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Government life insurance.

644. Are proceeds of life insurance issued under U.S. Government programs includable in insured's estate?

Yes, despite a federal law which provides that no tax can be levied on government life insurance. The estate tax is not a tax on property, but a tax on the right to transfer property at death. Hence, the exemption from taxes does not apply to the estate tax. Proceeds of a policy owned by the insured at the time of his death are includable in his estate (government life insurance is nonassignable). (1)

The U.S. Supreme Court has held that community property laws cannot interfere with the right of an insured to name his own beneficiary of his National Service Life Insurance. (2) Consequently, it has been held that even though an insured and his spouse are residents of a community property state and all premiums have been paid with community funds, the entire proceeds of government life insurance issued to servicemen and veterans are includable in insured's gross estate for federal estate tax purposes as if they were his separate property. (3) The Supreme Court of California has held that the Wissner decision is not authority with respect to Federal Employees Group Life Insurance, that community property rights can be asserted in the proceeds of such insurance notwithstanding the insured's beneficiary designation. (4) If the Carlson decision is followed in the federal courts, then the proceeds of FEGLI (and probably Servicemen's Group Life Insurance as well) are includable in the insured's estate on the same basis as the proceeds of regular group life insurance. (See Q 619 to Q 620.) In the case of FEGLI, the master policy used to specifically prohibit assignment, but assignment is now permissible (generally, effective October 3, 1994).

Life insurance proceeds were includable in a federal judge's estate where the judge attempted to assign a FEGLI policy which was not assignable at the time of the attempted assignment. The judge also attempted to assign the policy after a limited 1984 change in the FEGLI law permitted some assignments. However, such attempts were made within three years of the judge's death and were caught by the gifts within three years of death rule (see Q 642). The assignments made after the 1984 change in FEGLI law were not permitted to relate back to the pre-1984 attempted assignment because assignments were not permissible before 1984. (5)

The IRS has held that in community property states which determine whether life insurance is separate or community property according to the "inception of title" doctrine (see Q 620), the proceeds of NSLI purchased initially as the insured's separate property are separate property even though later premiums were paid with community funds. (6)

(1.) IRC Sec. 2042; U.S. Trust Co. of N.Y. v. Helvering, 307 U.S. 57 (1939); Rev. Rul. 55-622, 1955-2 CB 385.

(2.) Wissner v. Wissner, 338 U.S. 655 (1949).

(3.) Est. of Hutson v. Comm., 49 TC 495 (1968) (NSLI); Hunt's Estate v. U.S., 4 AFTR 2d 6051 (E.D. Tex. 1959) (USGLI); Rev. Rul. 56-603, 1956-2 CB 601 (USGLI, NSLI, and policies issued under the Servicemen's Indemnity Act of 1951).

(4.) Carlson v. Carlson, 11 Cal. 3d 474, 521 P.2d 1114 (1974).

(5.) Hays v. U.S., 95-2 USTC [paragraph] 60,203 (S.D. Ill. 1995).

(6.) Rev. Rul. 74-312, 1974-2 CB 320.

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Publication:Tax Facts on Insurance and Employee Benefits
Date:Jan 1, 2010
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