want something for their son for a number of different reasons. Locking in insurability and money to supplement his retirement at a much later date. They don't want whole life or a GUL.

I took an application with the parents as co-owners 50-50 and the mom 100% beneficiary. Received message from carrier stating that their MAY be tax implications and to ensure proper owner and beneficiary designations.

It was an e-app, so unsure if maybe it was flagged because parents do not share same last name?

I know Goodman rule typically applies when there are 3 people to the transaction. If they list parents as co-owners and only one of the parent co-owners as 100% beneficiary, then I don't really know how the Goodman rule would come into play. I guess because there are 3 parties?

I'm thinking the cleanest way would be to list mom as both owner and 100% beneficiary which only leaves a potential issue if they are to get divorced.

 

[Tahoe Ray]

Yes, their intention would be to transfer 100% ownership to the son (when he is 18+) and to have the spouse (assuming he is married) be 100% beneficiary. They want something for their son for a number of different reasons. Locking in insurability and money to supplement his retirement at a much later date. They don't want whole life or a GUL.

I took an application with the parents as co-owners 50-50 and the mom 100% beneficiary. Received message from carrier stating that their MAY be tax implications and to ensure proper owner and beneficiary designations.

It was an e-app, so unsure if maybe it was flagged because parents do not share same last name?

I know Goodman rule typically applies when there are 3 people to the transaction. If they list parents as co-owners and only one of the parent co-owners as 100% beneficiary, then I don't really know how the Goodman rule would come into play. I guess because there are 3 parties?

I'm thinking the cleanest way would be to list mom as both owner and 100% beneficiary which only leaves a potential issue if they are to get divorced.

Goodman is an estate/gift tax issue. It comes into play with the addition of the child's future spouse as a beneficiary more than anything.

Very few people are going to have a problem with this in today's tax environment. That being said, we'll likely see a reduction in the tax exemption in the future (that's just crystal ball stuff) but I think that anything under 6-7mil will still be pretty safe.

I wouldn't recommend a Goodman situation if you can avoid it but if there was one very temporarily (since the son's ownership would hopefully coincide with the spouse becoming the bene), it's unlikely to create a lot of issues for this particular client. (in my opinion, without much other information)

 

[Allen Trent]

It was an e-app, so unsure if maybe it was flagged because parents do not share same last name?

Carrier software on eapp are designed to trigger Goodman when 3 distinct SS# are involved, not by name. If mom & dad are not married at time of death, Goodman would apply as 1 owner would be gifting part or all of death behefit to the ex spouse

 

[Allen Trent]

Goodman is an estate/gift tax issue. It comes into play with the addition of the child's future spouse as a beneficiary more than anything.

Very few people are going to have a problem with this in today's tax environment. That being said, we'll likely see a reduction in the tax exemption in the future (that's just crystal ball stuff) but I think that anything under 6-7mil will still be pretty safe.

I wouldn't recommend a Goodman situation if you can avoid it but if there was one very temporarily (since the son's ownership would hopefully coincide with the spouse becoming the bene), it's unlikely to create a lot of issues for this particular client. (in my opinion, without much other information)

I get what you mean, but unless someone files an estate tax return to utilize more than their annual gift tax exclusion (currently 17k i believe) & take a hit against lifetime exclusion, Goodman would indeed cause a tax issue...... i think. Not many people would know to file an estate tax return to utilize lifetime exemption, especially if the giver was still alive. If they did file the estate tax return, last i knew was that 100% are audited, further adding other risks & costs

I would avoid Goodman issue, especially with some of these max funded cases that will need a later ownership change & especially Single Premium kid/grandkid MEC policies that willl trigger taxable gain reporting at time of ownership change

 

[Tahoe Ray]

I get what you mean, but unless someone files am estate tax return to utilize more of their annual gift tax exclusion (currently 17k i believe), Goodman would indeed cause a tax issue i think. Not many people would know to file an estate tax return to utilize lifetime exemption, especially if the giver was still alive. If they did file the estate tax return, last i knew was that 100% are audited, further adding other risks & costs

I would avoid Goodman issue, especially with some of these max funded cases that will need a later ownership change & especially Single Premium kid/grandkid policies that willl trigger taxable gain reporting at time of ownership change

Oh, I agree. No point in going into a Goodman situation if you can avoid it.

But, you should have a tax professional review all of these decisions in general. They would likely not have a tax issue IF they check all of the boxes.

 

[Allen Trent]

I get what you mean, but unless someone files an estate tax return to utilize more than their annual gift tax exclusion (currently 17k i believe) & take a hit against lifetime exclusion, Goodman would indeed cause a tax issue...... i think. Not many people would know to file an estate tax return to utilize lifetime exemption, especially if the giver was still alive. If they did file the estate tax return, last i knew was that 100% are audited, further adding other risks & costs

I would avoid Goodman issue, especially with some of these max funded cases that will need a later ownership change & especially Single Premium kid/grandkid MEC policies that willl trigger taxable gain reporting at time of ownership change

@Tahoe Ray
while the below article isnt related to Goodman, I saw this article about IRS audits of Gift/Estate tax returns. It goes back to my point that I believe 100% of all Gift/Estate tax returns are audited, so avoiding exceeding $17k gift tax return when changing ownership on a policy or a death claim involving Goodman would likely be best as I am assuming IRS audits can not only be expensive to pay CPA/Attorney to handle, but it can bring everything else on the table that wasnt even part of it.

So, I think we agree, definitely avoid Goodman when you can (preferably always). I also think we should utilize more indemnification/guardian documents with the carrier on Annuity & larger funding policies of minors so that the minor is the legal owner on paper, but the parent/guardian is the person overseeing it until the minor is no longer a minor. This is how all custodians handle minors that open a Roth, Traditional, etc as the minor has to legally be the participant & owner of the plan, but the custodian cant legally allow a minor to enter into a contract.