Tax Consequences of Assigning Life Insurance-Time For Another Look

Abstract

Copyright © 1999 by Douglas A. Kahn and Lawrence W. Waggoner.The Taxpayer Relief Act of 1997 furnishes the courts and the Internal Revenue Service an opportunity to close certain loopholes in the federal tax consequences of assigning life insurance. About twenty years ago, we published an article arguing that the tax consequences of assigning life insurance affords taxpayers unwarranted opportunities for tax avoidance. Since then, developments in the case law and Internal Revenue Service rulings have broadened the loopholes. In this update of our article, we show how the new tax law supports our original position.The most litigated estate tax issue concerning life insurance is whether the proceeds are includible in the insured's gross estate. This question is usually governed by section 2042 of the Internal Revenue Code of 1986 (Code), the estate tax provision specifically dealing with life insurance. To be included under section 2042, the insured must "possess at his death any of the incidents of ownership [in the policy], exercisable either alone or in conjunction with any other person," or the proceeds must be "receivable by the [insured's] executor."