Abstract
The Taxpayer Relief Act of 1997 furnishes the courts and the Internal Revenue Service an opportunity to close certain loopholes in the federal tax consequences of assigning life insurance. About twenty years ago, we published an article arguing that the tax consequences of assigning life insurance affords taxpayers unwarranted opportunities for tax avoidance. Since then, developments in the case law and Internal Revenue Service rulings have broadened the loopholes. In this update of our article, we show how the new tax law supports our original position.
Our position is that the Silverman analysis gives taxpayers a windfall and provides life insurance an unfair advantage over other investment vehicles. We argue that Silverman was inconsistent with the law existing when the case was decided and, more importantly, is inconsistent with section 2035 as reformulated by the 1997 Act. To set the stage for our argument, we begin with brief discussions of the operation of life insurance, the different types of life insurance, and the economic elements that comprise life insurance. We next survey the relevant provisions of the tax laws, as they now exist, that apply to life insurance policies and proceeds. Finally, we examine several different types of circumstances in which an insured has assigned life insurance to a third party and consider whether the current tax treatment of such assignments "has it right," in light of the amendments to section 2035 made by the 1981 Act and especially the 1997 Act. Special emphasis will be given to the Silverman-type situation in which the insured assigns a policy within three years of death and the assignee pays the post-assignment premiums.
Recommended Citation
Douglas A. Kahn and Lawrence W. Waggoner,
Tax Consequences of Assigning Life Insurance—Time for Another Look,
4 Fla. Tax Rev.
(2001).
Available at: https://scholarship.law.ufl.edu/ftr/vol4/iss1/7