126 / If life insurance proceeds are payable to a religious, charitable, or educational organization, is their value taxable in the insured’s gross estate?
Generally, no. If the insured has any incident of ownership in the policy at the time of death, the proceeds are includable in the insured’s gross estate, but a charitable deduction is allowable for their full value.1
If, however, the law in the state of the donor’s domicile does not recognize that a charity has an insurable interest in the life of the donor, complications may arise. In some states, a charity may not have an insurable interest with respect to a newly issued insurance policy given to the charity or for a policy applied for and issued to the charity as owner and beneficiary. If the charity does not have an insurable interest and the insurer or the insured’s estate raises the question of lack of an insurable interest, the insured’s estate may be able to recover the proceeds (or the premiums paid). The proceeds are includable in the insured’s estate to the extent that the proceeds could be received by the insured’s estate. No charitable deduction may be allowed if the executor recovers the proceeds for the estate or if the executor were to fail to recover the proceeds and the proceeds passed to charity.2
1. IRC §§ 2042(2), 2055; Commissioner v. Pupin, 107 F.2d 745 (2d Cir. 1939); McKelvy v. Commissioner, 82 F.2d 395 (3d Cir. 1936).
2. See Let. Rul. 9110016 (revoked by Let. Rul. 9147040 when state law was amended to permit an insured to immediately transfer a newly purchased life insurance policy to charity).