Estate Tax Issues

<div class="Section1">Yes, generally, for estates of decedents dying after 1984; <em>but see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3982">3982</a> for details.</div><br />

<div class="Section1"><br /> <br /> Yes.<br /> <br /> In <em>Estate of Boyd v. Commissioner</em>,<a href="#_ftn1" name="_ftnref1">¹</a> in an unusual factual situation, the decedent’s son was left the decedent’s entire probate estate, $153,000, under decedent’s will plus $389,000 of life insurance proceeds as the policy beneficiary. The decedent’s second wife (the son’s step-mother) received nothing. The decedent’s will directed his executor to pay out of the probate estate the tax (an estimated $78,000) allocable to the life insurance proceeds. The son disclaimed the entire probate estate <em>and</em> any right to have the probate estate pay any death tax attributable to the life insurance proceeds. The IRS refused to give effect to the second disclaimer, which had the effect of reducing the amount of marital deduction the estate claimed. The disclaimer statute says that a qualified disclaimer means an irrevocable and unqualified refusal to accept an <em>interest in property</em>. The court recognized the subject of the second disclaimer as an interest in property for purposes of the statute and allowed the claimed marital deduction.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Remember that under IRC Section 2518 and many state statutes, a disclaimer is qualified only if (among several other requirements) no portion of the disclaimed interest passes to the disclaiming party as a result of the disclaimer. It is important to consider where the disclaimed interest passes after the disclaimer is made.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     819 F.2d 170, 87-1 USTC ¶ 13,720 (7th Cir. 1987), <em>rev’g</em> 85 TC 1056 (1985).<br /> <br /> </div>

<div class="Section1">Life insurance owned by a corporation on its majority shareholder was not included in the shareholder’s estate where the shareholder sold her interest in the corporation within three years of death. The corporation had always owned the policy, paid the premiums, and been beneficiary of the proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> However, where a majority shareholder reduced his interest in a corporation to 40 percent within three years of death and proceeds of life insurance owned by the corporation on such shareholder were payable to the shareholder’s daughter, proceeds were included in the shareholder’s estate.<a href="#_ftn2" name="_ftnref2">²</a> Also, where a corporation transferred a life insurance policy to the beneficiary within three years of the controlling shareholder’s death, proceeds were included in the controlling shareholder’s estate even though the shareholder transferred his interest in the corporation to his son after the corporation’s transfer of the life insurance policy and prior to his death.<a href="#_ftn3" name="_ftnref3">³</a> Where a non-majority shareholder held the right to purchase a policy on his life from a corporation upon termination of a buy-sell agreement and the shareholder caused the corporation to transfer the policy to an irrevocable trust within three years of the shareholder’s death, the proceeds were included in the shareholder’s estate.<a href="#_ftn4" name="_ftnref4">⁴</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Let. Rul. 8906002.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Rev. Rul. 90-21, 1990-1 CB 172, situation 2.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Rev. Rul. 90-21, 1990-1 CB 172, situation 1.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     TAM 9127007.<br /> <br /> </div>

<div class="Section1"><br /> <br /> No. IRC Section 2035 brings back into a decedent’s estate certain gifts made within three years of death. The bring-back rule of Section 2035 applies to a transfer of an interest in property that is included in the value of the gross estate under IRC Sections 2036, 2037, 2038, or 2042, or would have been included under any of these sections if such interest had been retained by the decedent. IRC Section 2042 has to do with proceeds of insurance <em>on the life of the decedent</em>.<br /> <br /> IRC Section 2033 (which includes property in which a decedent had any interest at all) governs whether the value of a policy owned by the decedent on the life of <em>another</em> is includable in the decedent’s estate. A transfer of an interest in property included in the value of the gross estate under Section 2033, or that would have been included under Section 2033 if the interest had been retained by the decedent, is not among the enumerated sections under the bring-back rule of Section 2035. Thus, the value of a policy owned by a decedent on the life of another and transferred by the decedent within three years of the decedent’s death (occurring after 1981) will not normally be brought back into the decedent’s estate under Section 2035.<br /> <br /> </div>

<div class="Section1"><br /> <br /> <em>Editor’s Note:</em> 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.<br /> <br /> If the policy is not transferred but the former spouse is required, under the divorce decree or agreement, to own and maintain a policy as security for post-death payments, installment payments of the proceeds would be taxable as alimony. Pre-2019, payments from an insurance trust established to discharge post-death obligations were fully taxable to the recipient spouse.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 71 (prior to repeal by Pub. Law No. 115-97); IRC § 682; Treas. Reg. §§ 1.71-1(c)(2), 1.101-5.<br /> <br /> </div>

<div class="Section1">Yes. The entire value of the proceeds must be included in the insured&rsquo;s gross estate even if the insured possessed no incident of ownership in the policy, and paid none of the premiums.<a href="#_ftn1" name="_ftnref1">¹</a> <em><em>But see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="167">167</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="168">168</a> for the rule in community property states. Proceeds payable to an executor in the executor&rsquo;s individual capacity rather than as executor for the insured&rsquo;s estate were not treated as payable to the insured&rsquo;s estate by the Tax Court.<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2042(1); <em>Estate of Bromley v. Commissioner</em>, 16 BTA 1322 (1929).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Estate of Friedberg v. Commissioner</em>, TC Memo 1992-310.<br /> <br /> </div></div><br />

<div class="Section1">The IRS has held that the availability of the deduction under IRC Section 2053(a)(3) depends upon the nature of the insured’s legal obligation under the divorce decree. If the insured’s obligation was simply to keep the policy in full force and effect with all premiums paid as long as the former spouse lived and remained unmarried, and the insured did that, then no obligation survived the insured’s death and the insured’s estate would not be entitled to a deduction. If, on the other hand, the divorce decree provided for the payment to the decedent’s former spouse of a specific sum of money upon the decedent’s death, and the decedent provided the funds by the purchase of life insurance, then the payment of the required amount would be a personal obligation of the decedent, so it would be payable from the decedent’s estate if the insurer was unable to meet its obligation. Under these circumstances, any proceeds payable to the former spouse to discharge the decedent’s obligation would be deductible under IRC Section 2053(a)(3).<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Rev. Rul. 76-113, 1976-1 CB 276.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes.<br /> <br /> The proceeds are includable in the insured&rsquo;s gross estate if the beneficiary has a legally binding obligation to use them to pay the insured&rsquo;s death taxes.<a href="#_ftn1" name="_ftnref1">¹</a> For powers that may be given to a trustee, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="182">182</a>.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Proceeds should not be includable in the gross estate merely because the beneficiary lends the proceeds to the estate, or uses the proceeds to buy assets from the estate. Liquidity can be provided to an estate in this manner.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;20.2042-1(b)(1).<br /> <br /> </div></div><br />

<div class="Section1">An exception is provided to the transfers within three years of death rules for any bona fide sale for adequate and full consideration.<a href="#_ftn1" name="_ftnref1">¹</a> It is unclear whether consideration equal to the interpolated terminal reserve of a policy plus any unexpired premiums is adequate to avoid the transfers within three years of death rule. TAM 8806004 interpreted full consideration as requiring that the consideration must be adequate relative to what would be included in the estate (i.e., the proceeds), not relative to what is transferred (i.e., the policy). <em><em>See</em> Estate of Pritchard v. Commissioner</em>,<a href="#_ftn2" name="_ftnref2">²</a> where consideration equal to the cash surrender value was inadequate. However, TAM 9413045 accepted the interpolated terminal reserve plus any unexpired premiums as adequate consideration.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2035(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     4 TC 204 (1944).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes.<br /> <br /> If certain requirements are met, a transfer to an irrevocable life insurance trust can qualify for the annual exclusion (and thus avoid the generation-skipping transfer (GST) tax). A nontaxable gift, which is a direct skip, has an inclusion ratio of zero (i.e., it is not subject to GST tax). Nontaxable gifts are defined as gifts eligible for the annual exclusion ($19,000 in 2025) (doubled if gifts are split between spouses), as well as certain transfers for educational or medical expenses. However, with respect to transfers after March 31, 1988, the nontaxable gift that is a direct skip to a trust for the benefit of an individual has an inclusion ratio of zero only if (1) during the life of such individual no portion of the trust corpus or income may be distributed to or for the benefit of any other person, and (2) the trust would be included in such individual’s estate if the trust did not terminate before such individual died.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, separate shares or separate trusts, as described in the preceding sentence, must be created for each such individual if premium payments are to be covered by the annual exclusion for GST tax purposes.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Because of the separate share requirement, the annual exclusion is generally not used for generation-skipping life insurance trusts. Instead, the trust is usually protected by allocating the GST exemption to all transfers to the trust.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2642(c); Rev. Proc. 2024-40.<br /> <br /> </div>