Trusts & Estates
To avoid estate taxation of the proceeds of a life insurance policy in the estate of an insured, estate planning professionals should make sure that the policy is owned by someone apart from the insured from the original issuance of the contract. Although an insured-owned policy may be gifted to avoid ownership at death, the proceeds will be included in the insured's estate if he or she dies within three years of the gift. Selling an insured-owned policy to a grantor trust could avoid the Internal Revenue Code Section 2035 transfer-within-three-years-of-death rule and other income tax concerns that can stem from the sale of a policy while the insured is alive. A similar strategy could be employed where the policy is owned by the insured's spouse where the spouse wants to be able to enjoy the benefits of the policy proceeds.
Mitchell M. Gans and Jonathan G. Blattmachr,
Life Insurance and Some Common 2035/2036 Problems: A Suggested Remedy, 139 T. & E. 58
Available at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship/773