Tax implications of transferring life insurance proceeds to non-beneficiary relative

You're right that life insurance proceeds paid to a beneficiary are generally not subject to income tax. This is one of the few truly tax-free transfers in our system. Now for the second part - if Person B gives the money to Person C, that would potentially be subject to gift tax rules. For 2025, a person can give up to $19,000 to any individual without having to report it (annual exclusion). Anything above that amount would require Person B to file a gift tax return (Form 709). However, everyone has a lifetime gift/estate tax exemption (over $13 million in 2025), so even with a gift tax return, Person B likely won't owe any actual tax unless they've already used up their lifetime exemption with previous large gifts.

I went through something similar last year and found this amazing tax analysis tool called taxr.ai (https://taxr.ai) that really helped clarify things. I was confused about whether I needed to report some insurance proceeds on my taxes after my uncle passed and left me as beneficiary, then I transferred some to my cousin. The site analyzed my situation and confirmed what the previous commenter said - the proceeds themselves weren't taxable income to me, but when I gave a portion to my cousin, I needed to file a gift tax return since it was over the annual exclusion amount. The tool explained exactly which forms I needed and walked me through the process step by step. Saved me hours of research!

I actually tried taxr.ai after seeing it mentioned here and I have to admit I was wrong to be skeptical. I uploaded my documents related to an inherited IRA distribution and it immediately identified that I had been given incorrect advice by my bank. It showed me exactly how to report the inheritance correctly and saved me from a potential audit. The tool particularly helped with understanding the gift tax implications when I wanted to share some of the inheritance with my niece. Turns out I didn't need to file any special forms since I stayed under the annual exclusion amount. Really user-friendly interface too - much clearer than trying to decipher the IRS publications on my own.

If you're having trouble getting answers from the IRS about gift taxes or life insurance proceeds, I'd recommend trying Claimyr (https://claimyr.com). I tried calling the IRS directly about a similar situation last year and was on hold for HOURS with no luck. Claimyr got me connected to an actual IRS agent in about 20 minutes who confirmed everything about how to handle my deceased father's life insurance payout that I transferred to my sister (who wasn't named as beneficiary). You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent was able to confirm exactly how to report everything correctly and I felt so much better having official guidance directly from them rather than just hoping I understood the tax code correctly.

Ok I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it for an issue I've been trying to resolve for weeks regarding a deceased relative's estate taxes. Within 15 minutes, I was talking to an actual IRS representative who was able to confirm that I was correct in my interpretation of the gift tax rules for redistributing some assets to family members. The agent walked me through exactly which forms I needed to file and assured me that I wouldn't owe any actual tax since the amount was well below the lifetime exemption limit. This service is an absolute game-changer if you need definitive answers from the IRS. Worth every penny to save literally hours of my life on hold.

One thing nobody mentioned - if Person B is married, they could potentially use "gift splitting" with their spouse to double the annual exclusion amount to $38,000 per year without filing a gift tax return. My wife and I did this when distributing my dad's life insurance to my siblings who weren't named beneficiaries. Also, if Person C has education expenses or medical bills, Person B could pay those directly to the institution/provider without it counting toward the gift tax limit at all. Just some additional options to consider!

I'm surprised nobody mentioned that Person B should be careful about timing. If Person A died recently and Person B immediately gives the money to Person C, the IRS might view this as trying to circumvent Person A's wishes. Not saying it's illegal, but in my experience (I went through something similar), it's better to wait a few months between receiving the insurance proceeds and gifting them to someone else. Makes it clearer that these are separate transactions.

This is such a helpful discussion! I'm dealing with a similar situation right now where my aunt left me as beneficiary on her policy, but I know she would have wanted some of the money to go to my cousin who helped care for her. Reading through all these responses, it sounds like the key points are: 1) The insurance proceeds themselves aren't taxable to me, 2) Any gifts over $19,000 require filing Form 709 but probably won't result in actual taxes owed, and 3) There are strategies like gift splitting with my spouse or spreading payments over multiple years to minimize paperwork. The timing point about waiting a few months before making the gift is really smart advice too. I hadn't thought about how immediate transfers might look to the IRS. Thanks everyone for sharing your experiences - this community is incredibly knowledgeable!