97 / Is life insurance owned by a corporation on its majority shareholder included in the shareholder’s estate when the shareholder divested an interest in the corporation within three years of death?

Life insurance owned by a corporation on its majority shareholder was not included in the shareholder’s estate where the shareholder sold her interest in the corporation within three years of death. The corporation had always owned the policy, paid the premiums, and been beneficiary of the proceeds.¹ However, where a majority shareholder reduced his interest in a corporation to 40 percent within three years of death and proceeds of life insurance owned by the corporation on such shareholder were payable to the shareholder’s daughter, proceeds were included in the shareholder’s estate.² Also, where a corporation transferred a life insurance policy to the beneficiary within three years of the controlling shareholder’s death, proceeds were included in the controlling shareholder’s estate even though the shareholder transferred his interest in the corporation to his son after the corporation’s transfer of the life insurance policy and prior to his death.³ Where a non-majority shareholder held the right to purchase a policy on his life from a corporation upon termination of a buy-sell agreement and the shareholder caused the corporation to transfer the policy to an irrevocable trust within three years of the shareholder’s death, the proceeds were included in the shareholder’s estate.⁴

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1. Let. Rul. 8906002.

2. Rev. Rul. 90-21, 1990-1 CB 172, situation 2.

3. Rev. Rul. 90-21, 1990-1 CB 172, situation 1.