The proceeds of life insurance may be included in the gross estate of the insured for estate tax purposes under IRC Section 2042 if the insured’s estate is the named beneficiary of the policy or the insured has any incidents of ownership with respect to the policy. In Rev. Rul. 2011-28 (December 1, 2011), a taxpayer set up a trust and the trust became the owner of a policy of insurance on the life of the taxpayer. The trust provided that the taxpayer could cause the trust to transfer the policy to the taxpayer, provided that the taxpayer transferred to the trust other assets of equivalent value. The IRS ruled that this power did not constitute a prohibited incident of ownership on the part of taxpayer.
The IRS has previously ruled that the ability to substitute trust assets for other assets of equivalent value does not cause the trust assets to be included in the taxpayer’s gross estate under IRC Section 2036, which includes assets transferred during life by a decedent over which he retained certain prohibited benefits or controls. The IRS has now ruled that this power of substitution also does not run afoul of the specific Code section that determines when the proceeds of a life insurance policy are included in a decedent’s gross estate for estate tax purposes.