Monday, November 17, 2014

97733572In two substantially identical private letter rulings, PLR 201423009 (released 6/6/2014) and PLR 201426005 (released 6/27/2014), the taxpayers requested guidance as to the impact of a sale of a survivor life policy from a grantor trust where both insureds are the grantors to a grantor trust where only one of the insureds is the grantor.

The proceeds of a life insurance policy are free from income taxation in the hands of the recipient after the death of the insured(s), unless during the life of the insured(s) there was a transfer of an interest in the policy for valuable consideration. However, the transfer for value rule does not apply in two circumstances set out in § 101(a)(2)(A) and (B).

1. As provided in § 101(a)(2)(A), the transfer for value rule will not apply where the basis in the policy for purposes of determining gain or loss in the hands of the transferee is the same as the basis in the policy for purposes of determining gain or loss in the hands of the transferor.

2. As provided in § 101(a)(2)(B), the transfer for value rule will also not apply to a transfer of the policy to the insured, to a partner of the insured, to a partnership in which the insured is a partner or to a corporation in which the insured is a shareholder or an officer.

The Service has ruled extensively that a transfer to a grantor trust of which the insured was the grantor is exempt from the transfer for value rule as a transfer to the insured within the meaning of § 101(a)(2)(B).

In Rev. Rul 2007-13, 2007-1 CB 685, the Service ruled that a transfer between two grantor trusts where the insured was treated as the owner of both trusts, as well as a transfer from a non-grantor trust to a grantor trust where the insured was treated as the owner of the purchasing trust, would fall within the exception in § 101(a)(2)(B) as a transfer to the insured and would not result in a transfer for value.

However, the Service had not previously issued a ruling where a survivor life policy was to be transferred from a grantor trust with respect to which both insureds were treated as the owners of the grantor trust to a grantor trust with respect to which only one of the insureds was treated as the owner of the grantor trust.

In both of these PLRs, the Service bifurcated the analysis of the proposed transfer, treating the transfer as two separate transfers:

1. The first transfer was by one of the insureds to the grantor trust of which that insured was treated as the owner. This transfer fall within the prior rulings and would fit within the exception in § 101(a)(2)(B) as a transfer to the insured.

2. The second transfer was a transfer by the other insured who was not treated as the owner of the transferee trust, so that transfer could not fall within the exception in § 101(a)(2)(B). Here, the Service treated the transfer first as a transfer from the nongrantor insured to his/her spouse, the other insured who was treated as the owner of the acquiring trust. This transfer would fall within the exception set out in § 101(a)(2)(A) and would not be a transfer for value. Then the insured spouse who was treated as the owner of the acquiring grantor trust transferred this interest to the grantor trust such that the transfer to the insured exception to the transfer for value rule in § 101(a)(2)(B) would apply.

Thus, this transfer from the joint grantor trust of the two insureds to the grantor trust of only one of the insureds would be totally protected from the transfer for value rule and the proceeds received by that trust subsequent to the death of the survivor of the insureds would be excluded from the gross income of the trust and not subject to income tax at that time.

Leave a Reply


4 − three =