175 / Are the proceeds of group term life insurance from an employer includable in an insured’s estate?

The general rules for including life insurance proceeds in the gross estate apply ( Q 81). Accordingly, the proceeds are includable if they are payable to or for the benefit of the insured’s estate, or if the insured possesses any incident of ownership in the policy at the time of his or her death. There is no question, for example, that if at the employee’s death the employee possessed the right to designate or change the beneficiary of his or her group life insurance, the employee possessed an incident of ownership within the meaning of IRC Section 2042(2).¹ In addition to the general rules concerning incidents of ownership, in group life insurance, the insured’s right to convert to an individual policy on termination of employment is not an incident of ownership.² Moreover, the power of an employee to effect cancellation of his or her coverage by terminating his or her employment is not an incident of ownership.³ Estate tax regulations that attribute corporate-held incidents of ownership to an insured who is a stockholder-employee under certain circumstances ( Q 319) provide (as amended in 1979) that in the case of group term life insurance, as defined in the regulations under Section 79, the power to surrender or cancel a policy held by a corporation “shall not be attributed to any decedent” through his or her stock ownership.⁴ (See Q 241 for the definition of group term life insurance.) Drawing somewhat of a parallel to the controlling stockholder regulations, the IRS has held that a partnership’s power to surrender or cancel its group term life insurance policy is not attributable to any of the partners. According to the IRS, it does not matter that partners do not qualify for the income exclusion provided in IRC Section 79 ( Q 246) because they are not employees. Under the facts of the ruling, the insured partner was one of 35 partners.⁵ The IRS has ruled privately in a case involving optional contributory plans of group life insurance that provide that if an employee opts not to participate on his or her own, certain specified relatives of the employee could, with the employee’s consent, apply and pay for the insurance on the employee’s life and own all incidents of ownership. The plan also provided that should the third-party applicant-owner cease to qualify as such, the insurance would terminate, in which event the employee would be eligible again to apply for coverage on his or her own. The IRS held that the employee did not possess an incident of ownership within the meaning of IRC Section 2042.⁶

The Tax Court has held that the death proceeds of a combination group term life and disability income policy are taxable for estate tax purposes under IRC Section 2042 as proceeds of life insurance.⁷

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1.     Chase Nat’l Bank v. U.S., 278 U.S. 327 (1929); Estate of Henry v. Commissioner, TC Memo 1987-119.

2.     Estate of Smead v. Commissioner, 78 TC 43 (1982), acq. in result, 1984-2 CB 2; Rev. Rul. 84-130, 1984-2 CB 194, modifying Rev. Rul. 69-54, Situation 2, 1969-1 CB 221; GCM 39272 (8-16-84); AOD 1984-056.

3.     Rev. Rul. 72-307, 1972-1 CB 221; Landorf v. U.S., 408 F.2d 461 (Ct. Cl. 1969); Estate of Lumpkin v. Commissioner, 56 TC 815 (1971), rev’d on other grounds, 474 F.2d 1092 (5th Cir. 1973).