98 / Are there any situations in which death proceeds of life insurance that were given away by an insured within three years of the insured’s death are not included in the insured’s gross estate?

An exception is provided to the transfers within three years of death rules for any bona fide sale for adequate and full consideration.¹ It is unclear whether consideration equal to the interpolated terminal reserve of a policy plus any unexpired premiums is adequate to avoid the transfers within three years of death rule. TAM 8806004 interpreted full consideration as requiring that the consideration must be adequate relative to what would be included in the estate (i.e., the proceeds), not relative to what is transferred (i.e., the policy). See Estate of Pritchard v. Commissioner,² where consideration equal to the cash surrender value was inadequate. However, TAM 9413045 accepted the interpolated terminal reserve plus any unexpired premiums as adequate consideration.

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1. IRC § 2035(d).

2. 4 TC 204 (1944).