Insurance Curator High-net-worth (HNW) clients using life insurance and insurance-funded structures to mitigate estate tax exposure must prepare for a potential IRS examination. This guide—focused on the United States (with practical examples for New York City, Los Angeles, and Miami advisors)—provides a prioritized checklist, documentation best practices, and vendor/pricing context to harden insurance-funded estate tax positions against audit scrutiny.
Why insurers and insurance-financed strategies draw IRS attention
Insurance-funded estate planning — especially Private Placement Life Insurance (PPLI), premium-financed policies, and large-case corporate-owned life insurance arrangements — can raise IRS questions on:
- Estate inclusion under IRC §2033–§2042,
- Transfer-for-value and gift tax characterization,
- Economic substance of premium financing loans,
- Valuation of life insurance interests on Form 706,
- Third-party compensation, split-dollar, and retained incidents of ownership.
Advisors must link legal analysis to contemporaneous document trails. For recent technical guidance and estate-inclusion nuances, see IRS Guidance on Life Insurance and Estate Inclusion: What Advisors Must Monitor.
High-level preparation checklist (start here)
- Obtain client authorization and assemble a centralized audit binder (digital + physical).
- Map each insurance-funded position to the applicable tax issue (estate inclusion, gift, transfer-for-value, imputed interest).
- Prepare a timeline of events for placement, premium financing, investment allocations (PPLI), policy loans, and beneficiary designations.
- Validate valuations used on Form 706 or gift-tax returns and preserve expert reports.
Detailed document checklist by issue
A. Policy formation & underwriting
- Original policy contract, signed amendments and riders.
- Underwriting files (medical records releases, APS summaries).
- Premium schedules and evidence of payment (bank wires, canceled checks).
- Illustration used at sale and actual in-force ledger.
- Insurer NAIC financial ratings and recent financial statements.
B. Premium financing (if applicable)
- Loan agreement, security/collateral documents, and guaranties.
- Bank term sheet and amortization schedule showing index and spread (e.g., SOFR + spread).
- Evidence of use of loan proceeds to pay specific premiums.
- Interest-rate hedge documents (if any) and valuation of any derivative.
- Contemporaneous business purpose memorandum and alternative financing analyses.
Note: premium-finance loans in the market commonly use SOFR + 1.5%–3.0% structures since LIBOR cessation; see SOFR reference rates at the New York Fed: https://www.newyorkfed.org/markets/reference-rates/sofr
C. PPLI / investment-backed life insurance
- Placement memorandum, subscription agreements and KYC/AML files.
- Investment management agreement, fee schedules, and fund NAV statements.
- Policy trust documents (if ILIT or life insurance trust used) and trustee meeting minutes.
- Annual policy reports showing separate-account assets and allocation.
PPLI minimums typically start in the $1M–$5M range; ongoing fees (setup + platform + investment mgmt) commonly total 0.75%–2.0% annually; see further PPLI cost context at Forbes Advisor: https://www.forbes.com/advisor/life-insurance/private-placement-life-insurance/
D. Estate & gift tax position support
- Attorney and tax advisor legal opinions addressing estate inclusion (incidents of ownership) and transfer-for-value rules.
- Valuation reports for policy cash values used on Form 706, including assumptions and comparable sales/methodology.
- ILIT trust minutes, Crummey notices and gift-tax returns (Form 709) with proof of delivery.
- Beneficiary designation history and any contemporaneous change-of-beneficiary paperwork.
For documentation best practices on premium financing and complex insurance deals, compare protocols in Documenting Transactions: Audit-Proofing Premium Financing and Complex Insurance Deals.
Audit risk matrix — what IRS examiners typically focus on
| Risk Area | Typical Examiner Questions | Documents to Prioritize |
|---|---|---|
| Incidents of ownership / estate inclusion | Who had control? Were any retained rights triggers? | Policy contract, trust docs, correspondence with insurer |
| Transfer-for-value | Was there a sale or other transfer that triggers recognition? | Assignment docs, consideration analysis, contemporaneous valuation |
| Premium financing economics | Was the loan bona fide? Was there economic substance? | Loan docs, collateral agreements, business purpose memo |
| PPLI investments | Were investments proprietary/respect rules? Were fees market? | Subscription agreements, fee schedules, KYC/AML files |
| Valuation | Are cash values correctly reported at death? | Actuarial/valuation report, in-force ledger, insurer statement |
Pricing and vendor context (U.S. market examples)
Large domestic carriers and third-party providers commonly used in U.S. HNW estate planning include New York Life, MassMutual, Northwestern Mutual, and Prudential. These carriers routinely support large-case underwriting, trustee coordination and premium financing relationships with banks in major financial centers (New York City, Chicago, Los Angeles).
Representative cost benchmarks (varies by carrier, client age, mortality rating, and policy size):
- PPLI minimum investment: $1,000,000–$5,000,000 (carrier-dependent). Source: Forbes Advisor.
- PPLI setup fee: $20,000–$50,000 (one-time).
- Annual trustee/admin fees: $3,000–$15,000.
- Investment management / portfolio fees: 0.50%–1.5% (plus underlying fund expenses).
- Premium-financing spreads: typically SOFR + 1.5%–3.0% (subject to borrower credit and market conditions). See SOFR historic reference: New York Fed.
When evaluating insurer credit and contractual protections, see Regulatory Due Diligence for High-Value Policies: Insurer Credit, Contractual Clauses, and Reserving.
Practical steps for New York, California, and Florida advisors (regional focus)
- New York City (NY): Expect rigorous valuation scrutiny — preserve actuarial files and insurer ledgers; involve Big Four actuarial support for policies exceeding $10M in death benefit.
- Los Angeles (CA): Confirm state premium-finance licensing, usury and collateral enforcement language for bank lenders used by California residents.
- Miami (FL): Coordinate PPLI and offshore trust structures with local estate counsel to reconcile Florida probate rules and federal estate inclusion points.
Preparing expert support & examiner engagement
- Retain an actuary experienced in life-insurance valuation (preferably one who has testified in probate or IRS disputes).
- Prepare a written examination response plan: designate lead advisor, counsel, and insurer contact.
- Offer voluntary production: produce a well-indexed binder with a concise executive summary and timeline to reduce examiner friction.
Final checklist before exam
- Consolidated audit binder completed (index + table of contents).
- Legal opinions, expert valuation, and business-purpose memos dated and signed.
- Originals for policy contracts, loan docs, trustee minutes accessible.
- Clear internal memo tying tax positions to statutes, regs, and revenue rulings.
Useful regulatory and market references:
- IRS — About Form 706 and estate tax rules: https://www.irs.gov/forms-pubs/about-form-706
- Forbes Advisor — Private Placement Life Insurance overview and cost context: https://www.forbes.com/advisor/life-insurance/private-placement-life-insurance/
- New York Fed — SOFR reference rates (for premium-finance indexing): https://www.newyorkfed.org/markets/reference-rates/sofr
By assembling thorough, contemporaneous documentation and engaging qualified actuarial and legal experts, advisors in New York City, Los Angeles, Miami and other U.S. markets materially reduce the risk and duration of an IRS examination of insurance-funded estate tax positions.