The three-year rule stipulates that life insurance policies transferred out of the insured's estate must be recaptured for estate valuation purposes if the insured dies within three years of the transfer. The purpose for this is to prevent "death bed" transfers of assets to reduce one's estate.
If the transfer occurred at least three years before the death of the insured, the fact that the insured paid the premiums will not cause the death proceeds to be included in the decedent's estate. If the estate owner dies within three years of the policy transfer, the face amount of the insurance would be included in the decedent's gross estate.
No one knows when they are going to die, so what can an insured do to lessen the impact of re-capture, if death occurs within three years of the transfer? Most advisers recommend that the ILIT include a provision that provides that, if death occurs within three years of the transfer, the trustee would be directed to pay out the proceeds to the spouse of the decedent, thus qualifying for the marital deduction and avoiding estate taxation on the proceeds. Obviously, this is practical only if there was a surviving spouse.
Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.