My client’s son was left a life insurance policy from his dad whom passed away a number of years ago.  The payout of the policy was restricted and remained untouched until age 18.  There was a court order to release the funds from restriction once that age was reached. The funds were then transferred to a money market/investment account.  He is currently a full-time college student, 20 years old and has always been claimed on his mother’s return.  The mother is now remarried and files a joint return where combined income is above $250k.  Son earned income from part-time work while away from college which was under $4k

The question – since this is a life insurance policy from the child’s dad passing away which was transferred to a investment account that pays dividends, interest and capital gains…should kiddie tax factor into the calculation of the return?  The fact that the parent can claim the child, whether or not they actually do, appears to generate the kiddie tax at the parents tax rate for the investment.  Possibly this is assuming it’s the parent that is transferring the funds to the child and therefore the kiddie tax.  Whereas life insurance generally are not taxable.