Some years ago, Y purchased a $100,000 universal life policy on his own life. Tw

Question

Some years ago, Y purchased a $100,000 universal life policy on his own life. Two years ago, he sold the policy to his cousin for the policy’s gift tax value of $40,000 as determined by government rules. The cousin paid two annual premiums of $2,200 each prior to Y’s death. Under these circumstances, which of the following statements is correct?

a)Some of the $100,000 death proceeds will be includible in Y’s gross estate.

b)Y’s cousin will be in receipt of taxable income equal to $55,600.

c)Y’s cousin will not be in receipt of any taxable income.

d)If Y had gifted the policy to his cousin, rather than making a sale, none of the death proceeds would have been included in Y’s gross estate.

Explanation / Answer

b)Y’s cousin will be in receipt of taxable income equal to $55,600.
$100,000 - $40,000 - ($2200 x2) = $55,600
The exclusion for death benefits is limited to the consideration paid plus the premiums or other sums subsequently paid by the buyer.

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