Exclusion from estate for life insurance proceeds.

• Author: Hudson, Boyd D.
• Position: Brief Article

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 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. Upon: such an event, the shareholder (or his estate) was obligated 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...