Are proceeds from a life insurance policy where the beneficiary designation is irrevocable always subject to donor's tax?

Are proceeds from a life insurance policy where the beneficiary designation is irrevocable always subject to donor's tax?

• A. True.
• B. False.
• C. Only if the premium was paid by the donor.
• D. Depends on the policy amount.

Answer: (B)

The statement that proceeds from a life insurance policy with an irrevocable beneficiary designation are always subject to donor's tax is not accurate. When the beneficiary designation is irrevocable, it means that the policyholder cannot change the beneficiary without the consent of the beneficiary. However, the donor’s tax comes into play primarily when a gift is made. In this context, the proceeds from a life insurance policy are generally not subject to donor's tax upon the death of the insured. This is because the death benefit is typically excluded from the taxable estate as a gift since the transfer occurs at death, not while the donor is still alive. The life insurance proceeds are paid to the beneficiary directly and are not considered a gift from the policyholder to the beneficiary during the lifetime of the policyholder. The irrevocable designation impacts the control the policyholder has over the policy but does not alter the fundamental nature of the transaction concerning donor's tax liabilities. Therefore, the assertion that such proceeds are always subject to donor's tax is incorrect.

The statement that proceeds from a life insurance policy with an irrevocable beneficiary designation are always subject to donor's tax is not accurate. When the beneficiary designation is irrevocable, it means that the policyholder cannot change the beneficiary without the consent of the beneficiary. However, the donor’s tax comes into play primarily when a gift is made.

In this context, the proceeds from a life insurance policy are generally not subject to donor's tax upon the death of the insured. This is because the death benefit is typically excluded from the taxable estate as a gift since the transfer occurs at death, not while the donor is still alive. The life insurance proceeds are paid to the beneficiary directly and are not considered a gift from the policyholder to the beneficiary during the lifetime of the policyholder.

The irrevocable designation impacts the control the policyholder has over the policy but does not alter the fundamental nature of the transaction concerning donor's tax liabilities. Therefore, the assertion that such proceeds are always subject to donor's tax is incorrect.