Federal Taxation of the Assignment of Life Insurance

The most litigated estate tax issue concerning life insurance is whether the proceeds should be included in the insured's gross estate. This question usually is governed by section 2042 of the Internal Revenue Code of 1954, the estate tax provision directed specifically at life insurance. While the Tax Reform Act of 1976 wrought enormous changes in many areas of estate taxation, Congress did not change section 2042. Thus the several unresolved questions concerning the interpretation of that section remain unsettled. But the question of the includability of life insurance proceeds in the gross estate of the insured is not always governed by section 2042. It sometimes turns on one of the other sections of the Code, notably section 2035. This Article will deal with the treatment under section 2035 of various types of transactions concerning life insurance.