23. Assignment of Group Term Life Insurance

Group term life insurance is includible in an insured's estate if the benefits are payable to the decedent's estate or if the insured possessed any incidents of ownership in the policy at his death. An incident of
ownership may be the insured's right to change the beneficiary.

An absolute assignment of all of the insured's rights in the policy disposes of his ownership. If the insured dies within 3 years of the assignment, the proceeds will be included in his estate. If the assignment is made more than 3 years prior to the insured's death, only the premiums paid the 3 years prior to death are includible in the estate.

The policy assignment should be irrevocable. If it is assigned to the spouse, the policy ownership may return to the insured on that spouse's death. Also, the spouse assigned a policy will retain ownership of the
group insurance, even if the spouse and the insured separate or divorce.

One may absolutely assign the group insurance to an irrevocable trust. Income and/or principal may be paid to the spouse or the children while effectively removing the asset from the insured's estate.

The assignment to the trust is not a taxable gift because the policy has no ascertainable value. Premiums paid by the employer qualify for the $10,000 annual exclusion as a present interest gift by the employee if the full proceeds were immediately paid to the beneficiaries at the insured's death. If the proceeds are retained to provide income, the premiums are considered a future interest gift and no gift tax exclusion is allowed. To
overcome this, the insured could gift cash ($1,000) to the trust along with the assignment and provide the beneficiaries a $10,000 annual, noncumulative withdrawal right.

The group policy and state law must permit the absolute assignment.

22. Extension for Estate Tax Payments


Even though payment of the Federal Estate Tax is due within nine months of the decedent's date of death, the I.R.S. may grant an extension of up to ten years for "reasonable cause." The interest rate charged by the I.R.S. will approximate 100% of the current prime rate.

The Internal Revenue Code 6166 allows the executor of a decedent's estate where the decedent owned an interest in a closely held business, to pay the estate taxes attributable to that business in installments. To qualify for this special treatment, the value of the decedent's interest in the closely held business must exceed 35% of his or her adjusted gross
estate. An interest in a closely held business is defined as:

1. The interest of a proprietor in a sole proprietorship or

2. The interest of a partner in a partnership where at
least 20% of the partnership's total capital interest is
included in the decedent's gross estate or where the
partnership had fifteen or fewer partners or

3. A shareholder's interest in a corporation where 20% or
more of the voting stock of the corporation was included
in the decedent's gross estate or where the corporation
had fifteen or fewer shareholders

I.R.C. 6166 allows that portion of the estate tax attributable to the decedent's interest in a closely held business to be paid in annual installments over a maximum period of ten years. Additionally, the estate executor may delay the beginning of the annual installments up to five years after the date of death.

Interest on the installments is charged at an annual rate of 4% of the amount of tax due up to $345,800--less the amount of the Unified Credit allowed against the estate tax.

I.R.C. 6166 also provides that where a decedent owns interest in two or more closely held businesses and 20% or more of the value of each business was included in the decedent's gross estate, the interests are treated as one interest in a single closely held business.

The I.R.S. may terminate the 6166 installment arrangement in certain situations such as where an annual payment is delinquent or where the interest in the closely held business is sold or exchanged.

The owner of an interest in a closely held business should consider the purchase of life insurance on his or her life with the policy death benefit payable to the estate. This would allow the estate executor a choice between paying the estate taxes due out of the policy proceeds or electing the 6166 installment treatment.

Tax reference verification 1-800-829-1040

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