The Servicemembers’ Group Life Insurance (SGLI) is a life insurance policy which can provide a death benefit of up to $500,000. Likewise the Veterans’ Group Life Insurance (VGLI) may allow you to keep your life insurance coverage after you leave the military for as long as you continue to pay the premiums.
From a German tax perspective these gratuities can come with tax aspects mostly in the income and inheritance tax area, especially if you receive them as a LN spouse or after you have left the US Military in Germany and are no longer under SOFA.
First, the disbursement of a life insurance policy is not an “income” transaction. For this reason, you have little worry about with regards to German income taxation. However, we have talked earlier about how the HEART Act lets you roll your SGLI benefit into a retirement plan. We strongly advise you look into this as we think being able to make such a contribution is a smart move in the German-American tax world from both a tax as well as a financial perspective. We are not sure if VGLI can be rolled over also, but definitely recommend to look into this potential option as well!
From a German inheritance tax perspective these benefits will become part of any inheritance / estate of the deceased and be subject to German inheritance taxation – unless very extenuating circumstance in the areas of residency and citizenship apply. While Germany has a non-taxable threshold between spouses of €500,000 there will likely not be a tax consequence if the benefit is received on a stand-alone basis and there are no other assets becoming part of the estate. However, if other assets do become part of the estate SGLI and VGLI benefits can have a hefty German inheritance tax effect.
For this reason, measures ought to be taken to label the benefit not part of the inheritance/estate of the deceased. This can only be achieved if the surviving spouse can claim the benefit in her own right. For this the SGLI or VGLI contract would need to be structured to where one spouse is the actual contract holder insuring him-/herself against the death of the other spouse – breaking the connection between contract holder and insured person. If this cannot be achieved, we recommend both parties enter into a written agreement to where they stipulate that the party entering into the SGLI/VGLI contract is doing so for, in the name and on behalf of the other spouse and the premiums are agreed to be borne by the non-contracting spouse. Ideally the monthly premiums are also transferred between the spouses’ bank accounts. We would like to point out that we cannot promise for this approach to stick with your local tax office, but at least it would provide an argument in one’s favor!
Given the inheritance risks of SGLI and VGLI we definitely recommend for Military couples to enter into a separate life insurance policy. The total sum would need to be roughly what could be expected as potential inheritance taxes. The policy itself would be structured in the above cross-fashion where the spouses insure themselves each against the death of the other person, breaking up the connection between contract holder and insured person.
Please let the taxperts know, if you have questions how to best go about potential SGLI and VGLI benefits, we are happy to help!
