656 / How are commissions received after the death of the insurance agent taxed?

Renewal commissions payable after the death of an insurance agent are “income in respect of a decedent” for income tax purposes. Additionally, the value of the right to the commissions is includable in the agent’s gross estate for estate tax purposes. As income in respect of a decedent, the renewal commissions are taxable to the ultimate recipient of the commissions (e.g., the agent’s estate, beneficiaries, or a trust) in the year in which they are received.¹ However, the person who reports such commissions as income is entitled to an income tax deduction (an itemized deduction) for the portion of federal estate taxes and generation-skipping transfer taxes attributable to their inclusion in the decedent’s gross estate. If the decedent has purchased renewal commissions from another agent, the recipient will be allowed to amortize any portion of the decedent’s cost unrecovered at death.²

If prior to receipt of the renewal commissions, the recipient sells or otherwise disposes of the right to commissions, all income is accelerated as the recipient must include the entire fair market value of the right to the commissions in the year of sale or other disposition (e.g., the recipient gifted the right to another person). On the other hand, if the recipient dies prior to receiving the commissions, the fair market value of the right to commissions will not be included on the final income tax return. In that case, the person who receives the income right from the second decedent by will or inheritance must include such commissions in gross income (as income in respect of a decedent) as they are received.³

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1. Latendresse v. Commissioner, 243 F.2d 577 (7th Cir. 1957); Estate of Goldstein v. Commissioner, 33 TC 1032 (1960), aff’d, 340 F.2d 24 (2d Cir. 1965); Estate of Remington v. Commissioner, 9 TC 99 (1947).

2. Latendresse v. Commissioner, supra.