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goodman rule and an indexed ul on juvenile?

123insure1900

Expert
48
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.

Thanks in advance for any guidance.
 
No. It would not be violated in that situation.

For prudence, I would suggest having both owners as equal Beneficiaries. However, I do not think that is technically required. maybe someone else can chime in and give some info.

I would make sure they understand that if they add the new Wife, and they have not already transferred Ownership to the Son, then the Goodman rule would be violated at that point.

An easy way to get around all of this would be to establish a Family Trust, and list it as Bene.
 
Thanks Scant. It was an e-app so maybe it was auto-flagged because parents do not share the same last name or maybe the carrier is just trying to protect itself?

So just to confirm,

It is your belief that the rule would not be violated even though there are 3 parties involved in the transaction.

Son-Insured
Mom and Dad- Joint owners 50/50
Mom- 100% beneficiary

3 parties: Son, Mom, Dad

Just want to confirm that was your understanding and that you still are comfortable with your original answer and that only issue which would potentially arise, to violate the Goodman rule, is if ownership was not transferred prior to designating the new wife as beneficiary?
 
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.

Thanks in advance for any guidance.

In your example, i believe ideally it would be best to have mom as 100% owner & 100% primary bene & dad as contingent owner & contingent bene to best avoid goodman issue if a death claim occurred. But ask the carrier how they view 2 co owners, different insured & same co beneficiaries as co owners. Many carrier systems trigger the Goodman acknowledgement when 3 different parties are in the roles on the policy. You would think that the death benefit wouldn't be considered a gift under Goodman if co owners were same as co beneficiary as they are gifting it to themselves. The issue will for sure be if a future spouse becomes a bene without an ownership change as a death of son would be a taxable gift from parent owners to sons spouse under Goodman Triangle

However, if the goal is to fund thos really well & for son to become owner, why not just make the 16 year old the owner now (parent as the payor guardian with am indemnification agreement). I did this with my kids life & annuity policies when they were minors to avoid any gift tax issues at time of policy transfer & to avoid me being taxed at time of ownership transfer (on NQ annuity or MEC). When you change ownership, the carrier is supposed to settle up the cost basis on NQ annuity & MECs & then the new owner gets a step up in basis to the current value of NQ annuity & MEC.

Even though you are likely not setting this IUL up as a MEC, a guardian indemnification agreement could still be utilized if child is owner right away, especially if the cash value of the policy at time of potential ownership change could exceed the annual gift tax exclusion. IE: if cash value is more than $34k & parents split gifts & make bo other gifts to the child at say age 25, the parents could owe gift taxes if they are owners or co owners initially & later change ownership
 
However, I do not think that is technically required. maybe someone else can chime in and give some info

If parents stay married until death claim of son, it wouldn't be an issue for 1 parent to be owner or bene as spouses have no gift issues between spouses. But if mom & dad divorce, goodman can become an issue if 1 parent is owner & other parent or both parents are beneficiary as the gift of the death benefit to the ex spouse wouldn't clear the Goodman Triangle as the ex spouse bene would be considered the 3rd party to the contract

at least that is my understanding & also why some carriers force a Goodman acknowledgement on cases where current spouses are split primary beneficiaries of a child or grandparent policy. Also, I believe this is why some carriers wont allow or discourage Grandparents being owners of policies where parents are beneficiaries.
 
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If taken to court, this all might be state dependent on joint property states vs. none.

At the end of the day, if the carrier tells you its a Goodman violation, I would listen and act accordingly.

If its a joint property state, no reason to not have just 1 spouse to eliminate any questions.
 

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