Can the IRS Go After an Insurance Policy With a Beneficiary After Death?

If you are the beneficiary of a life insurance policy, you will receive a payout from the policy upon the insured's death. In general, these proceeds are not considered income, so you do don't have to report them as such on your personal income tax return and the IRS will not tax them. However, any interest paid on this money is taxable and must be reported.

If the insured owed taxes at the time of his death, the IRS cannot seize the benefits paid to a beneficiary from his life insurance policy. In other words, the IRS cannot seize the money paid to you as the beneficiary of a life insurance policy for debts owed by the person who took out that policy. This is because once the benefits are paid to you as the beneficiary, the proceeds are your property.

The IRS may seize life insurance proceeds in a few limited circumstances. If the insured failed to name a beneficiary or named a minor as beneficiary, the IRS can seize the life insurance proceeds to pay the insured's tax debts. The same is true for other creditors. The IRS can also seize life insurance proceeds if the named beneficiary is no longer living. In this case, it is as if the policy doesn't have a beneficiary at all.

To ensure life insurance proceeds are not seized by the IRS, the insured can name one or more alternate beneficiaries. In the event the primary beneficiary dies early, this will prevent the policy from being without a beneficiary. The insured could also name as beneficiary a trust, which is administered by a trustee. After the insured's death, the trustee would allocate the life insurance proceeds as instructed by the trust terms. This is a helpful tool for insureds who want to leave life insurance to a minor child.