142 / Can the federal government collect an insured’s delinquent income taxes from a beneficiary who receives life insurance death proceeds?

A government tax lien survives an insured’s death. Consequently, if a tax lien has attached to the cash surrender value during the insured’s life, the taxes can be collected from the proceeds to the extent of the cash surrender value at death. If life insurance proceeds are exempt from the claims of the insured’s creditors under applicable state law, however, the insured’s unpaid taxes cannot be collected from that portion of the proceeds that exceeds the cash surrender value.¹ If the tax assessment was not made until after the insured’s death, the beneficiary is not liable for any of the insured’s back taxes provided the proceeds are exempt from claims of the insured’s creditors under state law.²

A different situation exists where the beneficiary is a surviving spouse who has filed joint returns with the insured. When joint returns have been filed, the surviving spouse generally is liable for the back taxes in his or her own right.³ Thus, the entire proceeds received by a surviving spouse may be subject to a lien for the unpaid taxes.

In one case, in which a wife who was the beneficiary of a policy insuring her husband’s life had been indicted but not yet convicted of his murder at the time the IRS served a levy on the policy proceeds, the court found that, under applicable state law, the wife had a property interest in the proceeds and thus the insurance company acted properly in paying the proceeds to the IRS in response to the levy.⁴

In another case, a surviving spouse used the proceeds of a policy insuring the deceased spouse to purchase annuities for the benefit of their children. The court ruled that the IRS was able to reach the funds, in payment of the couple’s delinquent income taxes, after the annuity purchase.⁵

In another case, a wife received two death benefit checks from policies insuring her husband’s life, placed the checks in a safe deposit box, and then attempted to renounce her interest in the death proceeds under state law after the IRS seized the checks for payment of taxes. A federal district court granted the government’s motion for summary judgment, ruling that the wife had accepted the proceeds, and that they were subject to the IRS lien.⁶