his giving the policy to you pursuant to the divorce is not a taxable event. section 1041 of the internal revenue code says so.
your cashing in the policy triggered the gain, so, yes you have to pay tax on the sum you received in excess of the premiums paid on the policy.
had you not cashed it in, it would have continued to grow tax deferred. you ended the deferral period by taking out the cash.
had you borrowed against the policy and paid it back over time, or not if the dividends and cash value increase were sufficient to cover the interest, there would have been no tax.
go back to the insurance company. see if you can repay the cash and reinstate the policy and then borrow the proceeds.
It is very possible that the proceeds are taxable. You should consult with your attorney or an accountant to determine if there is a way to shelter you. Since you indicate that you need the proceeds to live on, there may be little way to avoid the tax consequences. This question should have been asked before your divorce was finalized. It is possible other awards took this into consideration. Only your lawyer knows for sure.
If its a taxable gain then, yes, you pay tax on it -- unless your settlement agreement says otherwise. It should have been dealt with in the settlement agreement, but it sounds like it wasn't.
You didn't have to pay tax on the transfer of the asset from him to you. You DO have to pay tax for cashing in the asset.
You should get an opinion from a CPA, since as one of the attorneys showed, there are ways to avoid the tax liability. Also, the transfer of the policy is valued at the time of the transfer. So, there may not have been any gain to you.
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