214 / If a life insurance policy is owned by someone other than the insured, is there a gift when the insured dies and the proceeds are paid to the owner's designated beneficiary?

Yes. For example, if a wife owns a policy on the life of her spouse and their children are named beneficiaries, subject to the wife’s right to change beneficiaries, there is a gift from the wife to the children when her spouse (the insured) dies. The value of the gift would be the value of the entire proceeds.¹ Under such circumstances, the gift of the proceeds will not be considered a split gift between the wife and her late spouse-insured under IRC Section 2513 ( Q 117), even if the executor signs a “consent of spouse” and files a gift tax return on behalf of the deceased spouse.²

In another example: A bought insurance on the life of B, revocably designating Y as beneficiary; Y is trustee of a trust established by A. The trust provided that trust income was payable to B for life, then to A for life, then trust corpus to the children of A and B. The trust also provided that for purposes of the trust agreement, if A and B died simultaneously, A would be presumed to have survived B. A and B died simultaneously. It was held that there was a taxable gift of the proceeds from A to the children of A and B.³ (See also Q 200.)

In addition, in another example: D created an unfunded revocable insurance trust under which life income was payable to B for life and the remainder to E and F. B purchased a life insurance policy on D’s life designating the trust as beneficiary and paying all the premiums. While B was alive, D died and the insurance proceeds were paid to the trust. B, until the death of D, possessed all the incidents of ownership in the policy, including the right to change the beneficiary. It was held that B made a completed gift for gift tax purposes to E and F on D’s death; the value of the gift was the amount of the policy proceeds less the present value of B’s life estate determined by use of the Estate and Gift Tax Table at Appendix D.⁴