Taxation of Estates and Gifts

Life Insurance

26 U.S.C. § 2042(1) says if you are the insured and your estate receives the benefit of that, it is includable in the gross estate.

26 U.S.C. § 2042(2) says if there is a life insurance policy on your life but the beneficiary is someone else and you have the power to exercise power over who gets the benefits of it, the amount that you can control is includable in your estate.

If bank takes out insurance on the decedent for his mortgage, that policy is includable.

Life insurance whose ownership is transferred within three years of death is includable under 26 U.S.C. § 2035.

  • However, if it can be shown that someone other than the decedent paid premiums, that portion of the life insurance is not includable. Liebmann v. Hassett.
    • E.g., with a $100,000 policy that D pays for for nine years, then his sister pays for for one year, then D dies, $90,000 is includable.
    • This is very similar to what happens with joint interests in 26 U.S.C. § 2040.

The actual current value of a life insurance policy is called "the interpolated terminal reserve value." (We won't have to know how to calculate it (The life insurance company would do it.), but know the term.)

There are no inclusions with irrevocable life insurance trusts (ILITs), where cash is given to the trust sufficient to generate interest equal to the premiums on the policy, which will pay to the desired persons. These are very common and optimal.