Does transferring a life insurance policy create tax problems?

Transfer for value and gift rules can change the usual tax treatment, so professional review is important. From a tax compliance standpoint, life insurance death benefits paid because of the insured person's death are generally excluded from federal income tax. Different tax results are possible depending on timing, beneficiary status, ownership, basis, and whether the payment is treated as principal or income. Preserve the source documents that support the taxpayer, amount, basis, and timing, then ask a CPA, enrolled agent, or tax attorney to validate the taxpayer, form, basis, and deadline.