Life insurance contracts may be sold for many reasons, including among family members as circumstances change, between trusts when it is desired to move a policy out of an irrevocable trust to one that has more desirable terms (although oftentimes that is nontaxable if it is a sale between grantor trusts), or changes in business relationships and coverages.
Previously, the IRS had adopted the position that an owner’s basis in a life insurance policy was the total premiums paid, less the portion of premiums paid attributable to mortality, expense or other insurance coverage (except when the policy was not owned for purposes of insurance protection). This was based on its reading of Code §1016. Thus . . .