Well, we hope none of us would like to be stuck in an eternal triangle, and we believe most of us have heard of the mysterious place Bermuda Triangle. However, have you heard of the term “Goodman Tringle”? Today, let us explore a bit into this concept.
What is Goodman Triangle
Imagine your beloved retired grandparents would like to see you be provided if their son should die prematurely. They purchased an insurance policy with themselves being the owner, their son being the insured and you being the beneficiary. The misfortune arrived without any warning – your parents both died in a plane crush after a few years. Your family is in agony, but your grandparents are relived that at least you are protected financially. However, a “gift taxes” bill came to them as the death benefit received by you becomes a “completed gift”. Mind you, the amount is usually not cheap, and now it must come out of your loving grandparent’s retirement funds that they could have been used for themselves.
So, as we can see from the previous example -- a Goodman Triangle refers to 3 parties having an interest in one life insurance contract. It is easy to memorize the term by connecting the example and a good intention behind it, but it is not why how the name came from: In 1930, Mrs. Goodman, who owned several policies on her husband, transferred the policies to a Revocable Trust and named her three children and her sister-in-law the beneficiaries of the trust. When her husband died in 1939, the trust became an Irrevocable Trust, and the policies became a “completed gift” to the beneficiaries of the trust. This triggered a gift tax. As the donor, Mrs. Goodman was responsible for paying the gift tax. Thus the “Goodman Triangle” was born.
Incomplete vs Completed Gift
Knowing the difference between an “incomplete gift” and a “completed” gift is important to avoiding the tax trap mentioned above. A gift is complete once the donor has relinquished the power to reclaim the benefit or to rename who will receive the benefit or to change the interests of the beneficiaries. If the insured dies, this “completes” the gift as the terms of the life is “completed”, the value of the gift is determined, and the donor becomes responsible for any taxes due.
If you think the gift should be the premiums paid or the cash value of the policy -- too bad -- it is not. The death benefit is the gift amount less any interest in the death benefit retained by the donor. Limiting the gift to the premiums paid or the cash value could have been arranged during the lifetime of the insured though. For example, a life insurance policy can be designed with a split dollar arrangement, which is a plan in which a life insurance policy’s premium, cash values, and death benefit are split between two parties; Or a life insurance policy can be designed with an irrevocable trust with the trust be the owner and beneficiary, which usually happens more often when a trustee is required to manage the benefits.
How to avoid the Goodman Triangle
Simple, if the parties to the policy does not exceed two, a gift tax complication will not be triggered when the insured passes away. Here are 3 direct examples to compare:
However, many people would like their children to be the beneficiary to provide some financial protection. The remedy may be creating an Irrevocable Trust for the benefit of the children. The “trust” would then own and be the beneficiary of the life insurance policy. It is usually not an easy decision, so the client’s objective, personal situation and comfort level determine if they would like to set up an Irrevocable Trust.
The graphs and article are from Shiyun Ye, based on “Beware the ‘Goodman Triangle’… Avoid it!” by Candice Faith, CLU, ChFc.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.