159 / Does the gift of a life insurance policy in trust (or a gift of subsequent premiums) qualify for the gift tax annual exclusion?

In the usual case, no annual exclusions are allowable either on the creation of the trust or on the payment of premiums ( Q 219, Q 223).¹

Example. C transfers certain insurance policies on C’s own life to a trust created for the benefit of D. Upon C’s death the proceeds of the policies are to be invested, and the net income paid to D during D’s lifetime. Because the income payments to D will not begin until after C’s death, the transfer in trust represents a gift of a future interest in property against which no exclusion is available.²

If the beneficiary were given the power to demand trust principal, apparently the annual exclusion would be available.³ Such a power, however, would cause the trust principal to be includable in the beneficiary’s gross estate.

Where an employee assigned his group life insurance policy to an irrevocable trust, the IRS ruled that subsequent premiums paid by the employer qualified for the annual exclusion as gifts of a present interest by the employee. Under the terms of the trust, the beneficiary or the beneficiary’s estate was to receive the full proceeds of the policy immediately on the insured’s death.⁴ In a later ruling, the facts essentially were the same, except that the trust terms directed the trustee to retain the insurance proceeds, paying income to the insured’s children for life, with the remainder to the grandchildren; the employer’s premium payments following the assignment were held to be gifts of a future interest in property, therefore not qualifying for the annual exclusion.⁵ (See also Q 80, Q 168.)

The IRS also has allowed the gift tax annual exclusion when a grantor created a trust with an initial contribution of a $50,000 group term policy on the grantor’s life and $1,000 in cash. The trust gave the grantor’s spouse a $3,000 annual noncumulative withdrawal right and provided that any asset in the trust, including the insurance policy, could be used to satisfy the demand. In this private letter ruling, the IRS held that the grantor’s initial contribution, as well as the grantor’s employer’s subsequent premium payments on the group term insurance, would qualify for the exclusion.⁶

For a discussion of the special provision with respect to gifts in trust to minors, see Q 160. For a discussion of Crummey withdrawal rights, see Q 161.