Estate Tax Issues

<p><strong>Includability of Proceeds or Premiums</strong></p><p> The IRS has ruled that where a divorced wife had an absolute right, under terms of a property settlement agreement incorporated by reference in a divorce decree, to annuity payments after the death of her former husband, and such payments were to be provided by insurance on his life maintained by him for that purpose, the former husband possessed no incidents of ownership in the insurance at his death. As a result, no part of the insurance proceeds was includable in his estate.<a href="#_ftn1">¹</a> (<em>See</em> Q <a href="javascript:void(0)">81</a> for the general rules of includability.) Also, the Tax Court has held that where a divorced husband was required under a property settlement agreement to maintain insurance on his life payable to his former wife, if living, but otherwise to their surviving descendants or to his former wife's estate if there were no surviving descendants, the insured possessed no incidents of ownership in the insurance. The insurance, in other words, was not merely security for other obligations.<a href="#_ftn2">²</a> In another case, the Tax Court held that where an insured was subject to a court order requiring the insured to maintain insurance on his life payable to his minor children, such court order, operating in conjunction with other applicable state law, effectively nullified incidents of ownership the insured would otherwise possess by policy terms.<a href="#_ftn3">³</a></p><p> When, on the other hand, the divorced husband was merely required to maintain a stated sum of insurance on his life payable to his former wife so long as she lived and remained unmarried, the insured was held to have retained a reversionary interest sufficient in value to make the proceeds includable in his estate ( Q <a href="javascript:void(0)">86</a>).<a href="#_ftn4">⁴</a> It also has been held that where, pursuant to a divorce decree, the proceeds of insurance maintained by a divorced husband on his own life to secure alimony payments are paid following the insured's death directly to the former wife, the proceeds are includable in the insured's estate. The Board of Tax Appeals reasoned that because the proceeds satisfy a debt of the decedent or his estate, the result is the same as if the proceeds are received by the decedent's executor ( Q <a href="javascript:void(0)">81</a>).<a href="#_ftn5">⁵</a></p><p> <a href="#_ftnref1">1</a>. Rev. Rul. 54-29, 1954-1 CB 186. </p><p> <a href="#_ftnref2">2</a>. <em>Estate of Bowers v. Commissioner</em>, 23 TC 911 (1955), acq. 1955-2 CB 4. </p><p> <a href="#_ftnref3">3</a>. <em>Estate of Beauregard v. Commissioner</em>, 74 TC 603 (1980), acq. 1981-1 CB 1. </p><p> <a href="#_ftnref4">4</a>. Rev. Rul. 76-113, 1976-1 CB 276. </p><p> <a href="#_ftnref5">5</a>. <em>Estate of Mason v. Commissioner</em>, 43 BTA 813 (1941), nonacq. 1941-1 CB 17 (1941). </p>

<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"><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 /> <p style="text-align: center;"><strong>Premiums Paid Pursuant to Instruments Executed After 1984</strong></p><br /> 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.<a href="#_ftn1" name="_ftnref1">¹</a> Pre-2019, premium payments that qualified as alimony payments generally were deductible by the payor spouse.<a href="#_ftn2" name="_ftnref2">²</a> 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.<br /> <p style="text-align: center;"><strong>Premiums Paid Pursuant to Instruments Executed Before 1985</strong></p><br /> 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.<a href="#_ftn3" name="_ftnref3">³</a> 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,<a href="#_ftn4" name="_ftnref4">⁴</a> (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.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> 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.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> 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.<a href="#_ftn7" name="_ftnref7">⁷</a> A voluntary assignment not required by the decree or agreement is also not sufficient.<a href="#_ftn8" name="_ftnref8">⁸</a> 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.<a href="#_ftn9" name="_ftnref9">⁹</a> 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.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> 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 <em>term</em> insurance, the premiums are neither includable in the recipient's income nor deductible by the payor.<a href="#_ftn11" name="_ftnref11">¹¹</a> 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.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> 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.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> 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.<a href="#_ftn14" name="_ftnref14">¹⁴</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>.       Temp. Treas. Reg. § 1.71-1T, A-6.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.       <em>See</em> IRC § 215, prior to repeal by Pub. Law No. 115-97.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.       <em>See, e.g., Carmichael v. Commissioner</em>, 14 TC 1356 (1950); Rev. Rul. 70-218, 1970-1 CB 19.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.       <em>Hyde v. Commissioner</em>, 301 F.2d 279 (2d Cir. 1962).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.       <em>Stevens v. Commissioner</em>, 439 F.2d 69 (2d Cir. 1971).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.       <em>See, e.g., Kiesling v. Commissioner</em>, 349 F.2d 110 (3d Cir. 1965); <em>Sperling v. Commissioner</em>, TC Memo 1982-681.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.       Rev. Rul. 57-125, 1957-1 CB 27; <em>Greenway v. Commissioner</em>, TC Memo 1980-97.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.       <em>Cole v. U.S.</em>, 76-1 USTC ¶ 9256 (E.D. Ill. 1975).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.       <em>Kinney v. Commissioner</em>, TC Memo 1958-209.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.     <em>Blumenthal v. Commissioner</em>, 183 F.2d 15 (3d Cir. 1950).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.     <em>Brodersen v. Commissioner</em>, 57 TC 412 (1971).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.     <em>Wright v. Commissioner</em>, 62 TC 377 (1974), <em>aff'd</em>, 76-2 USTC ¶ 9736 (7th Cir. 1976).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.     <em>Auerbach v. Commissioner</em>, TC Memo 1975-219.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.    <em>Mandel v. Commissioner</em>, 229 F.2d 382 (7th Cir. 1956).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Where insurance proceeds payable to a divorced spouse are required to be included in the insured's estate, it is sometimes possible to secure an offsetting deduction either (1) on the basis that the beneficiary's right to the proceeds amounts to a claim against the estate representing a personal obligation of the decedent existing at the time of death<a href="#_ftn1" name="_ftnref1">¹</a> or (2) on the basis that the beneficiary's interest in the proceeds amounts to an indebtedness against the proceeds included in the estate.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A deduction is not allowed on either basis, however, if the claim or indebtedness is founded on an agreement between the spouses in the nature of a property settlement agreement not supported by "adequate and full consideration in money or money's worth."<a href="#_ftn3" name="_ftnref3">³</a> Where (i) property is transferred from a decedent or from a decedent's estate to a former spouse of the decedent pursuant to a property settlement agreement, (ii) divorce occurred within a three-year period measured from the date one year before the agreement was entered into, and (iii) the property is includable in the decedent's gross estate, the transfer is considered to be made for an adequate and full consideration in money or money's worth.<a href="#_ftn4" name="_ftnref4">⁴</a> A relinquishment or promised relinquishment of marital rights in property is not consideration in money or money's worth.<a href="#_ftn5" name="_ftnref5">⁵</a> Although one court held that a wife's right to support is a "marital right in property,"<a href="#_ftn6" name="_ftnref6">⁶</a> the IRS has declined to follow the decision<a href="#_ftn7" name="_ftnref7">⁷</a> and declares instead that a release of support rights by a spouse constitutes consideration in money or money's worth.<a href="#_ftn8" name="_ftnref8">⁸</a> The Tax Court has consistently agreed that a spouse's relinquishment or promised relinquishment in a separation agreement of support rights is consideration in money or money's worth.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Even though it is found that the relinquishment or promised relinquishment of support rights is consideration in money or money's worth, it also must be found that the claim or indebtedness against property was "contracted bona fide and for an adequate and full consideration in money or money's worth."<a href="#_ftn10" name="_ftnref10">¹⁰</a> It must be found, in other words, that that which is sought to be deducted from the estate was bargained for in exchange for support rights. Thus, the executor of the estate must be prepared to show, according to applicable local law, the value of the support rights at the time the separation agreement was entered into. If the executor is unable to establish a dollar value by any reasonable approach, such as taking into account the value of the marital assets and the former spouses' incomes and their expenses, the deduction sought will be denied.<a href="#_ftn11" name="_ftnref11">¹¹</a> If a dollar value of the support rights is established, the deduction allowed cannot exceed that amount or, if less, the amount of the claim.<br /> <br /> If insurance proceeds are payable to a former spouse pursuant to the terms of a property settlement agreement (but not pursuant to a court decree), the insured's estate may be permitted an offsetting deduction to the extent of the value of any support rights relinquished by the former spouse under the agreement.<a href="#_ftn12" name="_ftnref12">¹²</a> But to the extent the proceeds exceed the value of such support rights, no deduction is allowable if the only other consideration given by the former spouse was relinquishment or promised relinquishment of inheritance rights in the decedent's property. For information on how to value support rights, <em>see</em> Revenue Ruling 71-67<a href="#_ftn13" name="_ftnref13">¹³</a> and <em>Estate of Fenton v. Commissioner.</em><a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> When a property settlement agreement is incorporated in a divorce decree, and when the divorce court is free to ignore the allowances made in the agreement and to set different allowances in its own discretion instead, the obligations of the parties are not "founded upon a promise or agreement" but upon the divorce decree. In this case, a deduction of a proper claim or indebtedness under IRC Section 2053 is allowable without regard to the nature of the consideration given by the former spouse.<a href="#_ftn15" name="_ftnref15">¹⁵</a> Even if both the agreement and the court decree provide that the covenants in the agreement shall survive any decree of divorce that may be entered, the obligations of the parties are still founded on the court decree, not on a promise or agreement.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> On the other hand, where a property settlement agreement is incorporated in a divorce decree, but under applicable state law the divorce court is not free to disregard the provisions of a valid property settlement agreement, the obligations of the parties are held to be founded upon a promise or agreement and not upon the divorce decree. In such case, the availability of the offsetting estate tax deduction is limited as previously explained.<a href="#_ftn17" name="_ftnref17">¹⁷</a><br /> <br /> Also, the IRS has ruled that where life insurance proceeds were payable to an insured husband's minor children pursuant to a divorce decree, the deduction was not allowable because (1) the decree exceeded the support obligation imposed by state law in requiring the spouse to maintain insurance on his life payable to his children, and (2) the maintenance of the insurance was not contracted for a full and adequate consideration.<a href="#_ftn18" name="_ftnref18">¹⁸</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 § 2053(a)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.       IRC § 2053(a)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.       IRC § 2053(c)(1)(A).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.       IRC § 2043(b)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.       IRC §§ 2053(e), 2043(b).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.       <em>Meyer's Estate v. Helvering</em>, 110 F.2d 367 (2d Cir. 1940), <em>cert. denied</em>, 310 U.S. 651 (1941).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.       Rev. Rul. 68-379, 1968-2 CB 414.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.       Rev. Rul. 71-67, 1971-1 CB 271; Rev. Rul. 75-395, 1975-2 CB 370.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.       <em>McKeon v. Commissioner</em>, 25 TC 697 (1956); <em>Estate of Glen v. Commissioner</em>, 45 TC 323 (1966); <em>Estate of Iverson v. Commissioner</em>, 65 TC 391 (1975), <em>rev'd and remanded on another issue</em>, 552 F.2d 977 (3d Cir. 1977); <em>Estate of Satz v. Commissioner</em>, 78 TC 1172 (1982). <em>See also Bowes v. U.S.</em>, 77-2 USTC ¶ 13,212 (N.D. Ill. 1977).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.     IRC § 2053(c)(1)(A).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.     <em>Estate of Iverson</em> and <em>Estate of Satz</em>, both cited <em>supra</em>.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.     <em>Gray v. U.S.</em>, 78-1 USTC ¶ 13,244 (C.D. Cal. 1978), on remand; <em>Estate of Fenton v. Commissioner</em>, 70 TC 263 (1978).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.     1971-1 CB 271.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.     70 TC 263 (1978).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.     <em>Commissioner v. Maresi</em>, 156 F.2d 929 (2d Cir. 1946); <em>Commissioner v. Estate of Watson</em>, 216 F.2d 941 (2d Cir. 1954), acq. 1958-1 CB 6; <em>Young v. Commissioner</em>, 39 BTA 230 (1939); <em>Estate of Mason v. Commissioner</em>, 43 BTA 813 (1941).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.     <em>Harris v. Commissioner</em>, 340 U.S. 106 (1950); <em>Estate of Robinson v. Commissioner</em>, 63 TC 717 (1975).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.     <em>Estate of Bowers v. Commissioner</em>, 23 TC 911 (1955), acq. 1955-2 CB 4; <em>Estate of Barrett v. Commissioner</em>, 56 TC 1312 (1971); <em>Gray v. U.S.</em>, 541 F.2d 228 (9th Cir. 1976), <em>reversing and remanding</em>, 391 F. Supp. 693; <em>Estate of Satz v. Commissioner</em>, 78 TC 1172 (1982); Rev. Rul. 60-160, 1960-1 CB 374; Rev. Rul. 75-395, 1975-2 CB 370.<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.    Rev. Rul. 78-379, 1978-2 CB 238.<br /> <br /> </div>

<div class="Section1"><br /> <br /> 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.<a href="#_ftn1" name="_ftnref1">¹</a> 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.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> 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.<a href="#_ftn3" name="_ftnref3">³</a> (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.<a href="#_ftn4" name="_ftnref4">⁴</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>.     <em>Estate of Robinson v. Commissioner</em>, 63 TC 717 (1975), acq. 1976-2 CB 2.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Estate of DeVos v. Commissioner</em>, TC Memo 1975-216.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Rev. Rul. 76-113, 1976-1 CB 276.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     Let. Rul. 8128005.<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"><br /> <br /> If an existing policy was transferred before July&nbsp;19, 1984, or after July&nbsp;18, 1984 pursuant to an instrument in effect prior to such date (and no election is made to have the IRC Section&nbsp;1041 nonrecognition rules apply), then the following rules apply.<br /> <br /> If the fair market value of the policy at the time of transfer exceeds the transferor&rsquo;s cost basis for the policy (net premiums paid), the transferor may have some taxable gain. (For fair market value, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="144">144</a>.) In <em>Commissioner v. Davis</em>,<a href="#_ftn1" name="_ftnref1">¹</a> the U.S. Supreme Court held that a transfer of property by a husband in exchange for his wife&rsquo;s relinquishment of her marital rights is a taxable exchange, and the value of the marital rights exchanged is equal to the fair market value of the property at time of transfer. The <em>Davis</em> rule apparently would apply to such a transfer involving a life insurance policy.<br /> <br /> The value of the policy transferred would not be taxable to the transferee and would not be deductible by the transferor.<a href="#_ftn2" name="_ftnref2">²</a> The same results would follow if a spouse purchased a single premium policy for the spouse&rsquo;s former spouse pursuant to the divorce settlement.<a href="#_ftn3" name="_ftnref3">³</a> Pre-2019, these values were not taxable to the recipient and deductible by the payor because they represented single sum payments rather than periodic payments of alimony. For tax years beginning after 2018, alimony is no longer deductible by the payor.<br /> <br /> Transfer of an existing policy can result in adverse tax consequences to the former spouse. If the policy is assigned to the former spouse, the proceeds are received as life insurance proceeds and not as alimony income. However, it would seem that the former spouse is a purchaser for value and, consequently, the proceeds would be subject to the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="77">77</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="79">79</a>).<a href="#_ftn4" name="_ftnref4">⁴</a> Hence, the profit (the excess of the proceeds over the value of the contract on the date of transfer plus all premiums and certain other amounts paid thereafter) would be taxable to the former spouse as ordinary income.<a href="#_ftn5" name="_ftnref5">⁵</a><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; 370 U.S. 65 (1962).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Ashcraft v. Commissioner</em>, 252 F.2d 200 (7th Cir. 1958), <em>aff&rsquo;g</em> 28 TC 356 (1957).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Morrison v. Commissioner</em>, TC Memo 1956-146.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See Commissioner v. Davis</em>, 370 U.S. 65 (1962).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;101(a)(2).<br /> <br /> </div></div><br />

<p> Leveraging of the GST tax exemption can be accomplished by allocating the exemption against the discounted dollars that the premiums represent when compared with the ultimate value of the insurance proceeds. However, in the case of inter vivos transfers in trust, allocation of the GST exemption is postponed until the end of an estate tax inclusion period (ETIP).<a href="#_ftn1">¹</a> In general, an ETIP would not end until the termination of the last interest held by either the transferor or the spouse of the transferor during the period in which the property being transferred would have been included in either spouse's estate if that spouse died. </p><p> Of course, the transferor should be given no interest that would cause the trust property to be included in the transferor's estate. Furthermore, the transferor's spouse should be given no interest that would cause the trust property to be included in the transferor spouse's estate if the transferor spouse were to die. </p><p> The property is not considered as includable in the estate of the spouse of the transferor by reason of a withdrawal power limited to the greater of $5,000 or 5 percent of the trust corpus if the withdrawal power terminates no later than 60 days after the transfer to the trust.<a href="#_ftn2">²</a> Also, the property is not considered as includable in the estate of the transferor or the spouse of the transferor if the possibility of inclusion is so remote as to be negligible (i.e., less than a 5 percent actuarial probability).<a href="#_ftn3">³</a> Furthermore, the ETIP rules do not apply if a reverse qualified terminable interest property (QTIP) election is made.<a href="#_ftn4">⁴</a> Otherwise, if proceeds are received during the ETIP, the allocation of the GST exemption must be made against proceeds rather than premiums and the advantage of leveraging is lost. <br/><blockquote><em>Example 1.</em> [Twenty years in this example only is based upon the $1 million GST exemption prior to any inflation or other adjustment after 1998.] G creates a trust for the benefit of his children and grandchildren. Each year he transfers to the trust $50,000 (to be used to make premium payments on a $2 million insurance policy on his life) and allocates $50,000 of his GST exemption to each transfer. Assuming G makes no other allocations of his GST exemption, the trust will have a zero inclusion ratio (i.e., it is not subject to GST tax) during its first 20 years. At the end of 20 years, G will have used up his GST exemption and the trust's inclusion ratio will increase slowly with each additional transfer of $50,000 to the trust. If G died during the 20-year period, the insurance proceeds of $2 million would not be subject to GST tax. Part of the $2 million proceeds may be subject to GST tax if G died in a later year. To ensure that the trust has a zero inclusion ratio, use of a policy that becomes paid-up before the transfers to trust exceed the GST exemption may be indicated. Example 2. Same facts as in Example 1, except that the trust is created for G's spouse, S, during her lifetime, and then, to benefit children and grandchildren. If the trust is intended to qualify for the marital deduction (apparently, other than if a reverse QTIP election is used), the valuation of property for purpose of the ETIP rule is generally delayed until G or S dies because the property would have been included in S's estate if she died during the ETIP. Consequently, if the $2 million insurance proceeds are received during the spouse's lifetime, the GST exemption is allocated against the $2 million proceeds, and a substantial amount of GST tax may be due upon subsequent taxable distributions and taxable terminations from the trust. Because allocation of the exemption must be made against the proceeds if they are received during the ETIP, the advantage of leveraging enjoyed in Example 1 is lost. NOTE: The 2025 OBBB increased the transfer tax exemption to $15 million (this $15 million base amount will be adjusted for inflation in future years). By way of history, the 2011 $5 million GST tax lifetime exemption was inflation-adjusted to $5.12 million in 2012, $5.25 million in 2013, $5.34 million in 2014, $5.43 million in 2015, $5.45 million in 2016, $5.49 million in 2017, $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million in 2021, $12.06 million in 2022, $12.92 million for 2023, $13.61 million in 2024 and $13.99 million in 2025. The 2010 Tax Relief Act also unified the lifetime gift exemption with the estate tax exemption.5 The American Taxpayer Relief Act of 2012 (ATRA 2012) made this unification permanent, so that the $5 million lifetime exemption will continue to be indexed annually for inflation, and the 2017 tax reform legislation doubled the $5 million base to $10 million. </blockquote><p>NOTE: The 2025 OBBB increased the transfer tax exemption to $15 million for 2026 (this $15 million base amount will be adjusted for inflation in future years). By way of history, the 2011 $5 million GST tax lifetime exemption was inflation-adjusted to $5.12&nbsp;million in 2012, $5.25 million in 2013, $5.34 million in 2014, $5.43 million in 2015, $5.45 million in 2016, $5.49&nbsp;million in 2017, $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million in 2021, $12.06 million in 2022, $12.92 million for 2023, $13.61 million in 2024, and $13.99 million in 2025. The 2010 Tax Relief Act also unified the lifetime gift exemption with the estate tax exemption.[1] The American Taxpayer Relief Act of 2012 (ATRA 2012) made this unification permanent, so that the $5 million lifetime exemption will continue to be indexed annually for inflation, and the 2017 tax reform legislation doubled the $5 million base to $10 million.</p><p>This increased exemption will provide transferors with flexibility in funding life insurance premiums through irrevocable life insurance trusts as it allows the transferor to front-pay premium payments with the unused portion of the $10 million exemption ($20 million for married couples), as indexed. In addition, ATRA 2012 made the portability of unused exemptions between spouses permanent, so that any unused exemption of a spouse who dies in a tax year beginning after 2010 may be used by the surviving spouse.6 (See Q 861.)</p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 2642(f). </p><p> <a href="#_ftnref2">2</a>. Treas. Reg. § 26.2632-1(c)(2)(ii)(B). </p><p> <a href="#_ftnref3">3</a>. Treas. Reg. § 26.2632-1(c)(2)(ii)(A). </p><p> <a href="#_ftnref4">4</a>. Treas. Reg. § 26.2632-1(c)(2)(ii)(C). </p><p> <a href="#_ftnref5">5</a>. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Section 302(b)(1), Pub. Law 111-312 (2010), amending 26 U.S.C. § 2505(a). <em>See also</em> The American Taxpayer Relief Act of 2012, Public Law 112-240, Rev. Proc. 2013-15, Rev. Proc. 2014-61, Rev. Proc. 2015-53, Rev. Proc. 2016-55, The 2017 tax reform legislation, Pub. Law No. 115-97, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40, Rev. Proc. 2025-32.</p><p> <a href="#_ftnref6">6</a>. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Section 303(b)(1), Pub. Law 111-312 (2010), amending 26 U.S.C. § 2010(c)(4). <em>See also</em> The American Taxpayer Relief Act of 2012, Public Law 112-240, Rev. Proc. 2013-15, Rev. Proc. 2014-61, Rev. Proc. 2015-53, Rev. Proc. 2016-55. The 2017 tax reform legislation, Pub. Law No. 115-97, Rev. Proc. 2018-18, Rev. Proc. 2018-57. </p>

<div class="Section1"><br /> <br /> No gain generally is recognized by the transferor if an existing policy is transferred to a spouse, or former spouse incident to a divorce, after July&nbsp;18, 1984, unless the transfer is pursuant to an instrument in effect on or before such date or the transfer is, under certain circumstances, in trust.<br /> <br /> When no gain is recognized, the transferee will be treated as having acquired the policy by gift and the transferor&rsquo;s cost basis for the policy (net premiums paid) is carried over to the transferee.<a href="#_ftn1" name="_ftnref1">¹</a> As a result, any such transfer of an existing policy will not cause the death benefit proceeds to be includable in the income of the transferee under the transfer for value rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="79">79</a>) due to the &ldquo;basis exception.&rdquo; A transfer is incident to a divorce if the transfer occurs within one year after the date the marriage ceases or is related to the cessation of the marriage.<a href="#_ftn2" name="_ftnref2">²</a> Thus, a transfer of property occurring not more than one year after the date on which the marriage ceased need not be related to the cessation of the marriage to qualify for Section&nbsp;1041 treatment. A transfer of a policy is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce or separation instrument and the transfer occurs not more than six years after the date on which the marriage ceases.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If property is transferred in trust for the benefit of the spouse or former spouse, however, gain will be recognized by the transferor to the extent that the sum of the liabilities assumed plus the amount of liabilities to which the property is subject exceed the total of the adjusted basis of all property transferred. Therefore, when a policy with a loan is transferred in trust, gain will be recognized to the extent the total liabilities of all property transferred to the trust exceed the total basis of all items of property transferred. When gain is recognized on a transfer in trust, the transferee&rsquo;s basis is adjusted to reflect the amount of gain recognized by the transferor. Payments from an insurance trust to which the property is transferred for the benefit of a spouse or former spouse will be taxed to the spouse or former spouse as a beneficiary and not taxed as alimony.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Both spouses or both former spouses may elect to have these rules apply to all transfers after 1983 and also may elect to have these rules apply to transfers after July&nbsp;18, 1984, under divorce or separation instruments in effect before July&nbsp;19, 1984.<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; IRC &sect;&nbsp;1041.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Temp. Treas. Reg. &sect;&nbsp;1.1041-1T, A-6.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Temp. Treas. Reg. &sect;&nbsp;1.1041-1T, A-7. <em>See also Joseph R. Belot v. Commissioner</em>, TC Memo 2016-113, June&nbsp;13, 2016 (Tax Court expansively interpreted the &ldquo;pursuant to a divorce or separation agreement&rdquo; requirement to find transfer incident to a divorce).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at p.&nbsp;711.<br /> <br /> </div></div><br />

<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 />