Question

Papi died in 2015 with a taxable estate of $6,430,000. This figure does not include any value, if applicable, associated with a $5,000,000 life insurance policy Papi had given away in a previous year. Five years ago, Papi gave his $5,000,000 life insurance policy (on his life) to his ungrateful nephew. The policy was a term policy; therefore, at the time of the gift, there was no value associated with the policy. Each year, when the premium was due on the policy, Papi gave his nephew cash to pay the premium. In no year was the premium (and, therefore, the cash gift) greater than the annual gift tax exclusion. Under the circumstances described, there are no gift tax implications related to the gift of the insurance policy. Papi's nephew received a check in the amount of $5,000,000 from the insurance company and became very happy with that $5m

Q - What is the estate tax due with respect to Papi's unfortunate death?

Answer 1

Insurance is subject to estate taxation if it is owned by the deceased on the date of death. In the given situation, it is understood that Papi has already transferred the Insurance ownership to his nephew 5 years back. Hence, the ownership of the Insurance policy remains with his nephew on the date of Papi's death. The annual premium amount was given by Papi as a cash gift to his nephew. Therefore, in this situation, since the ownership of the Insurance was not with Papi on his death, the proceed from Insurance is outside the perview of estate tax.

Further, it is considered that all other calculation like debts, marital deduction has been already considered to arrive the taxable estate amount of $6,430,000. The tax calculation will be as below:-

Particulars	Amount
Taxable Estate Value	$6,430,000
2015 exclusion amount	$5,430,000
Amount Taxed	$1,000,000
2015 top tax rate	40%
Tax Due	$400,000