PLR 200947006 (Nov. 20, 2009) & PLR 200948001 (Nov. 27, 2009)

In Private Letter Rulings 200947006 & 200948001, the IRS considered whether a series of transactions among a partnership, corporations and trusts which altered the ownership and beneficiary designations of two life insurance policies required inclusion of the policies in the insured’s estate.

At the outset, the partnership’s sole asset was life insurance on the taxpayer’s life. The general partner of the partnership was a corporation that was wholly owned by the insured. The limited partners of the partnership included the insured and a second corporation. The second corporation was owned by a trust formed by the insured’s parents. The trustees were the insured and his sister. The sole current beneficiary was the insured. The insured did not have any power of appointment. Upon the insured’s death, the trust assets were to pass in trust for his descendants.

The insured, the partnership, the corporations and the trusts proposed entering into a multi-step transaction, which would result in the partnership still owning the life insurance; however, the partnership would be owned by the trust created by the insured’s parents, plus another trust formed by the insured for the benefit of his wife and children. The insured would remain a co-trustee of the trust created by his parents, but he would release to his co-trustee/sister all powers to make decisions with respect to the insurance. The first trust would contribute cash to the partnership in an amount estimated to cover the premiums on the policies for the rest of the insured’s life.

The IRS held that policies were not includible in the insured’s estate because he would hold no incidents of ownership either before or after the transactions. The IRS relied on Estate of Knipp v. Commissioner, 25 T.C. 153 (1955), in which a decedent was a 50% general partner in a partnership that owned and was the beneficiary of ten life insurance policies on the decedent’s life. In Knipp, the Tax Court found that the partnership bought the policies in the ordinary course of business and that the decedent, in his individual capacity, had no incidents of ownership. Therefore, the policies were not includible in his estate. Prior to Private Letter Rulings 200947006 & 200948001, some practitioners believed that a partnership might not be able to benefit from Knipp unless there was a business purpose for holding the insurance. However, the partnerships in the Private Letter Rulings had no assets apart from the insurance, which suggests that a business purpose for ownership of the policies is not necessary.