Tax Planning and Insurance, Pt. 2: Estate Taxes and Life Insurance

It is not entirely clear whether IRC Section 2206 imposes a duty on the executor to seek apportionment, or only gives the executor the power to do so. Where the executor is unable to recover a pro-rata share of the estate tax from the beneficiary of the life insurance proceeds, the estate cannot claim a deduction under IRC Section 2054; it is a bad debt and as such is not deductible under IRC Section 2054. A legatee whose share of the estate bears the burden of tax attributable to the proceeds, however, is entitled to a bad debt deduction.

If the government is unable to collect the estate tax from the insured's estate, the tax can be collected from the beneficiary of the life insurance proceeds up to the full amount of the proceeds if the value of the proceeds was includable in the gross estate. Any person who receives property includable in a decedent's gross estate under IRC Sections 2034 to 2042 is liable for the tax.

It is immaterial that the insured's will directed payment from the insured's general estate. An insurance company holding the proceeds under a settlement option is not liable for the tax. There is a split of authority as to whether transferee liability for interest on any unpaid tax is limited to the amount of proceeds received from the decedent's estate.

See all six articles from Tax Facts Online, part of AdvisorOne's 22 Days of Tax Planning for 2012 Special Report.