Question

In 2015, James gave his son John a $5,000,000 term life insurance policy taken on James' life. At the time of the gift, James was in good health, and the value of the term insurance policy for gift tax purposes was less than the $14,000 annual exclusion amount. However, James died in the year 2017. Which of the following statements is true?

A) In 2017, the $5,000,000 gift is included in the gross estate of James, for the estate tax purpose.
B) In 2017, the $5,000,000 payout is not included in the gross estate of James for the estate tax purpose, as he had outlived the transfer by more than one year.
C) James will get an annual exclusion of $50,000 i.e. 1 percent of the gift amount in 2017.
D) James is eligible for a unified tax credit of $500,000, i.e. 10 percent of the gift amount, in 2017 as he outlived the transfer by more than one year.
E) James cannot avail the charitable deduction in 2017, as he did not outlive the transfer by more than one yea

Answer 1

The correct statement regarding the $5,000,000 term life insurance policy given to John by James in 2015, after James passed away in 2017, is that the payout is not included in James' gross estate for estate tax purposes. This is due to the policy value being under the 2015 annual exclusion amount and that it was given more than one year prior to James' death.

Step-by-step explanation:

In the scenario where James gave his son John a $5,000,000 term life insurance policy in 2015 and passed away in 2017, the correct statement is: In 2017, the $5,000,000 payout is not included in the gross estate of James for the estate tax purpose, due to his having passed the gift more than one year prior to his death. This is because the annual gift exclusion in 2015 allowed gifts up to $14,000 per recipient to be given without being subject to the gift tax or affecting the lifetime exemption. Since the term life insurance policy was a present interest gift and its value was under the exclusion amount, it is likely that it would not be included in the estate. Furthermore, James' gross estate would only include gifts made within three years of death if they were related to life insurance policies falling under the IRS 'three-year rule'.

Contrary to some of the incorrect options, James cannot benefit from exclusions or credits in 2017 since these apply to the donor's tax obligations while alive, not posthumously. Additionally, there is no 1% annual exclusion on the gift amount, and the unified tax credit cannot be a percentage of the gift amount and does not apply in this context after James' death.