Insured Estate

<div class="Section1">They are treated in the same manner as other insurance. Proceeds are includable in the insured&rsquo;s estate if the proceeds are payable to or for the benefit of the insured&rsquo;s estate, or if the insured has any incidents of ownership in the policy at the time of his or her death ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="81">81</a>).<a href="#_ftn1" name="_ftnref1">¹</a><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;2042.<br /> <br /> </div></div><br />

<div class="Section1">Yes. They are subject to the same rules as other life insurance proceeds and may be included in the insured&rsquo;s gross estate ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="81">81</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="175">175</a>).<a href="#_ftn1" name="_ftnref1">¹</a><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>Estate of Ackerman v. Commissioner</em>, 15 BTA 635 (1929); <em>Estate of Wright v. Commissioner</em>, 8 TC 531 (1947); <em>see Commissioner v. Estate of Noel</em>, 380 U.S. 678 (1965).<br /> <br /> </div></div><br />

<div class="Section1">It should not be includable in the grantor’s estate if, generally, (1) the trust is irrevocable and the grantor has retained no power to alter or amend, (2) the grantor has retained no interest or control over enjoyment of the property or income, and (3) the grantor does not have a reversionary interest in excess of 5 percent.<a href="#_ftn1" name="_ftnref1">¹</a> If the grantor retains power to withdraw and surrender policies placed in the trust, the funding property may be includable in the grantor’s gross estate.<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>.     IRC §§ 2036, 2037, 2038; <em>First Nat’l Bank of Birmingham (Estate of Sanson) v. Commissioner</em>, 36 BTA 651 (1937), acq. 1937-2 CB 24; <em>Estate of Carlton v. Commissioner</em>, 34 TC 988 (1960), nonacq. 1964-1 CB 9; Rev. Rul. 81-164, 1981-1 CB 458.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Treas. Reg. § 20.2042-1(c)(4); <em>Estate of Resch v. Commissioner</em>, 20 TC 171 (1953), acq. 1953-2 CB 6.<br /> <br /> </div>

<div class="Section1">One-half of the value of the unmatured policy is includable in the non-insured spouse&rsquo;s gross estate.<a href="#_ftn1" name="_ftnref1">¹</a> The value of the policy is determined under Treasury Regulation Section 20.2031-8 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="200">200</a>).<a href="#_ftn2" name="_ftnref2">²</a> The amount includable in the estate of the surviving insured spouse upon his or her subsequent death is determined by applying state law to the facts presented to ascertain the extent to which the proceeds are treated as community property or as separate property of the insured.<a href="#_ftn3" name="_ftnref3">³</a><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>U.S. v. Stewart</em> (Cal.) 270 F.2d 894 (9th Cir. 1959); <em>California Trust Co. v. Riddell</em> 136 F. Supp. 7 (S.D. Cal. 1955); Rev. Rul. 74-284.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 75-100, 75-1 CB 303.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; See <em>Estate of Cervin v. Commissioner</em>, 111 F.3d 1252, 97-1 USTC &para;&nbsp;60,274 (5th Cir. 1997), rev&rsquo;g TC Memo 1994-550; <em>Estate of Cavenaugh v. Commissioner</em> (Tex.), 51 F.3d 597, 95-1 USTC &para;&nbsp;60,195 (5th Cir. 1995), rev&rsquo;g in part 100 TC 407 (1993); <em>Scott v. Commissioner</em> (Cal.) 374 F.2d 154 (9th Cir. 1967); Rev. Rul. 75-100, <em>supra</em>.<br /> <br /> </div></div><br />

<div class="Section1">Accumulated dividends (including interest thereon) and post-mortem dividends are reported together with the face amount of the policy on Schedule D of the insured’s estate tax return.<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>See</em> https://www.irs.gov/pub/irs-pdf/f1041sd.pdf (last accessed Oct. 1, 2023).<br /> <br /> </div>

<div class="Section1">Yes. The entire value of the proceeds is includable in the grantor’s gross estate. If the grantor has funded the trust, the funding property is also includable.<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 § 2038(a); Treas. Reg. § 20.2042-1(c)(4).<br /> <br /> </div>

<div class="Section1">No. A policy loan is considered an advancement of part of the policy proceeds, not an enforceable claim against the estate.<a href="#_ftn1" name="_ftnref1">¹</a> Only the excess of the proceeds over the amount of the policy loan is includable in the gross estate.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. §§ 20.2042-1(a)(3), 20.2053-4; <em>Kennedy v. Commissioner</em>, 4 BTA 330 (1926).<br /> <br /> </div>

<div class="Section1">If the trust instrument provides that the trust will end on the grantor’s death, the entire value of the property is includable in the grantor’s gross estate. Otherwise, the grantor’s reversionary interest is includable in the estate. The longer the trust term, the less will be the value of the reversion in the grantor’s estate. This value is determined by use of the Estate and Gift Tax Tables found in Appendix D. If the gift of the income interest was a taxable gift, the amount of the gift, if not included in the gross estate, will be added to the taxable estate for purposes of computing the tentative estate tax. Nothing will be includable in the <em>beneficiary’s</em> estate if the trust instrument provides for termination on the beneficiary’s death. Otherwise, the value of the right to income will be includable. This value decreases as the trust term draws to a close.<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>.     Treas. Reg. § 20.2031-7(d)(2)(ii).<br /> <br /> </div>

<div class="Section1"><br /> <br /> If the insured elects to have death proceeds held under an interest or installment option for the insured&rsquo;s surviving spouse with proceeds remaining at the surviving spouse&rsquo;s death payable to another, a portion of such remaining proceeds may be includable in the surviving spouse&rsquo;s gross estate under IRC Section 2036 as a transfer by the surviving spouse of his or her community property interest with life income retained. Such a transfer will be imputed to the surviving spouse if under state law the insured&rsquo;s death makes the transfer absolute ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="216">216</a>). The amount includable is the value of the surviving spouse&rsquo;s community half of the remaining proceeds going to the beneficiary of the remainder interest, less the value (at the insured&rsquo;s death) of the surviving spouse&rsquo;s income interest in the <em>insured&rsquo;s</em> community half of the proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> In states where the noninsured spouse has a vested interest in the proceeds of community property life insurance (e.g., California and Washington), a gift of the surviving spouse&rsquo;s community property interest should not be imputed to the surviving spouse unless the surviving spouse has consented to or has acquiesced in the insured&rsquo;s disposition of the proceeds.<a href="#_ftn2" name="_ftnref2">²</a> <em>But see Estate of Bothun v. Commissioner</em>,<a href="#_ftn3" name="_ftnref3">³</a> decided under California law, where an IRC Section 2036 transfer was imputed to the surviving spouse-primary beneficiary when, because the surviving spouse failed to survive a 15-day delayed payment clause, proceeds were paid to the contingent beneficiary. The opinion contained no suggestion of any evidence that the noninsured spouse had consented to the delayed payment clause.<br /> <br /> The IRS has ruled that where community property life insurance is payable to a named beneficiary other than the noninsured spouse, if deaths of the insured and the insured&rsquo;s spouse occur simultaneously when both possess the power to change the beneficiary in conjunction with the other, one-half of the proceeds is includable in each spouse&rsquo;s estate without regard to whether local law provides a presumption as to survivorship.<a href="#_ftn4" name="_ftnref4">⁴</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>U.S. v. Gordon</em>, 406 F.2d 332 (5th Cir. 1969).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Whiteley v. U.S.</em>, 214 F. Supp. 489 (W.D. Wash. 1963).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; TC Memo 1976-230 (1976).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 79-303, 1979-2 CB 332.<br /> <br /> </div></div><br />

<div class="Section1">The general rules for including life insurance proceeds in the gross estate apply ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="81">81</a>). Accordingly, the proceeds are includable if they are payable to or for the benefit of the insured&rsquo;s estate, or if the insured possesses any incident of ownership in the policy at the time of his or her death. There is no question, for example, that if at the employee&rsquo;s death the employee possessed the right to designate or change the beneficiary of his or her group life insurance, the employee possessed an incident of ownership within the meaning of IRC Section 2042(2).<a href="#_ftn1" name="_ftnref1">¹</a> In addition to the general rules concerning incidents of ownership, in group life insurance, the insured&rsquo;s right to convert to an individual policy on termination of employment is <em>not</em> an incident of ownership.<a href="#_ftn2" name="_ftnref2">²</a> Moreover, the power of an employee to effect cancellation of his or her coverage by terminating his or her employment is <em>not</em> an incident of ownership.<a href="#_ftn3" name="_ftnref3">³</a><div></div><div class="Section1">Estate tax regulations that attribute corporate-held incidents of ownership to an insured who is a stockholder-employee under certain circumstances ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="319">319</a>) provide (as amended in 1979) that in the case of group term life insurance, as defined in the regulations under Section 79, the power to surrender or cancel a policy held by a corporation &ldquo;shall not be attributed to any decedent&rdquo; through his or her stock ownership.<a href="#_ftn4" name="_ftnref4">⁴</a> (<em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="241">241</a> for the definition of group term life insurance.)</div><div></div><div>Drawing somewhat of a parallel to the controlling stockholder regulations, the IRS has held that a partnership&rsquo;s power to surrender or cancel its group term life insurance policy is not attributable to any of the partners. According to the IRS, it does not matter that partners do not qualify for the income exclusion provided in IRC Section 79 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>) because they are not employees. Under the facts of the ruling, the insured partner was one of 35 partners.<a href="#_ftn5" name="_ftnref5">⁵</a> The IRS has ruled privately in a case involving optional contributory plans of group life insurance that provide that if an employee opts not to participate on his or her own, certain specified relatives of the employee could, with the employee&rsquo;s consent, apply and pay for the insurance on the employee&rsquo;s life and own all incidents of ownership. The plan also provided that should the third-party applicant-owner cease to qualify as such, the insurance would terminate, in which event the employee would be eligible again to apply for coverage on his or her own. The IRS held that the employee did not possess an incident of ownership within the meaning of IRC Section 2042.<a href="#_ftn6" name="_ftnref6">⁶</a></div><div class="Section1"><br /> <br /> The Tax Court has held that the death proceeds of a combination group term life and disability income policy are taxable for estate tax purposes under IRC Section 2042 as proceeds of life insurance.<a href="#_ftn7" name="_ftnref7">⁷</a><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; <em>Chase Nat&rsquo;l Bank v. U.S.</em>, 278 U.S. 327 (1929); <em>Estate of Henry v. Commissioner</em>, TC Memo 1987-119.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Estate of Smead v. Commissioner</em>, 78 TC 43 (1982), acq. in result, 1984-2 CB 2; Rev. Rul. 84-130, 1984-2 CB 194, modifying Rev. Rul. 69-54, Situation 2, 1969-1 CB 221; GCM 39272 (8-16-84); AOD 1984-056.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 72-307, 1972-1 CB 221; <em>Landorf v. U.S.</em>, 408 F.2d 461 (Ct. Cl. 1969); <em>Estate of Lumpkin v. Commissioner</em>, 56 TC 815 (1971), <em>rev&rsquo;d on other grounds</em>, 474 F.2d 1092 (5th Cir. 1973).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;20.2042-1(c)(6).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 83-148, 1983-2 CB 157; GCM 39034 (9-21-83).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 76-421, 1976-2 CB 280.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Estate of Perl v. Commissioner</em>, 76 TC 861 (1981).<br /> <br /> </div></div><br />