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1
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Overview
• IRC Section 2033 inclusion
• The value of life insurance owned by a decedent
  on the life of another will be includable in the
  decedents estate if the decedent dies first
• IRC Section 2035 inclusion
• Life insurance proceeds will be includable in the
  insureds estate if the insured held any
  incidents of ownership within three years of
  death
• IRC Sections 2036, 2037, 2038 inclusion
• Policy proceeds will be includable in the
  insureds estate if the insured transferred the
  policy to another party but retained a lifetime
  right to
• Enjoy the legal rights to the policy
• Have the policy revert back to him or his estate
  under certain conditions
• Alter, amend, revoke, or terminate the policy

2
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Overview (contd)
• IRC Section 2042 inclusion
• If (a) policy proceeds were paid to (or for the
  benefit of) the insureds estate or (b) the
  insured owned at the date of his death an
  incident of ownership in the policy
• Proceeds will be includable in the insureds
  gross estate
• IRC Section 2039 inclusion
• When a life insurance policy is used as part of
  the financing of an employee benefit, proceeds
  may be includable as an annuity
• IRC Section 2041 inclusion
• If the insured elected a settlement option for a
  beneficiary and also gave that beneficiary a
  general power of appointment over the policy
  proceeds, the proceeds will be includable in the
  beneficiarys gross estate

3
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Overview (contd)
• IRC Section 2044 inclusion
• Life insurance proceeds may be includable in the
  estate of a beneficiary who was the insureds
  spouse and who received the proceeds as a
  qualifying income interest for life under QTIP
  rules
• Life insurance defined
• Contract under which the insurer agrees to pay a
  specified death benefit at the death of the
  insured
• There must be risk shifting and risk sharing
• The element of risk must be present at the time
  of the insureds death for the proceeds of the
  contract to be includable as life insurance in
  the insured's estate
• Death benefit must be (a) payable unconditionally
  and (b) have no effect on other legal liabilities
  or rights in connection with the insureds death

4
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance owned on the life of another (IRC
  Section 2033)
• Typical situations
• Business partners
• Son buying policy on parent
• Estate tax value
• Replacement cost
• In most case, cash surrender value of the policy
  (interpolated terminal reserve) plus the unearned
  premium
• Common disaster
• Uniform Simultaneous Death Act
• Insured presumed to survive the beneficiary,
  interpolated terminal reserve includable in
  policyowners estate
• If presumed order of death reversed, then the
  death benefit is includable in policyowners
  estate

5
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance owned on the life of another (IRC
  Section 2033) (contd)
• Excludable growth
• No inclusion required for the increase in the
  value of the policy from the date of death to the
  valuation date
• Alternate valuation trap
• If the policyowner-decedents executor uses the
  alternate valuation date to value assets in the
  estate and the insured dies during that 6 month
  period, the increase in the value caused by the
  insureds death will be includable
• Beneficiary who predeceases insured
• Typically, a primary beneficiarys right to
  receive policy proceeds expires with his death
• If the primary beneficiary dies before the
  insured and no rights pass to the beneficiarys
  heirs, nothing will be in the beneficiarys estate

6
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035)
• Transfers in certain situations will be brought
  back into the gross estate for estate tax
  purposes if the decedent held at death an
  interest which would have been included in one or
  more of the following IRC sections
• Section 2036 transfers with retained life state
• Section 2037 transfers taking effect at death
• Section 2038 revocable transfers
• Section 2042 proceeds of life insurance
• Inclusion is also mandated if the property would
  have been included under one of those four IRC
  sections and the insured gave up fatal rights
  within three years of death

7
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035) (contd)
• Adequate consideration rule
• Exclusion for a sale of property made for
  adequate and full consideration
• Premiums not brought back
• Does mere payment of premiums within three years
  of death cause the proceeds to be brought back
  into the estate?
• It does not!
• Gifts of policies within three years of death
• A gift, or release, or transfer of any incidents
  of ownership in a life insurance policy by the
  insured within three years of the insureds death
  will result in inclusion under IRC Section 2035,
  regardless of the insureds motive for the
  transfer
• Only applies to transfers of policies by the
  insured

8
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035) (contd)
• Gifts of policies beyond the three year period
• No inclusion
• Payment of premiums by a third party owner
• If the donee pays premiums after the policy is
  received, even if the transfer occurred with
  three years of the insureds death, only a
  portion of the proceeds would be includable in
  the insureds estate
• Inclusion ratio total premiums paid by donor
  / total premiums paid
• Example
• 1,000,000 policy with 25,000 semi-annual
  premiums. Insured paid 50,000 and then
  transferred policy to son
• Son paid 100,000 (four payments of 25,000) up
  to the time of insureds death
• Only 1/3 of the 1,000,000 would be includable.
  (50,000 / 150,000)

9
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035) (contd)
• The beamed transfer theory
• IRS argued that if the insured significantly
  participated in the procurement of a policy on
  his own life, that action, together with the
  transfer of amounts to pay premiums on the
  policy, was equivalent to purchase and transfer
  of the policy
• After a number of losses in court, the IRS has
  announced it will no longer pursue this theory
• Avoidance of issue
• Insured never owns the policy
• Adult beneficiary/trustee takes all actions to
  purchase policy and place it in effect
• Trustee is authorized, but not required, to
  purchase the insurance
• Trust specifically prohibits insured from
  obtaining any rights in the policy
• Trust permits, but does not require, trustee to
  pay premiums

10
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035) (contd)
• Avoidance of issue (contd)
• Insured gives trustee enough money to pay
  premiums for more than one year
• Cash gift is given with no strings attached
• Gift is made well in advance of when premium is
  due
• Trustee does not act mechanically as insureds
  agent
• Trust document contains as few references as
  possible to life insurance and is not titled
  Irrevocable Life Insurance Trust
• Actual policyowner could, for at least the first
  three years, pay premiums from a source other
  than gifts from the insured and if necessary
  borrow from another relative or a bank

11
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035) (contd)
• Exchange of contract within three years of death
• Not included in insureds estate
• Group Term Life
• Transfers of group term life insurance to another
  within three years of the insureds death will
  result in inclusion under IRC Section 2035
• Assignment of all of insureds interest in group
  term life insurance more than three years prior
  to death generally avoids inclusion (caution, if
  change in insurer)
• Corporate owned life insurance
• IRC Section 2042 treats a shareholder who owns
  more than 50 of a corporations stock as if he
  owned the life insurance actually owned by the
  corporation
• But only to the extent the policy is payable to
  someone other than the corporation or its
  creditors

12
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Incidents of ownership within three years of
  death (IRC Section 2035) (contd)
• Corporate owned life insurance (contd)
• If the corporation transfers the policy within
  three years of the insureds death, for purposes
  of IRC Section 2035, the insured would have been
  deemed to have made a fatal transfer and
  inclusion of the proceeds would result
• Community property issues
• Add additional layers of complexity
• Insurance purchased with community property funds
• Techniques for success
• Make sure insured never has any incidents of
  ownership
• With trusts trustee should be independent and
  not acting as an agent for the insured

13
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Proceeds payable to/for benefit of insureds
  estate (IRC Section 2042(1))
• Insurance payable directly to estate
• Entire value must be included
• Insurance payable indirectly to estate
• If proceeds are for the benefit of the estate,
  they are includable
• Proceeds considered payable for benefit of estate
  if used to pay
• Federal estate tax
• State death taxes
• Income or gift or any other taxes
• Debts or other charges against the estate

14
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Proceeds payable to/for benefit of insureds
  estate (IRC Section 2042(1)) (contd)
• Insurance payable to beneficiary barred from
  collecting
• Where state law diverts the proceeds to heirs of
  the insureds estate (e.g., beneficiary murdered
  insured), the proceeds are treated for federal
  estate tax purposes as if they had passed into
  the insureds estate first and then were paid out
  to the insureds heirs
• Insurance payable to executor or testamentary
  trustee payable to others under governing
  instruments
• Implications of state law must be examined
• Number of cases that hold that insurance should
  be considered payable to the ultimate beneficiary
  rather than to the estate, even though the
  instrument appears to make the proceeds payable
  to the estate or its executor
• Example Where state law allows insurance on a
  parents life to pass free from claims against
  the estate, even if payable to the insureds
  estate

15
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2))
• General rule
• Mere possession of incidents of ownership will
  cause inclusion
• Amount includable
• The entire amount
• Incidents of ownership defined
• The right to
• Cancel the policy
• Assign the policy
• Surrender the policy
• Obtain a policy loan
• Change the beneficiary
• Pledge the policy for a loan
• Change the contingent beneficiaries

16
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Incidents of ownership defined (contd)
• The right to (contd)
• Change the beneficiaries share of proceeds
• Require consent before change of beneficiaries
• Require consent before assignment of policy
• Litigated issues with regard to incidents of
  ownership
• Mere right to alter time and manner of payment of
  proceeds
• Require consent to designation of beneficiary
  who does not have insurable interest
• Right to receive dividends on a mutual policy
• Right to change beneficiary of a policy held in
  trust
• Right to change the term of a trust that holds a
  policy
• Right to exercise ownership rights only in
  conjunction with another
• Naming by third party owner of person to be named
  in insureds will as beneficiary

17
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Litigated issues with regard to incidents of
  ownership (contd)
• The inability of the insured to exercise a
  retained power
• Absence of intention of insured to retain
  incident of ownership
• Instruction to the insurance agent and/or insurer
  to divest the insured of any incident of
  ownership
• Right to designate/change beneficiary on policy
  on the insureds life owned by insureds
  employer, even though employer retains right to
  amend or cancel the policies without the
  insureds consent
• Right to terminate spouses interest in a policy
  through divorce
• Right to obtain cash values of policy irrevocably
  assigned for the benefit of the insureds
  children to a trust
• Right to cancel insurance payable to a trust
  providing income for life for the insured
• Right to cancel a no-fault auto insurance policy
  that provided survivor loss benefits
• Right to purchase policy from its owner

18
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Litigated issues with regard to incidents of
  ownership (contd)
• Right to convert policy from term to whole life
  or from whole life to limited pay
• Right to substitute policies of equal value for
  those held by a trust
• Right of one partner under a cross purchase
  buy-sell to veto another partners right to
  borrow, surrender, or change beneficiaries
• Insureds right to alter, amend, or revoke a
  trust that is named as beneficiary of a policy on
  the insured
• The right to select settlement options
• Loans made by the insured to an ILIT to fund
  premiums
• The continuing power to determine the
  compensation of an ILIT trustee
• Insureds right to remove a trustee for cause

19
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Attribution of ownership
• To the extent that a policy is payable to a party
  other than the entity-owner, the insured may be
  deemed to hold an incident of ownership in the
  policy
• Community property issues
• When life insurance is purchased by community
  property domiciliaries, federal law usually
  recognizes it as being owned one-half by the
  husband and one-half by the wife
• State community property laws determine the
  extent to which the insured had incidents of
  ownership in a policy
• Inception of title (Texas, Louisiana, New Mexico,
  and Arizona)
• Insurance proceeds on a policy purchased prior to
  the couples marriage or move to a community
  property state remains as it was at inception,
  separate property

20
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Community property issues (contd)
• Premium tracing (California and Washington)
• Each spouse deemed to own his share of the
  property proportionate to his share of the
  premium contribution
• More than 5 test
• Conditional transfer, a gift of a policy coupled
  with a but if . . .back to me string
• Such a reversionary interest would be considered
  an incident of ownership, if the actuarial value
  exceed 5 of the value of the policy
• Measured immediately prior to the insureds death

21
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• More than 5 test (contd)
• Reversionary interest and third party owner
• Third party owner of a policy on the insureds
  life dies before the insured and the policy
  passes back to the insured
• Example
• W purchases policy on H
• W is killed in an auto accident and H dies one
  hour later
• As beneficiary of Ws will, H becomes (if only
  for one hour) the owner of the insurance proceeds
  that are actually paid to the contingent
  beneficiaries
• Does H have incidents of ownership?
• Careful examination of state law will determine
  answer

22
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Insured also trustee
• IRS will treat decedent as having held an
  incident of ownership in a policy on his own life
  held in a trust if he was trustee and
• Decent (acting alone or in conjunction with
  others) had power as trustee to change the time
  or manner of enjoyment
• Decedent transferred a policy to the trust or
  paid premiums
• Decedent could have exercised his powers as
  trustee for his own benefit
• To avoid insured as trustee problems, planners
  should consider
• Specifically forbid an insured serving as trustee
  from taking any action with respect to a policy
  on his life held by a trust over which the
  insured is trustee or co- trustee

23
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• To avoid insured as trustee problems, planners
  should consider (contd)
• Be sure the insured has no beneficial interest in
  the trust
• Specify that the insured, as trustee, cannot use
  trust income or assets to satisfy his legal
  obligation to support his children
• Place assets in the trust to generate sufficient
  income to pay premiums
• Follow the terms of the trust closely and avoid
  conflict fact patterns
• Insured as fiduciary other than trustee
• When insured becomes executor or administrator of
  an estate or the custodian of a minor or
  otherwise legally incompetent persons assets,
  there is a strong possibility that an incident of
  ownership problem may arise if the estate or
  custodial account holds a policy on the
  insureds life

24
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Split dollar
• If the insured is given the power to name and
  change the beneficiary of the portion of the
  proceeds not going to the corporation
• All the proceeds would be includable in the
  insureds gross estate
• Estate tax deduction for claims against the
  estate for proceeds paid to the corporation in
  return for paying a portion of premiums may be
  available when
• Insured was not a controlling shareholder
• There was a bona fide written agreement as to the
  reimbursement
• The agreement was entered into initially for full
  and adequate consideration as part of a business
  transaction

25
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Insurance receivable by beneficiaries other than
  insureds estate (IRC Section 2042(2)) (contd)
• Split dollar (contd)
• For controlling shareholders
• Proceeds includable in estate to extent they are
  payable to or for the benefit of a party other
  than the corporation
• Insulating incidents of ownership
• Convincing corporation to forego customary
  protection or right to borrow against the cash
  value or veto a loan against or surrender of the
  policy
• have the policy owned by a third party such as a
  trust

26
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Inclusion of life insurance in retirement plans
  (IRC Section 2039)
• Background
• Decedents executor must include in the gross
  estate the value of any payment receivable by
  any beneficiary by reason of surviving the
  decedent under any form of contract or agreement
  . . .(other than as life insurance under policies
  under the life of the decedent)
• Proceeds of a policy on a plan participants life
  are not generally subject to IRC Section 2039,
  but other IRC sections could apply
• The subtrust concept
• Avoiding federal estate taxation on life
  insurance proceeds paid as part of a distribution
  from a qualified retirement plan through a
  subtrust concept
• Insured employee makes an irrevocable beneficiary
  designation divesting him of right to change
  beneficiary of the plan proceeds
• Qualified plan amended to provide that policy
  will not be distributed to insured at retirement

27
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Inclusion of life insurance in retirement plans
  (IRC Section 2039) (contd)
• The subtrust concept (contd)
• Avoiding federal estate taxation on life
  insurance proceeds paid as part of a distribution
  from a qualified retirement plan through a
  subtrust concept (contd)
• Plan amended to give insured right to purchase
  policy for its full value at retirement
• Policies on life of insured-trustee are placed
  into a subtrust
• Insured given no control over the subtrust and
  cannot remove its independent trustee
• Issues and considerations
• Divesting incidents of ownership is a gift
• Future employer premiums could be considered a
  gift
• Such gifts would not qualify for the annual gift
  tax exclusion

28
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Inclusion of life insurance in retirement plans
  (IRC Section 2039) (contd)
• The subtrust concept (contd)
• Issues and considerations (contd)
• Divesting incidents of ownership is a gift
  (contd)
• Transfers would not qualify for the GSTT annual
  exclusion
• If plan participant dies within three years of
  the gift, the proceeds could be brought back into
  the gross estate of the insured under IRC Section
  2035
• Alternatives to the Subtrust concept
• Let the policy in the qualified plan lapse and
  purchase another one outside the plan
• Have the insured purchase the policy from the
  qualified plan

29
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
• General Rule
• Unlimited deduction allowed for property in the
  decedents estate that passes to the surviving
  spouse in a qualifying manner
• Surviving spouse must be a U.S. citizen or
  property must pass to a qualified domestic trust
  (QDOT) for the benefit of a surviving spouse
• No deduction allowed for certain terminable
  interests
• Interests which terminate or fail to vest upon
  the lapse of time or upon the occurrence or
  nonoccurrence of a specified event or contingency
• A spouses interest in a life insurance policy is
  terminable if
• There is any possibility that the spouses
  interest will terminate upon the occurrence or
  nonoccurrence of a specified event or contingency
• Some other person will receive the property as a
  result of the termination
• That other person will receive the property
  interests without paying consideration

30
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• General Rule (contd)
• Proceeds will qualify for the marital deduction
  if they are paid in the form of
• Lump sum
• Life annuity ending with spouses death
• Life annuity with principal remaining paid to
  spouses estate
• Payment to spouse (interest only or installments)
  and principal remaining paid to specified
  beneficiary coupled with surviving spouse having
  a general power of appointment over principal
• Payment to spouse of interest only, with
  remaining principal qualifying under QTIP rules
• Outright payment under insured's will
• Outright payment under state intestacy laws
• Payment of proceeds to trust which itself
  qualifies for marital deduction

31
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• Lump sum to spouse
• Life insurance will qualify under the federal
  estate tax marital deduction if payable as a lump
  sum to the decedent-insureds surviving spouse
• Income to spouse, balance to spouses estate
• A marital deduction will be allowed if the
  insured or surviving spouse selects a settlement
  option with the insurer giving the surviving
  spouse income from the proceeds for the spouses
  life with the balance of the proceeds going to
  the spouses estate
• Income to spouse, power of appointment
• Interest can be payable to the spouse and then
  some other beneficiary and still qualify
• If surviving spouse is given a general power of
  appointment over the proceeds and certain other
  requirement are met

32
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• Income to spouse, power of appointment (contd)
• Five conditions that must be met
• All income to spouse rule
• No one but the spouse will receive income or
  installments as long as the spouse lives
• Annually or more frequently rule
• Installments or interest must be payable annually
  or more frequently
• Power to appoint rule
• Surviving spouse must have general power to
  appoint all or specific portion of the amounts
  held by the insurer to herself, her estate, her
  creditors, or the creditors of her estate

33
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• Income to spouse, power of appointment (contd)
• Five conditions that must be met (contd)
• Alone and in all events rule
• Power to appoint must be exercisable by the
  surviving spouse without the need to consult or
  obtain anyone elses consent
• No power except to provide for spouse rule
• Amounts payable cannot be subject to a power of
  appointment in anyone else's hands other than the
  surviving spouse
• Except for a power in the hands of another to
  appoint some or all of the insurance proceeds to
  the surviving spouse

34
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• QTIP rules
• Income only payments to spouse with payments to
  a beneficiary following the termination of
  spouses interest can qualify for the marital
  deduction
• Even if surviving spouse is given no general
  power of appointment
• The rules
• Proceeds must pass from the decedent
• Surviving spouse must be given a qualifying
  income interest for life
• Original decedents executor must make an
  irrevocable election on the federal estate tax
  return to have the marital deduction apply

35
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• Payment under insureds will
• Life insurance proceeds can qualify for the
  marital deduction if assets in the estate pass
  outright by will (or by intestate inheritance) to
  the surviving (U.S. citizen) spouse
• Payment to estate trust or marital deduction
  trust
• Payments of life insurance to a trust which
  otherwise qualifies for the marital deduction
  will qualify the proceeds for the marital
  deduction
• Time delay clause
• Provision inserted into the insurer beneficiary
  form that payment will be made to surviving
  spouse , but only if the spouse is living at the
  end of a given period of time (typically 30 or 60
  days after the death of the insured)
• Designed to assure that proceeds do not fall into
  the hands of the surviving spouses relatives or
  to avoid needless probate

36
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• Time delay clause (contd)
• Issue the marital deduction will be denied if
  the surviving spouse dies before the end of the
  specified period
• Statutory provisions that enable a marital
  deduction even if a time delay clause is used
• The delay cannot exceed 6 months
• The spouse must survive whatever period is
  specified
• Common disaster clause
• Provides a presumption as to the order of death
• If both the insured and the beneficiary die in
  the same accident, the insured is presumed to
  have survived the beneficiary

37
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Estate tax marital deduction (IRC Section 2056)
  (contd)
• Common disaster clause (contd)
• No matter how long the beneficiary survived the
  insured, if the beneficiary subsequently dies as
  a result of the accident which killed the
  insured, the proceeds will pass to the contingent
  beneficiary
• The marital deduction will be lost
• Uniform simultaneous death act (USDA)
• If the insured and beneficiary die at so nearly
  the same time that the order of their deaths
  cannot be ascertained, there is a legal
  presumption that the beneficiary died first
• Can reverse presumption
• Estate tax charitable deduction (IRC Section
  2055)
• An unlimited charitable deduction is allowed for
  the net amount of life insurance proceeds
  included in the insureds estate if they are then
  paid to a qualified charity

38
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Apportionment rules who pays the estate tax on
  insurance proceeds?
• General rule
• Any person who receives includable property is
  personally liable for a deficiency in the estate
  tax
• The IRS can follow any person who received life
  insurance proceeds and collect its tax from other
  property even of the proceeds themselves have
  been spent
• Executors right to recover
• The IRS specifically authorizes the executor to
  recover from the named beneficiaries a
  proportionate share of the taxes
• Apportionment formula
• proceeds included in estate and received by
  beneficiary
• taxable estate

39
Estate Taxation of Life Insurance
Appendix A Tools Techniques of Life Insurance
Planning

• Apportionment rules who pays the estate tax on
  insurance proceeds? (contd)
• Marital share exemption
• Executor can require reimbursements by the
  beneficiaries only for the tax attributable to
  the excess of proceeds over the aggregate amount
  of marital deductions
• Apportionment provisions by client
• Clients can engineer a different result through a
  combination of state law and careful will
  planning
• Use of disclaimers
• Disclaimer an unqualified refusal to accept
  property
• Disclaim right to have another pay estate taxes
• No exception for charity
• Can provide otherwise through apportionment
  provisions