318 / If a partnership purchases and owns life insurance on the life of a partner, are policy proceeds includable in the insured partner’s estate?

If a partnership is both policy owner and beneficiary, insurance proceeds are not includable in an insured’s gross estate under the incidents of ownership test ( Q 85).¹

Proceeds received by a partnership will be included with other partnership assets in determining the value of a decedent’s partnership interest for estate tax purposes; consequently, his or her gross estate will reflect a share of the proceeds proportionate to the partnership interest.²

If an insured has personal incidents of ownership in a policy, including the right to change a beneficiary, the entire value of the proceeds will be includable in the gross estate.³

Where death proceeds are payable to a partner’s personal beneficiary, the insured is deemed to possess an incident of ownership in the insurance in his or her capacity as a partner for purposes of IRC Section 2042(2) regardless of the percentage of the partnership interest. Consequently, if a partnership owns insurance at the time of an insured partner’s death, the entire proceeds will be includable in the partner’s estate.⁴

For estate tax treatment of group term life insurance covering the life of a partner, see Q 175.