Life Insurance and Federal Tax Debt
Question: Can the Internal Revenue Service attach life insurance proceeds payable to a specified beneficiary to satisfy a decedent’s tax debt?
Case Example: When Decedent died, she had an outstanding federal tax debt of approximately $90,000. There is not enough money in Decedent’s estate to pay the tax debt, but she had a life insurance policy of $1.5 million dollars payable to Beneficiary. The life insurance policy had no cash value during Decedent’s life.
Answer: The Internal Revenue Service (“IRS") cannot attach life insurance proceeds payable to a specified beneficiary to satisfy a decedent’s tax debt unless the policy had a cash value during the decedent’s lifetime. U.S. v. Bess, 357 U.S. 51 (1958). A federal tax lien attaches to life insurance proceeds only to the extent such proceeds equal the cash surrender value of the policy.Because Decedent’s life insurance had no cash value during her life, the IRS cannot reach the proceeds that are payable to Beneficiary.
Under Internal Revenue Code §6321, if a person fails to pay federal taxes, a lien arises “upon all property and rights to property, whether real or personal, belonging to such person." In U.S. v. Bess, the Supreme Court held that a decedent does not have a property right in life insurance policy proceeds to which a federal tax lien can attach. However, an insured does have a property right in the cash surrender value of a policy. As such, a lien on the cash surrender value would have existed during the insured’s life and the lien remains in force after the insured dies. In Decedent’s case, her policy had no cash value, so she had no property right in the policy before her death to which a lien could attach. Thus, the proceeds should go to Beneficiary free and clear of any claim by the IRS.
Shannon G. Becker
The Law Office of Shannon G. Becker, LLC
P.O. Box 3663
Mansfield, Ohio 44907