Transfer for Value
When beneficiaries receive the death proceeds of a life insurance policy, such proceeds are generally exempt from federal income tax, with a few exceptions. One important exception occurs when the policy has been transferred for a valuable consideration during the insured's life. No transfer for value occurs when a policyowner makes a gift by transferring a policy without receiving valuable consideration. The death proceeds still qualify for a full income tax exemption. When a policy has been sold or otherwise transferred for a valuable consideration, the income tax exemption is limited to the purchase price plus any subsequent premiums paid by the transferee. The portion of the death proceeds includible in the beneficiary's gross income is equal to the gain in the policy-the death proceeds payable minus the purchase price and subsequent premiums paid by the transferee. Certain categories of transferees can purchase a life insurance policy without triggering a transfer for value. These so-called "exempt transferees" are: - The insured individual
- A partner of the insured
- A partnership in which the insured is a partner
- A corporation in which the insured is an officer or a shareholder
- A person who receives the policy by any form of transfer in which the transferee's tax basis in the policy is determined by reference to the transferor's basis
If a non-exempt transferee purchases an existing life insurance policy, the death proceeds are partially subject to federal income tax. Some common non-exempt transferees include: - A co-shareholder of the insured
- A child or sibling of the insured* (unless the transfer is by gift)
- The insured's living trust**
- The insured's key employee
| 
