Value Of Unmatured Policy

<div class="Section1"><br /> <br /> Transfers of property after June 30, 1969 in connection with the performance of services are governed by IRC Section 83. For transfers before February 13, 2004, Treasury Regulation Section 1.83-3(e) provided that, &ldquo;In the case of a transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, only the cash surrender value of the contract is considered to be property.&rdquo;<br /> <br /> For transfers after February 12, 2004, the Treasury Regulations generally treat the policy&rsquo;s fair market value (specifically the policy cash value and all other rights under the contract, including any supplemental agreements to the contract, whether or not they are guaranteed, other than current life insurance protection) as property. For transfers of life insurance contracts that are part of split-dollar arrangements that are <em>not</em> subject to the split-dollar regulations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4022">4022</a>), however, only the cash surrender value of the contract is considered property.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The IRS has provided a safe harbor on how to determine the fair market value of a life insurance contract.<a href="#_ftn2" name="_ftnref2">²</a> The fair market value of a life insurance contract may be the greater of either: (1) the interpolated terminal reserve and any unearned premiums, plus a pro rata portion of a reasonable estimate of dividends expected to be paid for that policy year, or (2) the product of the &ldquo;PERC amount&rdquo; (PERC stands for premiums, earnings, and reasonable charges) and the applicable &ldquo;Average Surrender Factor.&rdquo;<br /> <br /> The PERC amount for a life insurance contract that is not a variable contract is the aggregate of:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; the premiums paid on the policy without a reduction for dividends that offset the premiums, plus<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; dividends that are applied to purchase paid-up insurance, plus<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; any other amounts credited or otherwise made available to the policyholder, including interest and similar income items, but not including dividends used to offset premiums and dividends used to purchase paid up insurance, minus<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; reasonable mortality charges and other reasonable charges, but only if those charges are actually charged and those charges are not expected to be refunded, rebated, or otherwise reversed, minus<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; any distributions (including dividends and dividends held on account), withdrawals, or partial surrenders taken prior to the valuation date.</blockquote><br /> The PERC amount for a variable life contract is the aggregate of:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; the premiums paid on the policy without a reduction for dividends that offset the premiums, plus<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; dividends that are applied to increase the value of the contract, including dividends used to purchase paid-up insurance, plus or minus<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; all adjustments that reflect the investment return and the market value of the contract&rsquo;s segregated asset accounts, minus<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; reasonable mortality charges and other reasonable charges, but only if those charges are actually charged on or before the valuation date and those charges are not expected to be refunded, rebated, or otherwise reversed, minus<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; any distributions (including dividends and dividends held on account), withdrawals, or partial surrenders taken prior to the valuation date.</blockquote><br /> The Average Surrender Factor is 1.0 when valuing life insurance contracts for purposes of the rules regarding group term life (Section 79), property transferred in connection with the performance of services (Section 83), and certain transfers involving deferred compensation arrangements (Section 402(b)). This is because under these rules no adjustment for potential surrender charges is allowed.<br /> <br /> The IRS pointed out that the formulas in its safe harbor rules must be interpreted in a reasonable manner, consistent with the purpose of determining the contract&rsquo;s fair market value. Specifically, the rules are not allowed to be interpreted in such a way as to understate a contract&rsquo;s fair market value.<br /> <br /> For transfers of property before July 1, 1969, the IRS ruled that the value of an unmatured policy is determined for income tax purposes in the same manner as for gift tax purposes (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="119">119</a>).<a href="#_ftn3" name="_ftnref3">³</a> In one case, the court accepted the value stipulated by the parties in an arm&rsquo;s length agreement.<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; Treas. Reg. &sect;&nbsp;1.83-3(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Proc. 2005-25, 2005-17 IRB 962.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 59-195, 1959-1 CB 18.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Gravois Planing Mill v. Commissioner</em>, 9 AFTR 2d 733 (8th Cir. 1962).<br /> <br /> </div></div><br />