113 / Is a deduction under IRC Section 2053(a)(4) considered a debt against the insured’s estate?

The Tax Court has allowed an offsetting deduction under IRC Section 2053(a)(4) where a divorced husband was required under the terms of a property settlement agreement incorporated in a divorce decree to maintain a certain amount of insurance on his life payable to his former spouse, and where the proceeds were paid upon his death directly from the insurer to the former spouse as beneficiary. The court held that the proceeds were property included in the estate and subject to an indebtedness even though, because the proceeds were paid directly to the former spouse, it was not necessary for her to file a claim against the estate.¹ The Tax Court also has allowed a deduction under IRC Section 2053(a)(4) where the decedent had been ordered through a divorce decree to assign two policies to the decedent’s former spouse.²

The position of the IRS now is that when a divorced spouse is required by the terms of a divorce decree to maintain insurance on his or her life payable to his or her former spouse, the estate is allowed an offsetting deduction under IRC Section 2053(a)(4) until the beneficiary spouse dies or remarries.³ (On these facts, the deduction would not be allowed under IRC Section 2053(a)(3).) The IRS has ruled similarly when, in a paternity action adjudicating custody and support rights, the insured was required by court decree to maintain insurance on the insured’s life for the benefit of the insured’s child.⁴