Advanced Underwriting Consultants

Question of the Day – February 2

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: We are in the middle of doing a Section 1035 exchange of an ILIT-owned life insurance policy for a new one.  Would there be a three year estate tax look-back period for the new policy?

Answer: No.  The three year estate tax look-back only applies where the insured is the owner of an existing policy and makes a transfer.  Here’s what Revenue Code Section 2035 says about the three year look-back:

If …the decedent made a transfer (by trust or otherwise) of an interest in any 
property, or relinquished a power with respect to any property, during the 3-year 
period ending on the date of the decedent's death, and…the value of such property 
(or an interest therein) would have been included in the decedent's gross estate 
under section…2042 the value of the gross estate shall include the value of any 
property (or interest therein) which would have been so included.

Code Section 2042 is the part of the tax law dealing with the includibility of the death benefit of personally owned life insurance in the decedent’s taxable estate.

A transfer of a policy by someone other than the insured to an ILIT does not cause a three year problem.  Likewise, in this example, where there is no transfer at all—and a Section 1035 exchange is not a transfer—there’s no estate tax issue.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.