Proceeds Taxable Because Of Transfer For Value

<div class="Section1"><br /> <br /> Since a transfer of a policy subject to a nonrecourse loan discharges the transferor of obligations under the loan, the transferor is treated as receiving an amount equal to the discharged obligations.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, there may be a transfer for value when a life insurance contract is transferred that is subject to a policy loan. Nonetheless, where the value of a policy exceeded the outstanding loan, a transfer was ruled in part a gift and within one of the exceptions to the transfer for value rule because the basis of the policy in the hands of the transferee was determinable in part by reference to the basis of the policy in the hands of the transferor ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> In Letter Ruling 8951056, the IRS found that the gratuitous transfer of a policy subject to a nonrecourse loan was held part gift, part sale. Because the transferor&rsquo;s basis was greater than the amount of the loan, the basis of the policy in the hands of the transferee was the basis in the hands of the transferor at the time of transfer and thus the transfer fell within the same exception to the transfer for value rule.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.1001-2(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 69-187, 1969-1 CB 45.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>But see</em> Let. Rul. 8628007.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes, generally, unless the transferee is a partner of the insured. This transfer does not come within any of the exceptions to the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>). If a sale is involved, death proceeds will be taxable to the extent that they exceed the consideration paid by the purchaser plus net premiums, if any, paid after the sale. Any interest paid or accrued by the transferee on policy indebtedness may be added to the exempt amount under certain circumstances ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>).<br /> <br /> A transfer to an insured, followed by a gift from the insured to the insured&rsquo;s spouse or family member ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="280">280</a>) or a sale to the insured&rsquo;s spouse after July 18, 1984, ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="106">106</a>) would avoid taxation of proceeds under the transfer for value rule. A federal appeals court refused to treat a direct transfer by an employer to the wife of an insured employee for a consideration as two transfers merged into one: a transfer to the insured employee and then a gift from him to his wife.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Est. of Rath v. U.S.</em>, 608 F.2d 254 (6th Cir. 1979).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. This would be a transfer for value without an exception.<br /> <br /> The transfer of a policy to a corporation in which the insured is a shareholder can be made without loss of the tax exemption, even where the transferor is not the insured ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="285">285</a>).<a href="#_ftn1" name="_ftnref1">¹</a> The exception does not apply to a transfer in the reverse direction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="287">287</a>). Of course, if an independent exception enumerated under IRC Section 101(a)(2) applied, then the transfer would not affect the tax-free nature of the death benefit. For example, if the corporation transferred the policy to a stockholder who is a partner of the insured or that is a partnership in which the insured is a partner, the death benefit would still be received by that party income-tax free.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes, as a general rule.<br /> <br /> IRC Section 101(a)(2) provides that if a policy or any interest in a policy is transferred for a valuable consideration, death proceeds generally will be exempt only to the extent of the consideration paid by the transferee and net premiums, if any, paid by the transferee after the transfer. Any interest paid or accrued by the transferee on indebtedness with respect to the policy is added to the exempt amount if the interest is not deductible under IRC<br /> Section 264(a)(4).<a href="#_ftn1" name="_ftnref1">¹</a> This provision regarding interest paid or accrued applies to contracts issued after June 8, 1997, in taxable years ending after this date. Further, for purposes of this provision, any material increase in a death benefit or other material change in a contract shall be treated as a new contract with certain limited exceptions.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="Section1"><br /> <br /> The balance of death proceeds is taxable as ordinary income. This is the so-called transfer for value rule. If a sale or other transfer for value comes within any of the following exceptions to the transfer for value rule, the exemption is available despite the sale or other transfer for value:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; the sale or other transfer for value is to the insured ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="282">282</a>);<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; the sale or other transfer for value is to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is an officer or shareholder ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="285">285</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="290">290</a>).<a href="#_ftn4" name="_ftnref4">⁴</a> Members of a limited liability company (&ldquo;LLC&rdquo;) taxed as a partnership are considered to be partners for this purpose; or<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; the basis for determining gain or loss in the hands of the transferee is determined in whole or in part by reference to the basis of the transferor. This occurs, for example, where a policy is transferred from one corporation to another in a tax&ndash;free reorganization ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="290">290</a>), where a policy is transferred between spouses ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="106">106</a>), or where a policy is acquired in part by gift ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="79">79</a>).<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The exceptions to the transfer for value rule do not apply if the transfer occurred in a reportable policy sale. A reportable policy sale means the acquisition of a life insurance contract (directly or indirectly) if the acquirer has no substantial family, business or financial relationship with the insured individual apart from the interest in the life insurance contract. This includes acquiring an interest in a partnership, trust or other entity that holds an interest in the life insurance contract.<a href="#_ftn7" name="_ftnref7">⁷</a> This<br /> new rule is effective for transfers occurring after December 31, 2017.</blockquote><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Notice that the exceptions include transfers to a partner of the insured or a partnership in which the insured is a partner. But, notice that the exception only includes a transfer to a corporation in which the insured is an officer or shareholder; it does not include a transfer to another officer or shareholder.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Under IRC Section 1041, no gain or loss is recognized upon the transfer of property between married taxpayers. As a result, the basis in the hands of the transferor in such a transfer is equal to the basis in the hands of the transferee, <em>i.e.</em>, carry-over basis. For this reason, a sale between such spouses or between trusts of which each spouse is a grantor, may qualify for an exception to the transfer-for-value rule under the basis exception of IRC Section 101(a)(2)(A), all other things being equal.<br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; TRA &rsquo;97, &sect; 1084(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9625013.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(A); Rev. Rul. 69-187, 1969-1 CB 45; Let. Rul. 8951056.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(3).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A sale to the insured is an exception to the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>).<a href="#_ftn1" name="_ftnref1">¹</a> The IRS has ruled privately that a transfer between two trusts, one of which benefitted the taxpayer directly (Trust A) and the second of which was a grantor trust established by the taxpayer (as grantor) for the benefit of his children and grandchildren (Trust B), would not violate the transfer for value rule because the transaction fell within the exception permitting sale of a policy to the insured himself.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> While both trusts were irrevocable, the taxpayer retained the power to reacquire assets he had placed within Trust B by substituting assets of equal value. The independent trustee responsible for overseeing Trust B was required to ensure that any substituted assets were of equal value to the assets the taxpayer chose to reacquire.<br /> <br /> Trust A owned a life insurance policy on the taxpayer&rsquo;s life, which the taxpayer wished to transfer into Trust B using his power of substitution.&nbsp;Because the taxpayer was both grantor of Trust B&nbsp;<em>and</em> the insured individual under the policy, the transaction was considered a transfer of the policy to the insured himself (the grantor and the grantor trust are treated as a single entity for tax purposes).<br /> <br /> Therefore, even though the transfer was technically a transfer of the policy from one trust to another, it was considered to fall within the exception to the transfer for value rule permitting transfers to the insured himself.<br /> <br /> Further, the value of the policy would not be included in the taxpayer&rsquo;s gross estate for estate tax purposes even though the taxpayer retained the right to move the policy between two irrevocable trusts. Typically, this type of power over an asset could cause the courts to find that a taxpayer retained incidents of ownership in an asset sufficient to warrant the asset&rsquo;s inclusion in the estate.<br /> <br /> In this case, however, the taxpayer could never reduce the value of the assets in Trust B because he was required to substitute assets of equal value&mdash;and an independent trustee was present to verify equivalence. Additionally, the taxpayer could not increase his own net worth through a transfer because, again, the values of the substituted assets were required to be equal.<br /> <br /> Likewise, the IRS found that the transfer of a survivorship policy insuring the joint lives of husband and wife between trusts both of which the husband insured was the grantor, where the husband and wife were also partners in a partnership unrelated to either trusts.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 201235006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 201332001.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. If a corporation sells a policy on stockholder A&rsquo;s life to stockholder B, proceeds will lose their tax-exempt status ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="286">286</a>). Even if the corporation does not sell a policy, but merely distributes it to stockholders, there will be a transfer for value. Valuable consideration may be found, for example, in relieving the corporation of its obligation to continue premium payments and its obligation to redeem the stock or in satisfying the corporation&rsquo;s dividend obligation to its stockholders.<a href="#_ftn1" name="_ftnref1">¹</a> The danger cannot be averted by a transfer to the insured and a subsequent transfer by the insured to another stockholder ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="288">288</a>).<br /> <br /> A transfer by a corporation to a shareholder was ruled to fall within an exception where stockholders also were partners in a bona fide, although unrelated, partnership.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Similarly, a transfer of a reverse split dollar policy from a corporation to two shareholders who also were partners of the insured for the purpose of funding a cross-purchase agreement fell within the partner exception to the transfer for value rule.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Further, a transfer of policies insuring shareholders/partners from a corporation to a partnership established specifically to receive and manage the policies was considered within the partnership exception to the transfer for value rule.<a href="#_ftn4" name="_ftnref4">⁴</a> However, had the transfer been to a trust for purposes of funding a similar arrangement &ndash; the policies would probably have been subject to the transfer for value rule without an exception.<br /> <br /> On the other hand, a change from a cross-purchase plan between individual stockholders to a stock redemption plan can be accomplished without violating the transfer for value rule. In each instance, a stockholder will be transferring a policy he or she owns on another stockholder&rsquo;s life to a corporation in which the insured is a shareholder. This kind of transfer qualifies as one of the exceptions to the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="285">285</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Monroe v. Patterson</em>, 197 F. Supp. 146 (N.D. Ala. 1961); <em>Lambeth v. Commissioner</em>, 38 BTA 351 (1938).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9347016, Let. Rul. 9045004.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9701026.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9309021.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Generally, yes, but not if the insured is an officer or shareholder of the corporation. IRC Section 101(a)(2)(B) provides that the transfer for value rule does not apply if the transfer is to a corporation in which the insured is a shareholder or officer ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>). Moreover, where a policy is transferred more than once, but the last transfer is to a corporation in which the insured is an officer or shareholder, the proceeds will be wholly tax-exempt regardless of any previous sale or other transfer for value.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Proceeds will lose their income tax-exempt status by sale to a corporation if an insured is merely a non-stockholder, non-officer employee, or director because this kind of sale does not come within the exceptions to the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>).<br /> <br /> It also is doubtful whether a person who is only nominally an officer, with no real executive authority or duties, would be considered an officer.<a href="#_ftn2" name="_ftnref2">²</a> Regulations do not define the term officer for this purpose.<br /> <br /> It should be noted that the important relationship is that between an insured and a corporation. In other words, even though a policyholder is not an insured, the exception will apply provided the insured is an officer or shareholder in the corporation to which the policy is transferred.<br /> <br /> Where an employer purchases a policy from an employee for contribution to a qualified plan, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a> for a discussion of the impact of the 2017 tax reform legislation.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.101-1(b)(3)(ii).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 80-314, 1980-2 CB 152.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No.<br /> <br /> The transfer for value rule does not apply where a policy is transferred to a partner of the insured or to a partnership in which the insured is a partner.<a href="#_ftn1" name="_ftnref1">¹</a> The partnership actually must operate as a partnership, however, and not exist in form only.<a href="#_ftn2" name="_ftnref2">²</a> A partner can sell a policy on the partner’s life to the partnership or to another partner. A retiring partner can sell to an incoming partner the policy the partner owns on another partner’s life. A partnership can sell a policy to an insured partner or to a copartner of the insured. Where a partnership owns a key person policy on the life of a non-partner, there is no transfer for value when a new partner enters or an existing partner leaves the partnership, provided the partnership is not terminated by that action.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Sale of a policy to a member of an insured’s family who is not a partner would disqualify the proceeds for exemption. Where there is an insurance-funded buy-sell agreement between more than two partners and a partner dies, a surviving partner may buy policies on the lives of other surviving partners from the deceased’s estate without loss of tax exemption for the death proceeds.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The IRS has ruled in a private letter ruling that members of a limited liability company (“LLC”), which was classified as a partnership for federal tax purposes, would be considered partners for purposes of the transfer for value rule.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A transfer for value by a corporation to a partnership in which an insured shareholder is a partner comes within the exception.<a href="#_ftn6" name="_ftnref6">⁶</a> Similarly, a transfer to shareholders who are partners, even though in an unrelated partnership, falls within the exception.<a href="#_ftn7" name="_ftnref7">⁷</a> Further, the IRS has ruled privately that a transfer of policies insuring shareholders/partners from a corporation to a partnership established specifically to receive and manage the policies comes within the exception.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> A sale of policies by an insured’s grantor trust to a limited partnership where the insured was a limited partner was ruled to fall within the exemption.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The IRS has indicated, however, that it will not issue rulings concerning whether or not the exception applies to a transfer of a life insurance policy to an unincorporated organization where substantially all of the organization’s assets consist or will consist of life insurance policies on the lives of its members.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> If a policy is transferred more than once and the last transfer, or the last transfer for value, is to a partner of the insured or to a partnership in which the insured is a partner, proceeds will be entirely tax-exempt regardless of any previous transfer for value.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 101(a)(2)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Swanson v. Commissioner</em>, 518 F.2d 59 (8th Cir. 1975), <em>aff’g</em> TC Memo 1974-61. <em><em>But see</em></em> Let. Rul. 9309021.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Let. Rul. 9410039.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     Let. Rul. 9727024.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     Let. Rul. 9625013.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     Let. Rul. 9042023.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.     Let. Rul. 9347016; Let. Rul. 9045004.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.     Let. Rul. 9309021.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.     Let. Rul. 9843024.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.   Rev. Proc. 2006-3, 2006-1 IRB 122; Rev. Proc. 2017-3, 2017-1 IRB 130.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.   Treas. Reg. § 1.101-1(b)(3)(ii).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Any transfer for a valuable consideration of a right to receive all or part of the proceeds of a life insurance policy is a transfer for value. The transfer for value rule extends far beyond outright sales of policies. The naming of a beneficiary in exchange for any kind of valuable consideration would constitute a transfer for value of an interest in the policy. Even the creation by a separate contract of a right to receive all or part of the proceeds would constitute a transfer for value.<br /> <br /> On the other hand, a mere pledging or assignment of a policy as collateral security is not a transfer for value.<a href="#_ftn1" name="_ftnref1">¹</a> A transfer of a policy by a corporation to a stockholder as a distribution in liquidation is a transfer for value.<a href="#_ftn2" name="_ftnref2">²</a> A transfer for value can occur even though the policy transferred has no cash surrender value.<a href="#_ftn3" name="_ftnref3">³</a> A transfer will be considered a transfer for value even though no purchase price is paid for the policy or interest in the policy, provided the transferor receives some other valuable consideration.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> In one case, two policies were purchased on the life of an officer-stockholder, one by the insured and the other by the corporation. Subsequently, the insured entered into an agreement with two employees for the purchase of his stock at his death. The policies were transferred to a trustee for use in partially financing the agreement and the employees took over the payment of premiums. On the insured&rsquo;s death, the proceeds were applied to the purchase of his stock. The court held that the employees were transferees for value even though they had paid no purchase price for the policies. Their agreement to make premium payments and to purchase the stock constituted a valuable consideration. Consequently, the employees were taxed on the difference between the premiums they had paid and the proceeds applied toward their purchase of the insured&rsquo;s stock.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> There was a transfer for value where two shareholders assigned to each other existing policies that had no cash values on their own lives to fund a cross-purchase agreement.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Similarly, where a partnership named two partners as cross-beneficiaries on policies owned by the partnership, a transfer for value had taken place.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> If a transferor receives no valuable consideration whatsoever, there is no transfer for value.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The transfer of a policy to a grantor trust treated as owned by the transferor was not a transfer for value where the insureds, terms, conditions, benefits, and beneficial interests other than naming the trustee as beneficiary and nominal owner did not change.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The transfer of a life insurance policy from one grantor trust to another grantor trust, where both trusts are treated as owned by the same taxpayer, will not be treated as a transfer for value.<a href="#_ftn10" name="_ftnref10">¹⁰</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="283">283</a> for a more detailed discussion of the application of the transfer for value rule in a situation involving multiple grantor trusts.<br /> <br /> The replacement of a jointly owned policy with two separately owned policies was also not a transfer for value.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> Other rules govern transfer to a grantor trust owned by an insured ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="282">282</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="283">283</a>) and transfers of policies to a qualified retirement plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.101-1(b)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>Lambeth v. Commissioner</em>, 38 BTA 351 (1938).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>James F. Waters, Inc. v. Commissioner</em>, 160 F.2d 596 (9th Cir. 1947).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>Monroe v. Patterson</em>, 197 F. Supp. 146 (N.D. Ala. 1961).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>Id.</em><br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 7734048.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9012063.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <em>Haverty Realty &amp; Investment Co. v. Commissioner</em>, 3 TC 161 (1944).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9041052.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 2007-13, 2007-11 IRB 684.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9852041.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes.<br /> <br /> Sale to the insured is an exception to the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>).<a href="#_ftn1" name="_ftnref1">¹</a> For example, if a corporation purchases a policy insuring a key person and later sells it to the insured, the proceeds will be received wholly tax-exempt by the beneficiary despite the sale to the insured.<a href="#_ftn2" name="_ftnref2">²</a> Moreover, a transfer to a trust that is treated as owned wholly or in part by the insured (such as a grantor trust) comes within the exception as a transfer to the insured to the extent the insured is treated as owner.<a href="#_ftn3" name="_ftnref3">³</a> An individual is treated as owner of a trust where the individual retains control over property the individual has transferred to the trust so that the income on that property is taxable to the individual under IRC Sections 671-679.<br /> <br /> Where a policy is transferred more than once but the last transfer, or the last transfer for value, is to the insured, the proceeds will be wholly tax-exempt regardless of any previous sale or other transfer for value.<a href="#_ftn4" name="_ftnref4">⁴</a> If the insured transfers the policy for a valuable consideration, and the transfer does not come within any of the exceptions to the transfer for value rule, the proceeds again will lose their tax-<em>exempt</em> status.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 8906034.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Swanson v. Commissioner</em>, 518 F.2d 59 (8th Cir. 1975); Rev. Rul. 2007-13.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.101-1(b)(3)(ii).<br /> <br /> </div></div><br />