Trusts and Estates Law Life Insurance: Estate Planning

by Hon. C. Raymond Radigan

Following up on my last article dealing with life insurance, I now set forth additional matters that must be considered in overall estate planning when dealing with life insurance.

One is able to transfer group insurance often provided by an employer so as to avoid having insurance proceeds includable in the employee’s estate. Rev. Rule 68-334, 69-54, 72-307, Smead v. United States, 78 TC 43 Rev. Rule 84 130. Even though the employer generally pays the insurance carrier the premium directly, nonetheless, under the foregoing determinations, the employee can use his or her annual exclusion to offset any gift tax concerning the transfer of the policy and the payment of premiums. Accordingly, one can transfer a group policy to an individual and ultimately avoid the proceeds being included in his or her estate for estate tax purposes.

The Crummey Power

As far as transferring group policies to a trust, the Crummey power can be utilized under the trust in order to create a present interest so as to gain the annual exclusion. A Crummey power gives the beneficiary the right to withdraw assets placed in the trust which they generally do not do and this causes the assets to be treated as a present interest and not a future interest and would then qualify for the annual exclusion. This can be achieved even though, under ordinary circumstances, the employer pays the premium directly to the carrier and the funds to pay the premium does not flow through the trust. The Internal Revenue Service (IRS) allows the annual exclusion if the trust has a Crummey power (private letter ruling 80-06-109, 80-21-058, 80-51-128).

Transfer of ownership of an insurance policy can be made under the Uniform Transfer to Minors Act pursuant to Estates Powers and Trust Law (EPTL) 7-6.9.

When a beneficiary of a trust pays the premiums on the policy of an insured, that individual can be subjected to gift tax, which may not qualify for the annual exclusion. Berger v. Commission, 201 F2d 171 Rev. Rule 79-47.

Annual renewable term policies transferred after three years will not be subject to the gift in contemplation of death rule, even though they are annually renewed. Rev. Rule 82-13.

In Goodnow v. United States, 302 F2d 516, the wife paid premiums on insurance funded in a revocable trust where her husband was the insured. The benefits were payable to the revocable trust created by the husband in which the wife was the lifetime income beneficiary remain over to others. The trust was funded by the husband. He took out the policy and retained the incidents of ownership. When the husband died, the full value of the policy was included in his estate since he had incidents of ownership and the trust was revocable. When the wife subsequently died, the court held the proceeds were not to be included in her estate for estate tax purposes. Had the trust been irrevocable and she paid the premiums and had an income interest, the outcome could have been different.

As to corporate owned insurance, the IRS looks to who has control of the corporation which means having more than 50 percent voting stock in the entity. If the insured stockholder holds 50 percent or less, the proceeds of the policy will not be included in his estate, and the attribution rules do not apply, which means if members of his family or a trust he has a beneficial interest by owning shares of stock in the corporation, it will not be attributable to the decedent. Of course, the decedent’s estate will be enhanced by the fact that the corporation will receive insurance proceeds, which will increase the value of its stock.

If the decedent is the sole or controlling stockholder and, at his death, the entity is the beneficiary, his interest in the corporation will be enhanced by the full value of the policy and, therefore, his estate tax will be subjected to the value of the policy, as it enhances the value of the corporation. If the beneficiary of the corporate owned policy on the decedent’s life is payable to a surviving spouse of the controlling stockholder, the policy will be included in his estate for estate tax purposes. However, if a third party is the beneficiary, to fulfill a valid business purpose, then the incidents of the policy of ownership held the policy by the corporation will not be attributable to the insured. See In re Dinen v. Commissioner, 72 TC 198 (1979) aff’d 633 F2d 203 (2d Cir. 1980), In re: Levy v. Commissioner, 70 TC 873 (1978).

Split-Dollar Policies

As an enticement to obtain a key employee in a corporation, a corporation may advance funds to enable that employee to pay premiums on a life insurance policy for him. The corporation will usually be reimbursed its advancement of premiums at the employee’s death. There are two basic structures to such policies called “endorsements” and “collateral assignments.” With an endorsement arrangement, the employer owns the policy and pays the premiums, and an interest is created for the employee insured. With the collateral assignment arrangement, the employee or a third party such as an irrevocable insurance trust owns the policy and assigns an interest to the employer as collateral to secure the ultimate repayment of advances. An employee may wish to transfer his interest in the policy so that the policy will not be includable in his estate for estate tax purposes. This is possible as long as he does not control the corporation. If he controls the corporation, and the corporation has any incidents of ownership in the policy, then the proceeds will be includable in the insured’s estate at death.

Where an insured transfers a policy to his spouse with the children as beneficiaries, when he dies the insurance proceeds will not be included in his estate if he survives three years. However, once he dies, with the wife having incidents of ownership in the policy and the children receiving the benefits, the spouse will be treated as having given a gift of the face amount of the policy to the children at the insured’s death. Goodman v. Commissioner, 156 F2d 218 Rev. Rule 81-166.

Transfer to Spouse

If a husband and wife die in a common disaster and the wife owns a policy on the life of the husband, and where the order of death cannot be established, the wife, as the owner of the policy, will be treated as predeceasing the insured, her husband, and, therefore, the full face value of the policy will not be included in her estate. She will be treated as predeceasing her husband owning a policy on his life and the value will be determined by the interpolated terminable reserve value of the policy, which is substantially less than the full face value of the policy. The policy is treated as an unmatured policy for valuation purposes. Wien v. Commissioner, 441 F2d 32 5th Cir.

Gift Value Transferred Policy

With a single premium policy, the value for gift tax purposes on the transfer of the policy is the cost to the donor rather than the cash surrender value at the date of the gift. Although the cost of a policy is greater than the surrender value and even though a willing buyer would be willing to only pay the cash surrender value, the courts have held that the value of the policy for tax purposes is worth more than the surrender value since the policy is an investment which has better economic benefits than the cash surrender value. Guggenheim v. Rasquin, 312 US 254.

The court held in Ryerson v. Commissioner, 312 US 260, that the cost to replace a policy at the date of the gift should control the value of the gift.

In my next article I will discuss some of the estate planning tools that have been deprived from the practitioner either by statute or the courts after many years of utilization in overall estate planning.


C. Raymond Radigan is a former surrogate of Nassau County and of counsel to Ruskin Moscou Faltischek. He is also chairman of the advisory committee to the Legislature on estates, powers and trusts law and the Surrogate’s Court Procedure Act.

Reprinted with permission from the Thursday, July 19, 2006 issue of the 
New York Law Journal (c) 2006, ALM Properties, Inc