137 / If an insured assigns a life insurance policy as collateral for a loan, are the proceeds includable in the insured’s gross estate?

Yes.

This is true regardless of policy ownership or beneficiary designation. To the extent that the creditor has a right to collect the debt from the proceeds, the proceeds are considered to be receivable for the benefit of the estate ( Q 81).¹ It is immaterial whether the debt is actually paid from estate assets or that the beneficiary has a right to recover from the estate the amount of proceeds paid to the creditor.² The amount of the debt outstanding at the date of the insured’s death, with interest accrued to that date, is deductible in determining the taxable estate even though the debt is paid from the proceeds.³ (For a policy loan, see Q 187.)

1. IRC § 2042(1); Treas. Reg. § 20.2042-1(b); Fidelity Trust Co. (Matthews) v. Comm., 3 TC 525 (1944); Est. of Hofferbert v. Comm., 46 BTA 1101 (1942); Morton v. Comm., 23 BTA 236 (1931); cf. Prichard v. U.S., 397 F.2d 60 (5th Cir. 1968) and Bintliff v. U.S., 462 F.2d 403 (5th Cir. 1972).