Insured Estate

<div class="Section1">They are treated in the same manner as other insurance. Proceeds are includable in the insured&rsquo;s estate if the proceeds are payable to or for the benefit of the insured&rsquo;s estate, or if the insured has any incidents of ownership in the policy at the time of his or her death ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="81">81</a>).<a href="#_ftn1" name="_ftnref1">¹</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.<br /> <br /> </div></div><br />

<div class="Section1">Yes. They are subject to the same rules as other life insurance proceeds and may be included in the insured&rsquo;s gross estate ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="81">81</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="175">175</a>).<a href="#_ftn1" name="_ftnref1">¹</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; <em>Estate of Ackerman v. Commissioner</em>, 15 BTA 635 (1929); <em>Estate of Wright v. Commissioner</em>, 8 TC 531 (1947); <em>see Commissioner v. Estate of Noel</em>, 380 U.S. 678 (1965).<br /> <br /> </div></div><br />

<div class="Section1">It should not be includable in the grantor’s estate if, generally, (1) the trust is irrevocable and the grantor has retained no power to alter or amend, (2) the grantor has retained no interest or control over enjoyment of the property or income, and (3) the grantor does not have a reversionary interest in excess of 5 percent.<a href="#_ftn1" name="_ftnref1">¹</a> If the grantor retains power to withdraw and surrender policies placed in the trust, the funding property may be includable in the grantor’s gross estate.<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>.     IRC §§ 2036, 2037, 2038; <em>First Nat’l Bank of Birmingham (Estate of Sanson) v. Commissioner</em>, 36 BTA 651 (1937), acq. 1937-2 CB 24; <em>Estate of Carlton v. Commissioner</em>, 34 TC 988 (1960), nonacq. 1964-1 CB 9; Rev. Rul. 81-164, 1981-1 CB 458.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Treas. Reg. § 20.2042-1(c)(4); <em>Estate of Resch v. Commissioner</em>, 20 TC 171 (1953), acq. 1953-2 CB 6.<br /> <br /> </div>

<div class="Section1">One-half of the value of the unmatured policy is includable in the non-insured spouse&rsquo;s gross estate.<a href="#_ftn1" name="_ftnref1">¹</a> The value of the policy is determined under Treasury Regulation Section 20.2031-8 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="200">200</a>).<a href="#_ftn2" name="_ftnref2">²</a> The amount includable in the estate of the surviving insured spouse upon his or her subsequent death is determined by applying state law to the facts presented to ascertain the extent to which the proceeds are treated as community property or as separate property of the insured.<a href="#_ftn3" name="_ftnref3">³</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; <em>U.S. v. Stewart</em> (Cal.) 270 F.2d 894 (9th Cir. 1959); <em>California Trust Co. v. Riddell</em> 136 F. Supp. 7 (S.D. Cal. 1955); Rev. Rul. 74-284.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 75-100, 75-1 CB 303.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; See <em>Estate of Cervin v. Commissioner</em>, 111 F.3d 1252, 97-1 USTC &para;&nbsp;60,274 (5th Cir. 1997), rev&rsquo;g TC Memo 1994-550; <em>Estate of Cavenaugh v. Commissioner</em> (Tex.), 51 F.3d 597, 95-1 USTC &para;&nbsp;60,195 (5th Cir. 1995), rev&rsquo;g in part 100 TC 407 (1993); <em>Scott v. Commissioner</em> (Cal.) 374 F.2d 154 (9th Cir. 1967); Rev. Rul. 75-100, <em>supra</em>.<br /> <br /> </div></div><br />

<div class="Section1">Accumulated dividends (including interest thereon) and post-mortem dividends are reported together with the face amount of the policy on Schedule D of the insured’s estate tax return.<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>See</em> https://www.irs.gov/pub/irs-pdf/f1041sd.pdf (last accessed Oct. 1, 2023).<br /> <br /> </div>

<div class="Section1">Yes. The entire value of the proceeds is includable in the grantor’s gross estate. If the grantor has funded the trust, the funding property is also includable.<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>.     IRC § 2038(a); Treas. Reg. § 20.2042-1(c)(4).<br /> <br /> </div>

<div class="Section1"><br /> <br /> If a life income beneficiary is the owner of insurance policies payable to a life insurance trust at the time of the insured’s death and the life income beneficiary is still the beneficiary at the time of death, an amount equal to the death proceeds will be includable in the life beneficiary’s estate under IRC Section 2036(a)(1) as a transfer of the proceeds with a life income interest retained.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In one case, an insured husband created a nonfunded revocable life insurance trust under which his wife was the life income beneficiary and the wife paid premiums out of her own funds. The court held that on the death of the wife, who died after the husband, the premium payments were not considered transfers, and the proceeds therefore were not includable in her estate under IRC Section 2036(a)(1).<a href="#_ftn2" name="_ftnref2">²</a> However, when a trust is irrevocable, there is a possibility that payment of premiums by the income beneficiary may cause the income beneficiary to be considered a co-grantor of the trust. Thus, the income beneficiary may be considered to have made a transfer with a retained income interest. This would cause the portion of the proceeds attributable to such premiums to be includable in the income beneficiary’s estate upon the income beneficiary’s subsequent death.<a href="#_ftn3" name="_ftnref3">³</a> Trust beneficiaries would not hold incidents of ownership in life insurance under IRC Section 2042 where (1) a beneficiary could not make contributions to a trust that might hold life insurance on the beneficiary’s life and (2) a beneficiary’s limited power of appointment could not be exercised if the trust held life insurance on the beneficiary’s life.<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>.     Rev. Rul. 81-166, 1981-1 CB 477.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Goodnow v. U.S.</em>, 302 F.2d 516, 157 Ct. Cl. 526 (Fed. Cir. 1962).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     IRC § 2036(a)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     Let. Rul. 9602010.<br /> <br /> </div>

<div class="Section1">No. A policy loan is considered an advancement of part of the policy proceeds, not an enforceable claim against the estate.<a href="#_ftn1" name="_ftnref1">¹</a> Only the excess of the proceeds over the amount of the policy loan is includable in the gross estate.</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. §§ 20.2042-1(a)(3), 20.2053-4; <em>Kennedy v. Commissioner</em>, 4 BTA 330 (1926).<br /> <br /> </div>

<div class="Section1">If the trust instrument provides that the trust will end on the grantor’s death, the entire value of the property is includable in the grantor’s gross estate. Otherwise, the grantor’s reversionary interest is includable in the estate. The longer the trust term, the less will be the value of the reversion in the grantor’s estate. This value is determined by use of the Estate and Gift Tax Tables found in Appendix D. If the gift of the income interest was a taxable gift, the amount of the gift, if not included in the gross estate, will be added to the taxable estate for purposes of computing the tentative estate tax. Nothing will be includable in the <em>beneficiary’s</em> estate if the trust instrument provides for termination on the beneficiary’s death. Otherwise, the value of the right to income will be includable. This value decreases as the trust term draws to a close.<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>.     Treas. Reg. § 20.2031-7(d)(2)(ii).<br /> <br /> </div>

<div class="Section1"><br /> <br /> If the insured elects to have death proceeds held under an interest or installment option for the insured&rsquo;s surviving spouse with proceeds remaining at the surviving spouse&rsquo;s death payable to another, a portion of such remaining proceeds may be includable in the surviving spouse&rsquo;s gross estate under IRC Section 2036 as a transfer by the surviving spouse of his or her community property interest with life income retained. Such a transfer will be imputed to the surviving spouse if under state law the insured&rsquo;s death makes the transfer absolute ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="216">216</a>). The amount includable is the value of the surviving spouse&rsquo;s community half of the remaining proceeds going to the beneficiary of the remainder interest, less the value (at the insured&rsquo;s death) of the surviving spouse&rsquo;s income interest in the <em>insured&rsquo;s</em> community half of the proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> In states where the noninsured spouse has a vested interest in the proceeds of community property life insurance (e.g., California and Washington), a gift of the surviving spouse&rsquo;s community property interest should not be imputed to the surviving spouse unless the surviving spouse has consented to or has acquiesced in the insured&rsquo;s disposition of the proceeds.<a href="#_ftn2" name="_ftnref2">²</a> <em>But see Estate of Bothun v. Commissioner</em>,<a href="#_ftn3" name="_ftnref3">³</a> decided under California law, where an IRC Section 2036 transfer was imputed to the surviving spouse-primary beneficiary when, because the surviving spouse failed to survive a 15-day delayed payment clause, proceeds were paid to the contingent beneficiary. The opinion contained no suggestion of any evidence that the noninsured spouse had consented to the delayed payment clause.<br /> <br /> The IRS has ruled that where community property life insurance is payable to a named beneficiary other than the noninsured spouse, if deaths of the insured and the insured&rsquo;s spouse occur simultaneously when both possess the power to change the beneficiary in conjunction with the other, one-half of the proceeds is includable in each spouse&rsquo;s estate without regard to whether local law provides a presumption as to survivorship.<a href="#_ftn4" name="_ftnref4">⁴</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; <em>U.S. v. Gordon</em>, 406 F.2d 332 (5th Cir. 1969).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Whiteley v. U.S.</em>, 214 F. Supp. 489 (W.D. Wash. 1963).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; TC Memo 1976-230 (1976).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 79-303, 1979-2 CB 332.<br /> <br /> </div></div><br />