321 / If life insurance is owned by and payable to a partnership or corporation to fund purchase of an owner’s business interest, are proceeds includable in the insured owner’s estate?

No.

Because proceeds are not payable to an insured’s estate and the insured has no incidents of ownership in the policy, at least in the insured’s capacity as an individual, the proceeds are not includable in the insured’s gross estate.¹ The same result should occur where a business owns the insurance but proceeds are payable to a trustee who must use them to purchase an insured’s business interest for the partnership or corporation.

The value of a business interest is, of course, includable in an insured’s gross estate.²

In valuing an insured’s business interest, the part of the proceeds that is proportionate to the insured’s interest in the business will be included unless the proceeds are excluded from the purchase price under the terms of an agreement and the agreement is effective in fixing the value of the business interest for estate tax purposes ( Q 322).³

Where an insured is a controlling stockholder, incidents of ownership in insurance owned by the corporation are not attributable to the insured so as to cause death proceeds to be includable in the decedent’s gross estate under IRC Section 2042 ( Q 319).⁴