Insurance Beneficiaries

<div class="Section1">The unsatisfactory answer appears to be that a determination of the fair market value of the insurance claim or claims at the date of death or at the alternate valuation date must be made from the facts and circumstances of the particular case.<a href="#_ftn1" name="_ftnref1">¹</a> This problem is most likely to be encountered when an insured’s death occurs during the policy’s contestable period and there is a question whether the insured made material misrepresentations in applying for the insurance or whether the insured’s death resulted from suicide.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>American Nat’l Bank &amp; Trust Co. v. U.S.</em>, 594 F.2d 1141 (7th Cir. 1979); Let. Rul. 8308001.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Basically, no. However, application of the rules may depend on when proceeds are payable. With a &ldquo;first-to-die&rdquo; or &ldquo;joint life&rdquo; policy, proceeds are payable at the death of the first insured to die. With a &ldquo;second-to-die,&rdquo; &ldquo;survivorship,&rdquo; or &ldquo;joint-and-survivor&rdquo; policy, proceeds are payable at the death of the last survivor.<br /> <br /> Thus, with a &ldquo;first-to-die&rdquo; policy, a policy owner who is not the insured may be treated as making a gift to beneficiaries when an insured dies. Also, with a &ldquo;second-to-die&rdquo; policy, at the second death, a policy owner who is not the insured may be treated as making a gift to beneficiaries ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="214">214</a>).<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Second-to-die policies generally are viewed as providing low-cost premiums for gift tax purposes; conversely, first-to-die premiums generally appear high compared to premiums to insure one life.<br /> <br /> <hr><br /> <br /> For income taxation of multiple-life life insurance, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="143">143</a>. For estate taxation of multiple-life life insurance, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="199">199</a>.<br /> <br /> </div><br />

<div class="Section1">Yes. Premiums paid in excess of the amount necessary to protect one beneficiary’s actuarially determined interest constitute gifts to the other beneficiaries.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>Commissioner v. Berger</em>, 201 F.2d 171 (2d Cir. 1953).<br /> <br /> </div>

<div class="Section1">Generally, no. The assignment qualifies for the unlimited marital gift tax deduction applicable to interspousal gifts, even though the policy is community property.<a href="#_ftn1" name="_ftnref1">¹</a> (The assignment is actually of the donor spouse’s one-half community property interest, because the donee spouse already owns the other one-half.) An annual exclusion may be allowed instead of the marital deduction if the donee spouse is a non-U.S. citizen.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2523.<br /> <br /> </div>

<div class="Section1">If the surviving spouse has a &ldquo;qualifying income interest for life&rdquo; in the proceeds, the proceeds will be includable in the surviving spouse&rsquo;s estate if the marital deduction election was made regardless of whether the surviving spouse has any power to appoint the proceeds ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="193">193</a>).<a href="#_ftn1" name="_ftnref1">¹</a> If the surviving spouse does not have a &ldquo;qualifying income interest for life&rdquo; in the proceeds, according to a 1979 revenue ruling, the answer depends on whether the income beneficiary at the surviving spouse&rsquo;s death could have discharged his or her legal duty to support the children, in whole or in part, by exercising the power to appoint the proceeds. To the extent the surviving spouse could have appointed the proceeds, the power would be treated as a general power of appointment and the proceeds would be includable. Under the facts of the ruling, it was held that no part of the proceeds was includable because all of the income beneficiary&rsquo;s children were adults at the time of the surviving spouse&rsquo;s death and the surviving spouse was not obligated under local law to provide for their support.<a href="#_ftn2" name="_ftnref2">²</a> <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="186">186</a> regarding the reciprocal trust doctrine.<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;&nbsp;2044.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 79-154, 1979-1 CB 301.<br /> <br /> </div></div><br />

<div class="Section1">If a beneficiary has the power to appoint to his or her estate, then the beneficiary has a general power of appointment over the proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> Generally, such a power, given to a surviving spouse-beneficiary, will qualify the proceeds for the marital deduction in the insured&rsquo;s estate ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="193">193</a>), but will cause remaining unpaid proceeds to be includable in the beneficiary&rsquo;s estate. However, includability in the beneficiary&rsquo;s estate will depend on when the power was created. If the power was created <em>after</em> October&nbsp;21, 1942, the proceeds remaining unpaid at the primary beneficiary&rsquo;s death are includable in his or her estate.<a href="#_ftn2" name="_ftnref2">²</a> If the power was created <em>before</em> October&nbsp;22, 1942, the proceeds remaining unpaid at the beneficiary&rsquo;s death are includable in his or her estate only if the beneficiary exercised the power. (<em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="204">204</a> with respect to when a power is created.)<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;&nbsp;20.2056(b)-6(e)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2041(a)(2).<br /> <br /> </div></div><br />

<div class="Section1">The full face amount plus paid-up additions, accumulated dividends (with interest thereon), and post-mortem dividends, less policy loans, should be included in Schedule D of the estate tax return.<a href="#_ftn1" name="_ftnref1">¹</a> The date-of-death value is used, regardless of whether the executor elects the optional alternative valuation date.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Estate Tax Form 706, Schedule D, and Form 712. Treas. Reg. § 20.2042-1(a)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Rev. Rul. 58-576, 1958-2 CB 625.<br /> <br /> </div>

<div class="Section1">Yes. If the gift tax is not collected from the donor, the donee is liable for the tax. The government can collect the gift tax from the donee-beneficiary, and the latter’s liability is not limited to the policy’s cash value.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 6324(b); <em>Commissioner v. Chase Manhattan Bank</em>, 259 F.2d 231 (5th Cir. 1958).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Generally, yes. If an individual pays a premium on a life insurance policy in which he or she has no ownership rights, the individual has made a gift of the premium.<a href="#_ftn1" name="_ftnref1">¹</a> Where, for example, a wife paid premiums on a policy owned by her husband and payable to his estate, she was held to have made a gift to her husband even though she had a contingent interest in the policy as a beneficiary of his estate. Under present law, however, such a gift would qualify for the unlimited marital deduction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="114">114</a>).<a href="#_ftn2" name="_ftnref2">²</a> A gift of premiums may qualify for the gift tax annual exclusion ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="218">218</a>).<br /> <br /> Ordinarily the premium payer will be considered the donor. However, where an employee assigned his group life insurance policy to an irrevocable trust he had created for his beneficiary, the IRS ruled that premiums subsequently paid by the employer were gifts from the <em>employee</em> to the trust.<a href="#_ftn3" name="_ftnref3">³</a> (<em>See also</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="154">154</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="159">159</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>Commissioner v. Boeing</em>, 123 F.2d 86 (9th Cir. 1941).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Harris v. Commissioner</em>, 10 TC 741 (U.S.T.C. 1948).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 76-490, 1976-2 CB 300; Rev. Rul. 79-47, 1979-1 CB 312.<br /> <br /> </div></div><br />

<div class="Section1">No, at least not at the time of death. Revenue Ruling 92-68<a href="#_ftn1" name="_ftnref1">¹</a> revoked Revenue Ruling 81-31,<a href="#_ftn2" name="_ftnref2">²</a> in which the IRS treated an employee as making a gift of the benefit from a DBO plan in the year of the employee&rsquo;s death.<a href="#_ftn3" name="_ftnref3">³</a> Note that neither Revenue Ruling 81-31 nor <em>Estate of DiMarco v. Commissioner</em> addressed whether an employee should be treated each year as (1) receiving compensation equal to the value of providing a death benefit or survivor income benefit to an eligible survivor if the employee died during the year, and (2) transferring such value to the eligible survivor. The use of the annual exclusion and the marital deduction might protect such a gift from any gift tax. (<em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="101">101</a> for estate tax aspects.)<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; Rev. Rul. 92-68, 1992-2 CB 257, revoking Rev. Rul. 81-31, below.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 81-31, 1981-1 CB 475.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Estate of DiMarco v. Commissioner</em>, 87 TC 653 (1986), acq. in result, 1990-2 CB 1.<br /> <br /> </div></div><br />