The Internal Revenue Service has issued a batch of guidance that could affect life insurance policyholders and others who use trusts to transfer policies.
The guidance, given in Revenue Ruling 2007-13, deals with a grantor insured by a life insurance policy who owns 2 grantor trusts.
The grantor, G, puts the policy in one grantor trust, then transfers the policy to the second grantor trust in exchange for cash.
In a second, related case, G puts the policy in one grantor trust, then transfers the policy to a second trust that is not a grantor trust in exchange for cash.
Determining what rules govern the transfers is important because the rules affect the incomes that the recipient of the death benefits must pay.
Section 101(a)(2) of the Internal Revenue Code “provides, generally, that if a life insurance contract, or any interest therein, is transferred for a valuable consideration, the exclusion from gross income … shall not exceed an amount equal to the sum of the actual value of the consideration and the premiums and other amounts subsequently paid by the transferee,” Chris Lieu, an IRS official, writes in the revenue ruling.