319 / If a corporation purchases life insurance on the life of a key person to indemnify it against loss on account of the key person’s death, are proceeds includable in the insured’s estate?

If, at an insured’s death, a policy was owned by and payable to a corporation and the insured possessed no incidents of ownership in the policy ( Q 85, Q 86), proceeds are not includable in the insured’s gross estate. If the insured possessed at his or her death any incidents of ownership in the policy, the proceeds are includable in his or her gross estate even though the corporation has been named owner and beneficiary.¹

Death proceeds of life insurance owned by and payable to a corporation are considered, along with the other non-operating assets, as a relevant factor in valuing a corporation’s stock for estate tax purposes (but see Q 321).² Consequently, where an insured is a stockholder, the value of proceeds will be reflected in valuing stock includable in the insured’s gross estate.³ It is not correct to value the stock first, without considering the insurance proceeds, and then simply add the amount of proceeds to that value.⁴ Factoring life insurance proceeds into the valuation of stock may or may not result in an increase in value equal to the full value of the insurance proceeds, depending on the valuation method.⁵ An offset may be available where there is an obligation to pay insurance proceeds to another party under a buy-sell agreement.⁶

It may be possible to obtain some reduction in the value of stock to reflect loss to the business of the key person’s services.⁷ The executor must offer proof to establish that the insured’s death actually did cause a loss. A loss does not result per se from the death of the owner and manager of a corporation.⁸