Tax Facts

183 / If a grantor funds his or her life insurance trust by transferring income-producing property to the trustee, is the value of the funding property includable in the grantor’s gross estate?

It should not be includable in the grantor’s estate if, generally, (1) the trust is irrevocable and the grantor has retained no power to alter or amend, (2) the grantor has retained no interest or control over enjoyment of the property or income, and (3) the grantor does not have a reversionary interest in excess of 5 percent.1 If the grantor retains power to withdraw and surrender policies placed in the trust, the funding property may be includable in the grantor’s gross estate.2

1. IRC §§ 2036, 2037, 2038; First Nat’l Bank of Birmingham (Estate of Sanson) v. Commissioner, 36 BTA 651 (1937), acq. 1937-2 CB 24; Estate of Carlton v. Commissioner, 34 TC 988 (1960), nonacq. 1964-1 CB 9; Rev. Rul. 81-164, 1981-1 CB 458.

2. Treas. Reg. § 20.2042-1(c)(4); Estate of Resch v. Commissioner, 20 TC 171 (1953), acq. 1953-2 CB 6.

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