Advanced Underwriting Consultants

Question of the Day – May 24

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:  My client’s attorney asked me to get the ITR value for the client’s life policy for Form 712.  What’s that all about?

Answer:  Form 712 is life insurance information supplement to a federal estate tax return (Form 706) or federal gift tax return (Form 709).  The IRS requires the executor of a decedent who owned a life policy on another person’s life—or the donor of a life policy—to report the interpolated terminal reserve (ITR) value of that policy.

The ITR must be reported on Part II, Line 58 of Form 712.

Treasury Regulations Section 25.2512-6 explains specifically how life policies are to be valued for gift tax purposes:

(W)hen the gift is of a contract which has been in force for some time and on which further premium payments are to be made, the value may be approximated by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the period extending beyond that date. (Emphasis added.)

The regulations also provide that the value of a life policy owned by the decedent on a third party is calculated in a similar way.  Calculating a policy’s ITR requires an actuary, and so the life insurance company that issued the contract should be consulted for their procedures.

While ITR is the starting point for valuing a policy, the regulations make clear that under the following circumstances different transfer tax valuation methods are appropriate:

  1. When the transfer of the contract is close to the time it was purchased, the value is the contract’s purchase price.
  1. When the policy is paid-up, its value is the cost of a paid-up policy for someone the same age as the insured’s current age.
  1. Where a policy has accrued dividends or outstanding indebtedness, the ITR value should be adjusted for such dividends or indebtedness.
  1. If there is something unusual about the policy or the circumstances that would make a different valuation method appropriate, neither the ITR method nor any other method listed above may be used.

After getting an ITR value from the insurance company’s actuary, the client should work with his or her tax professional to decide which valuation method is most appropriate for the transfer tax value of the policy.

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