AALU: Understand the Transfer for Value Rule

A Primer on the Transfer for Value Rule

Estate and business succession planning often involves life insurance, including transfers of existing policies to irrevocable life insurance trusts (ILITs) or other parties. Understanding the transfer for value rule and its potential tax impact is critical when considering such policy transfers.

Death benefits paid under a life insurance policy generally are received by the beneficiary without imposition of income taxes. A transfer of the policy for value, however, will subject the policy death benefits to income tax pursuant to the “transfer for value” rule, to the extent the benefits exceed the consideration and subsequent premiums paid for the policy. Not all policy transfers for value are obvious, which may result in inadvertent application of the rule, although numerous exceptions exist.

A life insurance policy transfer can trigger the transfer for value rule, costing the beneficiaries dearly. Before any such transfer is made, a careful review of the facts, the transfer for value rule, and its exceptions should be considered.

Get the complete primer on the Transfer for Value Rule in the latest Washington Report.