For all the benefits of life insur- ance, great ideas can be undone
by sloppy execution. A recurring
error is improper designation of
the three parties of interest for
every life insurance transaction.
When these relationships are incorrectly designated, intended benefits can be needlessly diminished,
Every life insurance policy has
three crucial players. The policy
owner: the person or entity that
pays the premiums and has authority to make changes to the policy.
The insured: the person whose life
is covered by the policy. The
beneficiary: the person or the entity
designated to receive the insurance benefit when the insured dies.
Standard insurance practice says
two of the three parties of interest
should be the same person or entity. Two examples: In a family insurance scenario, the owner and
insured will typically be the same;
the insured owns the policy on his/
her life, and names the spouse as
beneficiary. If a business wants to
insure a key employee, the business will usually be both owner and
However, if three different per-
sons or entities play the roles of
policy owner, insured, and bene-
ficiary, adverse tax consequences
may be incurred. This condition
is often referred to as a “Goodman
Triangle,” in reference to a 1946
court case, Goodman vs. Commis-
sioner of the Internal Revenue Ser-
vice, in which the owner of the pol-
icy was making gifts to non-owner
beneficiaries upon the death of the
insured. The tax logic behind this
determination is convoluted, but
some examples are instructive.
Gift Tax Trigger
A father owns a life insurance policy on his adult son (the insured);
the son’s wife is the beneficiary. If
the son dies, his wife will receive
the insurance proceeds tax free.
But the way the IRS sees it, the wife
has received a gift from her husband’s father, the owner of the policy. This triggers a gift tax assessment against the father.
Three shareholders in a C-corpora-
tion have a buy-sell agreement
drafted. The corporation, as owner,
purchases three insurance policies,
naming the other two shareholders
as beneficiaries for each insured’s
policy. Since the three parties are
different, the owner (the corpora-
tion) is deemed to have made a
taxable gift to the beneficiaries
(the surviving shareholders) upon
an insured’s death. The IRS con-
siders the insurance proceeds as a
distribution from the business to
shareholders, on which the recipi-
ents now owe income tax.
A man obtains a policy on his life,
naming his spouse as beneficiary.
As his faculties begin to diminish,
a decision is made to make the
spouse the owner, giving her authority to make changes. So far, so
good. But to assist in managing
her affairs, the spouse adds the insured’s eldest son as a co-owner.
With the addition of the son as co-owner, the owner (spouse and son)
is now different than the beneficiary (spouse only).
Rule May Not Be Workable
There may be occasions when the
rule of thumb that two of the three
parties in a life insurance trans-
action should be the same doesn’t
appear workable. These instances
call for professional input, and
sometimes, the establishment of a
new entity, like a trust, to serve as
either owner and/or beneficiary to
satisfy the Goodman Triangle rules.
A Goodman Triangle assessment
should be part of every life insur-
ance review. Make sure you, and
your financial professionals, tend
to the details.
Be aware of a recurring error in life insurance transactions:
improper designation of the three parties of interest.
JOHN M. DRISCOLL, PRESIDENT
JOHN DRISCOLL & COMPANY, INC.
5080 N. 40th Street, Suite 400, Phoenix, AZ 85018
(602) 957-7155, John_Driscoll@JDriscollCo.com
Goodman vs. Commissioner of
the Internal Revenue Service.
Registered Representative of Park Avenue Securities LLC (PAS). Securities products offered through PAS, member FINRA, SIPC. General Agent of The Guardian Life Insurance Company of America® (Guardian), New York, NY.
PAS is an indirect, wholly-owned subsidiary of Guardian.
The Guardian Network® is a network of preferred providers authorized to offer products of The Guardian Life Insurance Company of America® (Guardian), New York, N Y and its subsidiaries. John Driscoll & Company, Inc. is an
independent agency and not an affiliate or subsidiary of Guardian.