Advanced Underwriting Consultants

Ask the Experts – May 21, 2015

Question:  If my client makes a transfer of his life insurance policy to his daughter, does that violate the transfer for value rule?

Answer:  Probably not, so long as the transfer is made by gift.

Internal Revenue Code Section 101(a) says that life insurance death proceeds are usually income tax free.  Subsection (2) of that Code Section says that there are certain circumstances under which it is possible for the death benefit to become income taxable.  The circumstances arise when a policy is transferred for valuable consideration to anyone except:

  • The insured
  • A partner of the insured
  • A partnership that includes the insured as a partner
  • A corporation of which the insured is an officer or shareholder.

In this case, the transfer is from the insured to his daughter.  Since the daughter is not an exempt transferee according to the preceding list, we should rightly be worried about the transfer for value rule.

If the client in this case receives anything of value in return from his daughter for making the policy transfer to her, it will be a transfer for value—and the death proceeds of the life insurance policy paid to her will be subject to income taxes.  On the other hand, if the client makes a gift of the policy to the daughter, the transfer is not “for value” and thus the death benefit will still be income tax free.