U.S. Tax Court: Cash-surrender value of life insurance policies not includible in estate

Sections 2036(a)(2) and 2038 do not require inclusion of certain life insurance policies’ cash-surrender values in the decedent’s estate

Cash-surrender value of life insurance policies not includible in estate

The U.S. Tax Court today issued an opinion concluding that sections 2036(a)(2) and 2038 do not require inclusion of certain life insurance policies’ cash-surrender values in the decedent’s estate because the decedent did not have any right, whether by herself or in conjunction with anyone else, to terminate the policies. 

The case is: Estate of Levine v. Commissioner, 158 T.C. No. 2 (February 28, 2022). Read the Tax Court’s opinion [PDF 315 KB] (41 pages)

Summary

The Tax Court briefly summarized the facts of the case as follows:

  • The decedent entered into split-dollar life insurance arrangements that required her revocable trust to pay premiums for life insurance policies taken out on the lives of her daughter and son-in-law. When the arrangements terminated, the decedent’s revocable trust had the right to be paid the greater of the premiums paid or the cash surrender value of the policies.
  • An irrevocable life insurance trust was the owner of these policies. The decedent’s children and grandchildren were the beneficiaries of the irrevocable trust, and a family friend who was substantially involved in the family’s businesses was the sole member of the investment committee that managed the irrevocable trust. The family friend and two of the decedent’s children also acted as the decedent’s attorneys in fact and as the revocable trust’s successor cotrustees. 
  • As the sole member of the irrevocable trust’s investment committee, only the family friend had the right to prematurely terminate the life insurance policies.  The arrangements gave the decedent and the other two attorneys-in-fact no rights to terminate the policies or the arrangement itself.

The Tax Court briefly summarized its holdings as follows:

  • As of the date of her death, the decedent possessed a receivable created by the arrangements, which was only the right to receive the greater of premiums paid or the cash surrender values of the policies when they are terminated.
  • Sections 2036(a)(2) and 2038 do not require inclusion of the policies’ cash-surrender values because the decedent did not have any right, whether by herself or in conjunction with anyone else, to terminate the policies. Only the irrevocable trust had that right.
  • Section 2703 applies only to property interests that the decedent held at the time of her death. There were no restrictions on the split-dollar receivable arrangement, so section 2703 is inapplicable.

 

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