Advanced Underwriting Consultants

Question of the Day – October 3

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 owns a term insurance policy on his life.  He intends to convert the coverage.  If he creates an irrevocable life insurance trust (ILIT) and has the new permanent policy owned by the trust, will he avoid the three year estate inclusion rule?

Answer:  No.

Section 2042 of the Revenue Code includes in the taxable estate of an insured all life insurance death benefits payable under personally owned policies.  Section 2036 of the Revenue Code says that the death benefit of life insurance transferred by the insured is included in the insured’s taxable estate:

If—

(1) 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

(2) the value of such property (or an interest therein) would have been included in the decedent’s gross estate under section …2042

If the insured owned the right to convert a term insurance policy to permanent, and that power was transferred to the trustee of an ILIT, it seems clear that the transfer is subject to the three year inclusion rule of Section 2036.

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