Life · Chapter 6 · Taxation
Transfer-for-Value Rule
Definition
If a life policy is sold or transferred for valuable consideration before the insured's death, the death benefit loses its income-tax-free status — the buyer excludes only the consideration paid plus premiums paid afterward; the rest is ordinary income. Safe-harbor exceptions (IRC §101(a)(2)): transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, to a corporation in which the insured is a shareholder or officer, or any carryover-basis transfer (e.g., a gift).
Exam tip
⚠️ Notice who is NOT on the exception list: a co-shareholder of the insured. That's why moving policies around in a cross-purchase buy-sell can trip transfer-for-value, while an entity/stock-redemption transfer to the corporation is protected.
Easy to confuse with
These are what this term gets tested against — if you can't tell them apart cold, drill the contrast.
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