280 / What is a transfer for value of a life insurance policy or an interest in a policy?

Any transfer for a valuable consideration of a right to receive all or part of the proceeds of a life insurance policy is a transfer for value. The transfer for value rule extends far beyond outright sales of policies. The naming of a beneficiary in exchange for any kind of valuable consideration would constitute a transfer for value of an interest in the policy. Even the creation by a separate contract of a right to receive all or part of the proceeds would constitute a transfer for value.

On the other hand, a mere pledging or assignment of a policy as collateral security is not a transfer for value.¹ A transfer of a policy by a corporation to a stockholder as a distribution in liquidation is a transfer for value.² A transfer for value can occur even though the policy transferred has no cash surrender value.³ A transfer will be considered a transfer for value even though no purchase price is paid for the policy or interest in the policy, provided the transferor receives some other valuable consideration.⁴

In one case, two policies were purchased on the life of an officer-stockholder, one by the insured and the other by the corporation. Subsequently, the insured entered into an agreement with two employees for the purchase of his stock at his death. The policies were transferred to a trustee for use in partially financing the agreement and the employees took over the payment of premiums. On the insured’s death, the proceeds were applied to the purchase of his stock. The court held that the employees were transferees for value even though they had paid no purchase price for the policies. Their agreement to make premium payments and to purchase the stock constituted a valuable consideration. Consequently, the employees were taxed on the difference between the premiums they had paid and the proceeds applied toward their purchase of the insured’s stock.⁵

There was a transfer for value where two shareholders assigned to each other existing policies that had no cash values on their own lives to fund a cross-purchase agreement.⁶

Similarly, where a partnership named two partners as cross-beneficiaries on policies owned by the partnership, a transfer for value had taken place.⁷

If a transferor receives no valuable consideration whatsoever, there is no transfer for value.⁸

The transfer of a policy to a grantor trust treated as owned by the transferor was not a transfer for value where the insureds, terms, conditions, benefits, and beneficial interests other than naming the trustee as beneficiary and nominal owner did not change.⁹

The transfer of a life insurance policy from one grantor trust to another grantor trust, where both trusts are treated as owned by the same taxpayer, will not be treated as a transfer for value.¹⁰ See Q 283 for a more detailed discussion of the application of the transfer for value rule in a situation involving multiple grantor trusts.

The replacement of a jointly owned policy with two separately owned policies was also not a transfer for value.¹¹

Other rules govern transfer to a grantor trust owned by an insured ( Q 282 and Q 283) and transfers of policies to a qualified retirement plan ( Q 3969).