Under these circumstances,
the life insurance proceeds will be included in the purchaser’s gross
estate and taxed accordingly. If not consumed, those same proceeds will be
subject to estate tax again in the survivor’s (beneficiary’s) estate.
Of course, the best way to avoid estate taxes is to keep valuable
property out of the estate. The introduction of the unlimited marital
deduction has eliminated the tax savings available under prior law for
gifts of life insurance to one’s spouse. This is true because simply
naming one’s spouse as beneficiary results in 100 percent of the
proceeds qualifying for the marital deduction.
Thus, it would seem that current planning techniques suggest the use of an
irrevocable life insurance trust (discussed below) for the married couple. If
the insured is single, an outright gift of the life insurance policy to the
beneficiary continues to be an attractive estate planning tool.
An existing life insurance policy may be transferred to a beneficiary and
therefore not be includable in your estate if (1) no incidents of ownership in
the policy are retained, (2) the beneficiary of the policy is not your estate,
and (3) the transfer of the policy is not within three years of your death. The
gift tax on the lifetime transfer will be less significant than the cost of
retaining the policy in your estate. The annual gift tax exclusion (discussed
later) may be used to reduce the value of the gift. Your life insurance
consultant will be able to advise you of the value of your policy for gift tax
Irrevocable Life Insurance Trust
For a married couple, significant savings may be obtained by assigning the
life insurance on either spouse’s life or on the death of the survivor of
both spouses (as in a second-to-die life insurance policy) to an irrevocable
life insurance trust for the benefit of the surviving spouse and the
insured’s other heirs. Typically, the terms of such a trust are
- The surviving spouse receives income for life. Upon his
or her death, the trust terminates and distributes its assets to the
- The trustee has the power to invade principal for the
benefit of the surviving spouse.
These savings can be accomplished without any real economic detriment to the
surviving spouse, since he or she not only has the right to receive income from
the trust for life, but also has, at the trustee’s discretion, the ability to
invade principal if necessary.
This kind of transfer in trust raises problems with respect to the payment
of future premiums. These problems require careful analysis and planning to
avoid related income and gift tax implications.
Normally, the transfer of ownership of a group term life insurance policy
will not produce a significant gift tax liability, but any policy having a cash
surrender value may create gift tax problems. One may borrow the cash surrender
value before the transfer or simply pay the gift tax, if any.