Exclusion from estate for life insurance proceeds.An irrevocable life insurance trust can be a useful way to keep insurance proceeds out of an individual's gross estate. It can also be used in conjunction with a business buy-sell agreement buy-sell agreement n. a contract among the owners of a business which provides terms for their purchase of a withdrawing partner's or stockholder's interest in the enterprise. to facilitate a sale of corporate stock to surviving shareholders. Letter Ruling 9622036 illustrates this technique. A, B and C were shareholders of corporation X; A and C each owned 43% of the common stock and B held the remaining 14%. The shareholders had entered into a stock restriction agreement that provided for the transfer of a shareholder's corporate stock in the event of death, disability, retirement or termination of employment "Fired" and "Firing" redirect here. For other uses, see Fired (disambiguation) and Firing (disambiguation). “Gross misconduct” redirects here. For the ice hockey term, see Penalty (ice hockey). . Upon: such an event, the shareholder (or his estate) was obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. to sell the shares, and the surviving shareholders were obligated to buy them, at a price stated in the agreement. Each shareholder had purchased life insurance on the lives of the other shareholders. The life insurance proceeds were to be used to fund the buy-out of a deceased shareholder's interest in X. The shareholders proposed to assign the policies to an irrevocable life insurance trust. The trustee (an unrelated party) would receive all policy rights in each of the policies. Such rights would include all of the right, title, interest, ownership, control, and incidents of ownership in any and all insurance policies, and would include any conversion privilege conversion privilege See exchange privilege. , waiver of premium Waiver of premium A provision in an insurance policy that allows payment of insurance premiums to be permanently or temporarily stopped in the event the policyholder becomes incapacitated. benefit, borrowing rights and assignment rights. In the event of a shareholder's death, the policy would mature and the proceeds would be payable to the trust. The trustee would distribute the proceeds to the surviving shareholders, who would be obligated to purchase the shares under the shareholder agreement. Under Sec. 2042(2), the value of a decedent's gross estate includes the proceeds of life insurance on the decedent's life to the extent the decedent possessed an incident of ownership. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. held that the proposed transfer of the policies to the life insurance trust divested the shareholders of all incidents of ownership. Therefore, the proceeds were not includible in the decedent's gross estate. From Boyd D. Hudson, J.D., Martin & Hudson, Pasadena, Cal. (Not a DFK DFK Direct Free Kick (Soccer) DFK Deep French Kiss DFK Daifuku DFK Dark Forces Knights Affiliate) |
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