Q: Do I owe taxes on life insurance money received from uncle?

A: The fact that the beneficiary was changed after your Grandpa's death certainly raises issues. Your uncle's power of attorney would not have been in effect, if the principal was already deceased because death of the principal would negate the power of attorney. This raises questions of who owned the policy, who were the beneficiaries prior to your uncle's change of beneficiary and, in general, whether or not your uncle could legally do what you have described.

Also, if your uncle changed the beneficiary to himself and then distributed the proceeds to you and others, that would constitute a gift from your uncle, not a distribution from the life insurance policy. Gifts are not subject to income tax, but depending on the size of the gift, there may be estate and gift tax consequences to your uncle.

The foregoing notwithstanding, as a general rule, however, life insurance proceeds distributed to beneficiaries are not subject to federal or state income taxes.

According to federal tax law, the proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries are exempt from taxation. This principle is supported by case law, which emphasizes that such proceeds pass by the terms of the insurance contract and not through the decedent's estate or intestate laws, making them tax-free unless otherwise specified by statute.

Regarding your right to request documentation, as a beneficiary, you may have a right to request relevant documents, such as the will or other records, to ensure transparency in the distribution of the life insurance proceeds. If your uncle acted as the power of attorney for your grandfather, his actions, including changing the beneficiaries, may be subject to scrutiny to ensure they were in line with his fiduciary duties. If you suspect any impropriety or require further clarification, you may consider consulting an attorney to formally request documentation or initiate legal proceedings to obtain the necessary records.

In summary, the life insurance proceeds you received are likely not subject to income tax, but you may have rights to request documentation from your uncle to verify the propriety of his actions as the power of attorney. Consulting with a legal professional is advisable to address any concerns or pursue further action if needed.

A: If the life insurance policy was paid directly to your uncle as the named beneficiary, and he then voluntarily distributed the funds to family members, what you received is considered a gift—not life insurance proceeds. Life insurance proceeds themselves are not taxable income under federal law when paid to a beneficiary, but gifts from another individual can have different implications.

Generally, you do not pay income tax on a gift. The person making the gift—your uncle—is the one responsible for any potential gift tax reporting, assuming the amount given to you exceeds the annual exclusion amount set by the IRS. However, if your uncle altered the beneficiary designations shortly before your grandfather’s passing, and especially if he was acting under a power of attorney, that raises concerns about fiduciary misuse and undue influence.

You have the right to request documentation such as the original life insurance policy, the will (if any), and a copy of the power of attorney document. Transparency is essential when fiduciary duties are involved. If your uncle refuses to provide this information, you may consider seeking legal counsel to explore your rights further.

Ultimately, unless you received over $17,000 from him in 2025 (or the IRS annual exclusion limit for that year), you likely have no immediate tax filing requirement for the gift. But the manner in which the beneficiary change occurred could have legal consequences unrelated to tax law.