Sunday, January 01, 2017

Estate Tax Impact of Life Insurance Required by Divorce

TITLE

Estate Tax Impact of Life Insurance Required by Divorce

AUTHOR(S)

DANIELLE E. MILLER

PUBLICATION

Estate Planning

PUBLISHER

WG&L

ABSTRACT (Key Points & Discussions)

    • Analysis of estate tax inclusion for life insurance policies that a divorcing spouse is obligated to own or maintain, and for an estate tax deduction if the insurance is includible in the gross estate.
    • One exposure to estate tax inclusion is from the decedent possessing incidents of ownership in the policy per Code §2042(2). However, even if the deceased spouse is owner, lack of actual control over or economic benefits from the policy may result in no incidents of ownership.
    • Estate tax inclusion can also result under Code §2036 via retained economic rights by the decedent  - for example, when the policy is held in a trust and the decedent may benefit from it.
    • Another source of inclusion is a transfer of ownership of the policy within 3 years of death under Code §2035.
    • Deductibility can be available under Code §2053(a)(3) as a claim against the decedent's estate. However, when the obligation is to obtain the policy and name the other spouse as beneficiary (as contrasted with an obligation to pay a fixed amount at death to the surviving spouse), there is no claim remaining after death so this provision may not apply to allow a deduction.
    • Deductibility can also arise under Code §2053(a)(4) as a debt against property (the insurance proceeds).
    • Requirement that obligation be contracted in a bona fide manner and supported by adequate and full consideration can be an obstacle to deductibility. For example, relinquishment of marital rights in decedent's property is not adequate consideration under Code §2043(b)(1) - however, meeting the requirements of Code §2516 will allow for a finding of adequate and full consideration.

RESEARCH TAGS

Divorce; Estate tax inclusion; Estate tax deductibility for claims and debts against property

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