Gift Tax And LIfe Insurance

<div class="Section1">The gift tax marital deduction generally is not available for a gift in trust unless the donee spouse has at least the right to all the income from the property and a general power of appointment over the principal, or unless the donee spouse’s income interest is a “qualifying income interest for life” in the property transferred, in which case the donee spouse does not usually have to have a general power of appointment over the principal. Because a life insurance policy ordinarily does not produce income before maturity, the requirement that the donee spouse receive all the income for life will not be met unless the donee spouse has the power to compel the trustee to convert the policy to income-producing property, or the power to terminate the trust and demand the policy.<a href="#_ftn1" name="_ftnref1">¹</a> An annual exclusion may be allowed instead of the marital deduction if the donee spouse is not a U.S. citizen.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. §§ 25.2523(e)-1(f)(4), 25.2523(e)-1(f)(6).<br /> <br /> </div>

<div class="Section1">Yes. If the trustee is directed to pay the dividends to the trust beneficiary, the value of probable dividends will be considered a gift of a present interest.<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>.     <em>Tidemann v. Commissioner</em>, 1 TC 968 (1943).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A reversionary interest trust is a trust whose property will, on specified circumstances, revert to the grantor.<br /> <br /> In a reversionary interest trust, the gift is the right to receive <em>trust income</em> during the trust term. The value of this right is determined and taxed in the year the trust is established. The value of the gift generally is the value of the property transferred less the value of the grantor’s retained interest.<a href="#_ftn1" name="_ftnref1">¹</a> The value of these income and reversionary (or remainder) interests are determined using the estate and gift tax valuation tables. For example, assuming a valuation table interest rate of 7 percent and a trust term of 45 years, the value of the gift of income is 0.952387 times the value of the property (1 - 0.047613). However, if the reversionary interest is not a qualified interest, the value of the gift is generally the full value of the property transferred to the trust.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> To avoid the above result, an annuity or unitrust interest generally should be given to the trust rather than an income interest.<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>.     Treas. Reg. § 25.2512-9(a)(1)(i).<br /> <br /> </div>

<div class="Section1">IRC Section 2503(c) provides that there is a gift of a present interest if the property that constitutes the gift and all income from the property (1) <em>may</em> be expended for the benefit of the minor, and (2) <em>will</em>, to the extent not so expended, pass to the minor when the minor is age 21, or, if the minor dies before reaching age 21, be payable to the minor&rsquo;s estate or as the minor may appoint under a general power of appointment.<a href="#_ftn1" name="_ftnref1">¹</a> The fact that under local law a minor is legally unable to exercise a power or to execute a will does not cause the transfer to fail to satisfy the conditions.<a href="#_ftn2" name="_ftnref2">²</a> Any premiums paid on the policy by the grantor should qualify as gifts of a present interest ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="223">223</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;2503(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;25.2503-4.<br /> <br /> </div></div><br />

<div class="Section1">Yes. In one case, a wife placed a policy on her husband’s life in a revocable trust for their children. It was held that a gift from the wife to the children was made when the insured died and the trust became irrevocable. The value of the gift was the full amount of the death proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> If the trust had been irrevocable, the annual premiums paid by the wife, instead of the proceeds, would have constituted gifts.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>Goodman v. Commissioner</em>, 156 F.2d 218 (2d Cir. 1946).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Watkins v. Commissioner</em>, 2 TCM (CCH) 252 (1943).<br /> <br /> </div>

<div class="Section1"><br /> <br /> In the usual case, no annual exclusions are allowable either on the creation of the trust or on the payment of premiums ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="219">219</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="223">223</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <blockquote><em>Example.</em> C transfers certain insurance policies on C&rsquo;s own life to a trust created for the benefit of D. Upon C&rsquo;s death the proceeds of the policies are to be invested, and the net income paid to D during D&rsquo;s lifetime. Because the income payments to D will not begin until after C&rsquo;s death, the transfer in trust represents a gift of a future interest in property against which no exclusion is available.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> If the beneficiary were given the power to demand trust principal, apparently the annual exclusion would be available.<a href="#_ftn3" name="_ftnref3">³</a> Such a power, however, would cause the trust principal to be includable in the beneficiary&rsquo;s gross estate.<br /> <br /> Where an employee assigned his group life insurance policy to an irrevocable trust, the IRS ruled that subsequent premiums paid by the employer qualified for the annual exclusion as gifts of a present interest by the <em>employee</em>. Under the terms of the trust, the beneficiary or the beneficiary&rsquo;s estate was to receive the full proceeds of the policy immediately on the insured&rsquo;s death.<a href="#_ftn4" name="_ftnref4">⁴</a> In a later ruling, the facts essentially were the same, except that the trust terms directed the trustee to retain the insurance proceeds, paying income to the insured&rsquo;s children for life, with the remainder to the grandchildren; the employer&rsquo;s premium payments following the assignment were held to be gifts of a future interest in property, therefore not qualifying for the annual exclusion.<a href="#_ftn5" name="_ftnref5">⁵</a> (<em>See also</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="80">80</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="168">168</a>.)<br /> <br /> The IRS also has allowed the gift tax annual exclusion when a grantor created a trust with an initial contribution of a $50,000 group term policy on the grantor&rsquo;s life and $1,000 in cash. The trust gave the grantor&rsquo;s spouse a $3,000 annual noncumulative withdrawal right and provided that any asset in the trust, including the insurance policy, could be used to satisfy the demand. In this private letter ruling, the IRS held that the grantor&rsquo;s initial contribution, as well as the grantor&rsquo;s employer&rsquo;s subsequent premium payments on the group term insurance, would qualify for the exclusion.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> For a discussion of the special provision with respect to gifts in trust to minors, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="160">160</a>. For a discussion of Crummey withdrawal rights, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="161">161</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; Treas. Reg. &sect;&nbsp;25.2503-2; <em>Commissioner v. Boeing</em>, 123 F.2d 86 (9th Cir. 1941).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;25.2503-3(c)(Ex. 2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Halsted v. Commissioner</em>, 28 TC 1069 (1957), acq. 1958-2 CB 5.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 76-490, 1976-2 CB 300.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 79-47, 1979-1 CB 312.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 8006109.<br /> <br /> </div></div><br />