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Question: How is a life insurance policy valued for gift tax purposes?
Answer: 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 gift tax valuation of a life policy is sometimes given the short-hand description of interpolated terminal reserve plus unearned premium. It is difficult, if not impossible, for a non-actuary to calculate interpolated terminal reserve (ITR).
The regulations make clear that under the following circumstances different gift tax valuation methods are appropriate:
- When the transfer of the contract is close to the time it was purchased, the value is the contract’s purchase price.
2. 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.
3. Where a policy has accrued dividends or outstanding indebtedness, the ITR value should be adjusted for such dividends or indebtedness.
4. 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.
When a policy owner needs to get a gift tax value for a life policy, he or she should work with the life agent to get a calculation of ITR from the life company. After that, the client should work with his or her tax professional to decide which valuation method is most appropriate for the gift tax transfer of the policy.
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