Mar 1, 2007 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

David A. Handler, a partner in the Chicago office of Kirkland & Ellis LLP, reports:

• Congressional Research Service (CRS) statistics. For all federal lawmakers' talk about the evils of the “death tax,” very few estates actually were hit by the estate tax in 2005 and even fewer can be expected to have incurred the liability in 2006.

  According to a report issued Feb. 7 by the CRS, the public policy research arm that works for members of Congress and their staffs on a nonpartisan basis, slightly more than 1 percent of the estates of adults who died in 2005 incurred estate tax liability. That's 18,431 estates. The year 2005 is the last year for which statistics are fully available.

  Of those with taxable estates in 2005, only 0.07 percent included farm assets, and a mere 0.46 percent included assets typically held by businesses. Furthermore, businesses comprised only 10.8 percent of the total value of taxable estates on which federal estate tax returns were filed in 2005. Farms comprised only 2.3 percent. Of course, the federal estate tax exemption was $1.5 million in 2005. These percentages would be lower in 2006, because the exemption rose to $2 million for that year.

• Transfers of insurance to grantor trusts are not “transfers for value.” Proceeds from a life insurance policy upon the death of the insured are generally excluded from gross income under Internal Revenue Code Section 101(a)(1). However, IRC Section 101(a)(2) provides that if a life insurance contract is transferred for consideration (if, for example, it's sold), the exclusion from gross income provided by Section 101(a)(1) doesn't apply except to the extent of the amount of the consideration paid and the premiums and other amounts subsequently paid by the transferee. This is the so-called “transfer for value rule.” IRC Section 101(a)(2)(B) contains an exception to this rule: It provides that this rule does not apply to a transfer of a life insurance contract 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 officer.

  In Revenue Ruling 2007-13 (issued Feb. 16), the Internal Revenue Service states, “The grantor who is treated for federal income tax purposes as the owner of a trust that owns a life insurance contract on the grantor's life is treated as the owner of the contract for purposes of applying the transfer for value limitations of § 101(a)(2).” The ruling illustrates two situations involving the transfer of an insurance policy to a grantor trust. In Scenario 1, there are two trusts, both of which are treated as owned by the grantor (G) for income tax purposes (in the form of a grantor trust). Under this scenario, Trust 2 sells an insurance policy on G's life to Trust 1 for cash. The ruling holds that there was no transfer of the contract for income tax purposes because G is treated as the owner of both trusts, and therefore there is no transfer for value within Section 101(a)(2).

  In Scenario 2, the facts are the same, except that Trust 2 is not a grantor trust. The ruling holds that the sale of the policy is a transfer of the policy for valuable consideration under Section 101(a)(2), but it is treated as a transfer of the policy to the insured (G), as the owner of Trust 1. As a result, the transfer for value rule does not apply.

  This revenue ruling is consistent with several prior letter rulings, except that, because it's a revenue ruling, taxpayers may rely upon it.

• The IRS publishes positions and settlement guidelines for family limited partnerships (FLPs). The Internal Revenue Service has just released a paper called “Appeals Coordinated Issue Settlement Guidelines,” dated Oct. 20, 2006. This paper addresses four issues related to FLPs, and the IRS' and taxpayers' positions on each issue. The paper then sets forth IRS settlement guidelines, most of which are redacted. The paper is useful in that it states the IRS' position on a number of issues relating to FLPs, but most of these positions are not a surprise.

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