May 6, 2013
Previously published on May 2013
The IRS privately ruled that the exchange by an irrevocable trust of a second-to-die life insurance policy for a new first-to-die policy would qualify as a like-kind exchange under Internal Revenue Code Section 1035 with no recognition of gain or loss. A husband and wife established an irrevocable trust that purchased a second-to-die life insurance policy insuring the lives of both of them. Sometime thereafter, the husband died, leaving the wife as the sole insured on the second-to-die policy. At a later date, the second-to-die policy was transferred to a new irrevocable trust created by the wife. The trustee of the new trust subsequently exchanged the second-to-die policy for a new life insurance contract covering only the wife's life. The IRS ruled that the exchange qualified for like-kind exchange treatment under Internal Revenue Code Section 1035 because the exchange did not involve a change of insured, which would have otherwise disqualified the transaction from nonrecognition treatment. The IRS reasoned that at the time of the exchange the wife remained the sole insured on the second-to-die policy following the death of her husband, and the wife was also the sole insured on the new first-to-die policy. Because both policies related to the same insured, the IRS held that the new trust did not have to recognize any gain or loss on the exchange of the policies. The key takeaway from this ruling is that the eligibility of an exchange for like-kind treatment under Internal Revenue Code Section 1035 is determined on the basis of facts that are available at the time of the exchange.
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