177 / Is an assignment of group term life insurance within three years before the death of an employee includable in the employee's gross estate?

An assignment of group term life insurance made within three years before the death of the insured will cause the proceeds to be included in the insured’s gross estate under IRC Section 2035 ( Q 96).¹ It has been held that where a prospective insured applied for group coverage and had ownership of the certificate placed in another, the prospective insured made a transfer of the insurance within the meaning of IRC Section 2035.²

Similarly, in Levine v. U.S.,³ where the decedent/insured’s controlled corporation procured the insurance and where the insured had his wife sign as the applicant and the beneficiary (the insured died in 1978, within three years of the insurance purchase), the proceeds of the life insurance were includable in the decedent/insured’s estate.

The IRS has ruled that an annual renewal of group term insurance by mere payment of the renewal premium does not create a new agreement but merely continues the old agreement, and that, therefore, as to an employee who has assigned his or her coverage, renewal is not a new transfer of insurance coverage for purposes of IRC Section 2035. Therefore, if the insured has transferred the insured’s coverage under such a plan more than three years before death, the death proceeds will not be brought back into the insured’s estate under IRC Section 2035.⁴

The IRS has also ruled that although (1) an employee cannot, by agreement with an assignee of the employee’s life coverage, effectively assign life coverage that the employee may receive in the future furnished by a new insurance carrier, and (2) a change of insurance carrier necessitates a new assignment of an employee’s coverage to the same assignee “and the new arrangement is identical in all relevant aspects to the previous arrangement” with the old carrier, the new assignment will not cause the proceeds to be includable in the employee’s estate under IRC Section 2035 if the employee dies within three years after the new assignment, but more than three years after the first assignment.⁵

A later private ruling dealt with the assignment of the insured’s rights in a group life policy that was later replaced by a policy virtually identical in all material respects with the prior policy, but issued by a different carrier. The new policy provided that an employee’s irrevocable assignment of the employee’s rights in the old policy would be effective to vest in the assignee the insured’s rights under the new policy. No new assignment was made after issuance of the new policy. The IRS stated that if applicable local law would not recognize the provision in the new policy as constituting a valid assignment of rights in the new policy, the insured would be treated as the owner of the policy at the insured’s death.⁶ The U.S. Court of Appeals for the Seventh Circuit held that the proceeds of a group life policy were includable in the decedent’s gross estate where the insured died within three years of the issuance of a policy offered by the employer in exchange for an earlier group life insurance policy. In this case, the insured was required to execute a new assignment when the second policy was issued.⁷

Where the issuance of a life insurance policy to a trust created by the insured’s children was treated as an exercise of the conversion rights under a group policy in which the insured had held incidents of ownership that the insured had not previously assigned and the insured died within three years of the conversion, the insured was considered to have transferred incidents of ownership in the policy within three years of death, and the proceeds were included in the insured’s estate.⁸