By ALAN S. NOVICK
Scripps Howard News Service
04-JUL-05
The face amount of an insurance policy is the amount of money that is paid to the beneficiary of the policy when the insured person dies. Any policy loans are deducted from this figure and any interest that is due to the beneficiary because of delay in payment is added.
The face amount figure is usually the figure used as a rough estimate in preparing an estimate of potential estate taxes. However for precise planning and, upon death, when the estate tax return is filed, the final figure is determined by taking the face amount and adding any paid-up additional insurance, accumulated dividends (with interest) and post death dividends, and then deducting any policy loans.
The final amount is then included on schedule D of the federal estate tax return, Form 706. The insurance company should provide this figure on Form 712 that should be sent to the beneficiary. Or, or if not automatically sent, then it should be requested by the beneficiary or the lawyer for the estate.
If the policy was not owned by the insured, none of the proceeds are included or taxable in the estate of the insured unless the transfer is not one that will qualify as removing the ownership of the policy from the insured.
If the policy is given away, then the face amount of the policy is not the amount that is used in determining any gift tax liability. Then, the closest rough estimate of the value is the cash surrender value of the policy.
If there is a dispute or question for example, if the death occurs during the policy's contestable period there is no clear statutory answer as to what amount is to be listed on the estate tax return. Apparently the best approach is to make a bona fide determination of the fair market value of the claim as of the date of death (or the alternate valuation date, which is 6 months after death) and insert that amount in the estate tax return. (See American National Bank and Trust Co. v. U.S. 594 F 2d 1141, 7th Circuit 1979; and IRS Letter Ruling 8308001.)
If an insured dies during the contestable period the company may avoid paying if the insured misrepresented material facts, like the prior diagnosis of cancer, or if the insured committed suicide.
The contestable period and the basis for refusal of a claim are important parts of any life insurance policy. These provisions should be read carefully and understood whenever a purchase of insurance is contemplated.
The valuation of insurance and the amount that will be taxable (if the insured owns the policy) are vital elements of a proper estate plan. If there will be a significant difference between the face amount and the includable amount for example, if there is a $90,000 loan due on a $100,000 face policy it is important that the attorney who prepared the estate plan is aware of such difference when the estate plan is being prepared.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304@aol.com.)
(Distributed by Scripps Howard News Service, http://www.shns.com.)
