109 / If an individual is required by a court decree or separation agreement to pay premiums on a life insurance policy for a former spouse, are the premiums taxable income to the recipient spouse? Are they deductible by the payor spouse?

Editor's Note: The 2017 tax reform legislation eliminated the previously existing above-the-line deduction for alimony for tax years beginning after 2018, and provides that alimony and separate maintenance payments are no longer included in the income of the recipient.

Premiums Paid Pursuant to Instruments Executed After 1984

Assuming that all the other alimony requirements are met, premiums paid by the payor spouse for term or permanent life insurance on the payor spouse's life pursuant to a divorce or separation instrument executed after December 31, 1984, qualify as alimony payments on behalf of the recipient spouse to the extent that the recipient spouse is the owner of the policy.¹ Pre-2019, premium payments that qualified as alimony payments generally were deductible by the payor spouse.² Note that the new rules governing alimony payments only apply for divorce agreements entered into on or after January 1, 2019, unless taxpayers divorcing in 2018 specifically agreed to apply the new rules.

Premiums Paid Pursuant to Instruments Executed Before 1985

If an existing policy is absolutely assigned to a recipient spouse, or a new policy that gives full ownership rights is purchased for the recipient spouse, the premiums are includable in the recipient spouse's gross income and are deductible by the spouse who assigned or purchased the policy.³ This is the result even though, under the terms of the decree or agreement, (1) the payor's obligation to pay premiums will cease upon the remarriage of the recipient spouse,⁴ (2) the recipient spouse's rights in the insurance terminate if the recipient spouse does not survive the payor spouse, or (3) the recipient spouse's exercise of ownership rights is subject to the approval of the divorce court.⁵

If the payor spouse retains ownership rights in the policy, or if the recipient spouse's interest is contingent (as where the policy itself or the right to name the beneficiary will revert to the payor upon the recipient spouse's death or remarriage), the premiums are not taxable to the recipient spouse and are not deductible by the payor.⁶

It is not sufficient that the decree or agreement requires that the recipient spouse is to remain primary beneficiary; the payor spouse must give up all ownership and control.⁷ A voluntary assignment not required by the decree or agreement is also not sufficient.⁸ Payments are not deductible alimony taxable to a recipient spouse where a policy is assigned to a trust that confers only a lifetime interest and the children are remaindermen.⁹ When the policy is placed in escrow merely as security for the payor's obligation to pay alimony, it is clear, under the foregoing rules, that the premiums are neither taxable to the recipient nor deductible by the payor.¹⁰

The Tax Court has held that even though a policy is assigned absolutely to the recipient spouse and the payor spouse is required to pay premiums, if the policy is term insurance, the premiums are neither includable in the recipient's income nor deductible by the payor.¹¹ The result is the same even when the term policy has a conversion privilege, if the recipient would have to pay the additional premium on conversion.¹²

Similarly, a payor spouse's policy loan repayments required by a separation agreement are not taxable to the recipient spouse, nor deductible by the payor, when the payor retains ownership of the policy and the recipient is the irrevocable beneficiary only until death or remarriage.¹³

The payor spouse's deduction, provided by IRC Section 215, is based on the inclusion of the same item in the recipient's gross income under IRC Section 71.¹⁴