Life insurance is one of the most efficient tools high net worth families have for creating estate liquidity, equalizing inheritances, and funding business succession. The structure of the policy, however, matters as much as the policy itself. A common ownership arrangement known as the Goodman Triangle can turn an income-tax-free death benefit into a taxable gift of the entire proceeds, and the problem is usually discovered only after the claim is paid.
This article explains how the Goodman Triangle works, what it can cost under 2026 federal transfer tax rules, where it appears in both family and business planning, how the Supreme Court’s 2024 decision in Connelly v. United States changed the analysis for company-owned policies, and the practical steps advisors and their clients can take to avoid it.
Key Takeaways
- A Goodman Triangle exists when the policy owner, the insured, and the beneficiary are three different parties.
- At the insured’s death, the owner is treated as making a completed gift of the full death benefit to the beneficiary.
- In 2026, a gift of that size typically uses up part of the owner’s $15 million lifetime exemption and requires a federal gift tax return. Amounts above the exemption are taxed at rates up to 40%.
- In business planning, a misaligned structure can produce gift, dividend, or compensation income consequences, and company-owned redemption plans must now also account for the Connelly valuation rule.
- The solution is structural: make two of the three roles the same party, or hold the policy in a properly drafted irrevocable life insurance trust (ILIT) or other appropriate entity.
What Is the Goodman Triangle?
Every life insurance contract has three roles:
- The Insured: the person whose life is covered by the policy.
- The Policy Owner: the person or entity that controls the contract, including the right to name and change beneficiaries, access cash value, or surrender the policy. The owner is usually, though not always, the premium payer.
- The Beneficiary: the person or entity that receives the death benefit.
When all three roles are held by different people or entities, planners call the arrangement a Goodman Triangle. It is also known as the “unholy trinity” of life insurance, and the tax result is often called the Goodman Rule. The name comes from Goodman v. Commissioner, 156 F.2d 218 (2d Cir. 1946). In that case, Mrs. Goodman placed policies on her husband’s life in a revocable trust for her children and sister-in-law. When her husband died in 1939, the trust became irrevocable, and the court held that her gift was measured by the full insurance proceeds, not the lower value of the policies before death. The IRS later applied the same reasoning to ordinary beneficiary designations in Revenue Ruling 81-166.
A common example:
| Role | Party |
|---|---|
| Policy Owner | Wife |
| Insured | Husband |
| Beneficiary | Adult children |
This arrangement is usually put in place with good intentions, often to keep the proceeds out of the insured’s taxable estate. It can accomplish that goal, but it creates a different and frequently larger problem.
Why the Death Benefit Becomes a Taxable Gift
While the insured is living, the policy owner can change the beneficiary, borrow against the policy, or surrender it. Because the owner has not given anything away, no gift has been made. The gift is “incomplete.”
At the moment of the insured’s death, that control ends. The beneficiary designation becomes fixed, and the beneficiaries become entitled to the proceeds. At that moment the gift is complete, and the owner is treated as having given the beneficiaries the entire death benefit. The value of the gift is not the premiums paid or the cash value. It is the full face amount paid by the carrier.
It is important to be precise about who bears the consequence. The beneficiaries generally still receive the death benefit free of federal income tax under Internal Revenue Code Section 101(a). The Goodman Triangle is a gift tax issue for the policy owner, not an income tax issue for the beneficiaries.
What the Gift Can Cost Under 2026 Rules
For 2026, the federal annual gift tax exclusion is $19,000 per recipient, the lifetime estate and gift tax exemption is $15 million per individual, and the top transfer tax rate is 40%. The One Big Beautiful Bill Act of 2025 made the $15 million exemption permanent, with inflation indexing in later years.
Example: A wife owns a $5 million policy on her husband and names their three adult children as equal beneficiaries. At his death, she is treated as giving about $1,666,667 to each child. After applying three $19,000 annual exclusions, she has made taxable gifts of $4,943,000.
- She must file IRS Form 709, generally due April 15 of the year after the insured’s death.
- If she has unused exemption, no gift tax is paid immediately, but $4,943,000 of her exemption is consumed. That exemption is no longer available to shelter her own estate, which can cost her heirs up to 40% of that amount later if her estate is taxable.
- If she has already used her exemption through prior lifetime gifts, the gift tax could approach $1.98 million, due in the year after the death.
- If grandchildren or trusts for grandchildren are beneficiaries, generation-skipping transfer tax may also apply.
For many families the practical cost is the quiet loss of exemption rather than an immediate tax bill. For high net worth families who have already made significant lifetime gifts, it can be an immediate seven-figure liability.
Why the Goodman Triangle Matters Most in High Net Worth Life Insurance
The Goodman Triangle can occur on a policy of any size, but it is most costly in high net worth life insurance planning, for several reasons:
- Larger face amounts. Policies of $5 million to $25 million or more are common in estate liquidity and business succession planning, so the deemed gift is large.
- Exemption already used. Many affluent clients made substantial lifetime gifts in recent years, often in anticipation of an exemption reduction that did not occur. A Goodman gift on top of those transfers is more likely to produce actual tax.
- Policies outlive the plan. Coverage purchased decades ago may no longer match the client’s current estate documents after marriages, divorces, deaths, or business changes.
- Multiple advisors. The attorney drafts the documents, the CPA prepares returns, the planner manages the plan, and the application is completed separately. Ownership and beneficiary designations can fall between those roles.
Common Family Scenarios to Watch For
- Spousal ownership. One spouse owns a policy on the other and names the children as beneficiaries.
- Adult child as owner. An adult child owns a policy on a parent and names all siblings as equal beneficiaries. The owner is treated as making a gift of each sibling’s share at the parent’s death.
- Grandparent as owner. A grandparent owns a policy on an adult child and names the grandchildren. This can create both a gift and a generation-skipping transfer.
- Trust-owned policies with individual beneficiaries. A trust owns the policy, but the carrier’s beneficiary form names individuals directly instead of the trust. The proceeds then bypass the trust’s terms and protections, which can produce unintended tax and distribution results. In most trust-owned designs, the trust should be both owner and beneficiary.
- Community property states. Where premiums are paid with community funds, the surviving spouse may be treated as owning half of the policy, and naming a third party as beneficiary can result in a gift of that half of the proceeds even when the insured is the named owner.
The Goodman Triangle in Business Planning
The same three-party problem appears in business succession planning, particularly in buy-sell agreements and executive benefit arrangements.
Cross-Purchase Buy-Sell Agreements
In a cross-purchase agreement, each owner buys a policy on the other owners. When an owner dies, the survivors use the proceeds to buy the deceased owner’s interest from the estate.
The mistake: Partner A owns a policy on Partner B but names Partner B’s spouse as beneficiary, intending to “simplify” the transaction. This creates a Goodman Triangle. At Partner B’s death, Partner A is treated as making a gift of the full death benefit to the spouse. Partner A also never receives the cash, yet remains obligated under the agreement to buy Partner B’s shares. The correct structure is Partner A as both owner and beneficiary.
Company-Owned Policies Payable to an Executive’s Family
When a corporation owns and pays for a policy on a key executive or shareholder but names the executive’s family as beneficiary, the corporation cannot make a personal gift. Instead, the proceeds may be recharacterized as a constructive dividend (for a shareholder-insured) or as compensation income (for a non-owner employee), which can eliminate the income tax exclusion the family expected. For a controlling shareholder (more than 50% of the voting stock), proceeds not payable to or for the benefit of the corporation can also be included in the insured’s gross estate under Treasury Regulation Section 20.2042-1(c)(6).
Related Requirements for Business-Owned Policies
- Employer-owned life insurance notice and consent. Under IRC Section 101(j), an employer must give the insured employee written notice and obtain written consent before the policy is issued, or the death benefit above premiums paid may become taxable income to the employer.
- Transfer-for-value rule. Moving existing policies among co-owners, for example when converting a redemption plan to a cross-purchase plan, can cause the death benefit to lose its income tax exclusion. Exceptions exist for transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer. A transfer between co-shareholders of a corporation is not, by itself, an exception.
Structures that keep two points of the triangle aligned:
| Strategy | Policy Owner | Insured | Beneficiary | Purpose |
|---|---|---|---|---|
| Cross-purchase | Partner A | Partner B | Partner A | Partner A receives the cash to buy Partner B’s shares |
| Entity purchase (redemption) | Company | Partner B | Company | Company receives the cash to redeem Partner B’s shares |
| Key person | Company | Executive | Company | Company offsets the financial loss of the executive |
How Connelly v. United States Changed Company-Owned Buy-Sell Planning
On June 6, 2024, the U.S. Supreme Court unanimously decided Connelly v. United States, 602 U.S. 257 (2024). The Court held that a corporation’s obligation to redeem a deceased shareholder’s shares at fair market value is not a liability that offsets the life insurance proceeds the company receives to fund that redemption. As a result, those proceeds increase the company’s value for federal estate tax purposes.
In Connelly, the company used $3 million of insurance proceeds to redeem a deceased brother’s shares. The estate valued the company without the proceeds, at about $3.86 million. The IRS included them, valued the company at about $6.86 million, and assessed additional estate tax, which the Court upheld.
Connelly does not change the mechanics of the Goodman Triangle. A properly structured redemption plan, with the company as both owner and beneficiary, still avoids the Goodman problem. What Connelly changes is the cost of that structure.
Illustration (hypothetical): Two owners each hold 50% of a company worth $4 million. The company owns a $2 million policy on each owner to fund a redemption. When one owner dies, the company receives $2 million, and under Connelly the company is valued at $6 million. The deceased owner’s 50% interest is valued at $3 million for estate tax purposes, even though the estate receives $2 million in the redemption. If the estate is taxable, the heirs pay estate tax on value they never receive. For family-owned businesses, the agreed buy-sell price may also be disregarded for estate tax purposes unless it meets the requirements of IRC Section 2703.
| Consideration | Entity Redemption (Company-Owned) | Cross-Purchase (Owner-Owned) |
|---|---|---|
| Goodman Triangle risk | Low when the company is owner and beneficiary | Present if an owner names the insured’s family instead of themselves |
| Estate valuation after Connelly | Proceeds increase company value | Proceeds stay outside the company and do not increase its value |
| Surviving owner’s tax basis | No basis increase for surviving owners | Surviving owners receive basis equal to the purchase price |
| Number of policies | One per owner | Multiplies with each owner (n × (n − 1)) unless a separate entity holds the policies |
| Other considerations | Simpler administration; premiums paid with company dollars | Policies on other owners are assets of each owner’s estate; uneven premiums when ages or health differ |
In response, many business owners and their advisors are reviewing company-owned arrangements. Options include converting to a cross-purchase plan (with attention to the transfer-for-value rule), or using a separate insurance partnership or LLC, or a trusteed cross-purchase arrangement, to hold the policies outside both the operating company and the owners’ personal estates. These structures require careful drafting and a bona fide business purpose. An ILIT remains the primary tool for providing personal estate liquidity to heirs, and it can work alongside, rather than replace, a properly funded buy-sell plan.
What If the Estate Is Below the Federal Exemption?
The valuation increase from Connelly produces federal estate tax only if the estate is taxable. With a $15 million exemption per person, many business owners’ estates will not owe federal estate tax. Even so, the higher valuation has consequences:
- Higher basis for heirs. Under IRC Section 1014, inherited shares receive a basis equal to their estate tax value. A higher value usually means little or no capital gain when the shares are redeemed. This assumes the redemption qualifies as a sale or exchange under IRC Section 302. Family attribution rules can cause a redemption in a family business to be treated as a dividend instead, so this should be confirmed with tax counsel.
- State estate taxes. Twelve states and the District of Columbia impose their own estate taxes, several with exemptions far below the federal amount. Oregon’s exemption, for example, is $1 million. A valuation increase can push an estate over a state threshold.
- Distorted estate division. If a will or trust divides assets among heirs based on value, a business interest valued higher than the price the estate actually receives can produce unequal results.
The Goodman Triangle gift, by contrast, is measured against the policy owner’s exemption, not the insured’s estate. It can matter even when the insured’s estate is well below the federal threshold.
How to Avoid the Goodman Triangle
The best approach is to prevent the triangle at application. For policies already in force, several corrective options are available.
1. Align Two of the Three Roles
- Owner is the insured. The insured owns the policy on their own life. There is no Goodman gift, but the death benefit is included in the insured’s gross estate.
- Owner is the beneficiary. For example, the wife owns the policy on her husband and names herself as beneficiary. The proceeds are received without a gift. They then become part of her assets and her estate.
2. Use an Irrevocable Life Insurance Trust (ILIT)
For high net worth families, an ILIT is often the preferred structure. The trust is both owner and beneficiary, so there is no Goodman Triangle, and the trust’s terms, not a beneficiary form, govern how proceeds are distributed. When the ILIT acquires a new policy directly, the proceeds are generally excluded from the insured’s estate. If the insured transfers an existing policy to the ILIT, the proceeds are included in the estate if the insured dies within three years of the transfer (IRC Section 2035). Premium gifts to the trust are commonly structured with Crummey withdrawal rights so they qualify for the annual exclusion. The insured should not serve as trustee.
3. Transfer Ownership During the Insured’s Lifetime
If a triangle already exists, the owner can give the policy to the intended beneficiaries or to an ILIT while the insured is living. The gift is valued at the policy’s value on the date of transfer, which for an in-force permanent policy is generally its interpolated terminal reserve plus any unearned premium (Treasury Regulation Section 25.2512-6). That value is typically far lower than the death benefit. Gifts of a policy are generally an exception to the transfer-for-value rule. The carrier can provide a Form 712 statement showing the value for gift tax reporting.
4. Consider an Irrevocable Beneficiary Designation
In some cases, the owner can make the beneficiary designation irrevocable before the insured’s death, which may complete the gift at the policy’s current value rather than the full death benefit. This approach limits the owner’s future flexibility, may require beneficiary consent for loans, surrenders, or later changes, and future premium payments may be treated as additional gifts. Its effect depends on the contract terms and state law, so it should be evaluated with tax counsel before it is used.
5. Review Business-Owned Coverage
Confirm that every buy-sell and key person policy names the correct owner and beneficiary, that Section 101(j) notice and consent was obtained, and that company-owned redemption arrangements have been reviewed in light of Connelly.
6. Verify With the Carrier
The carrier’s records, not the estate plan, control who receives the proceeds. Request an in-force ownership and beneficiary confirmation from each carrier and compare it with the current estate documents.
Policy Ownership Review Checklist
- Who is the owner, insured, and beneficiary on each policy, according to the carrier?
- Are any two of those roles the same party? If not, is there a deliberate reason and a plan for the gift?
- If a trust owns the policy, is the trust also the named beneficiary?
- Are grandchildren or generation-skipping trusts named anywhere?
- For business coverage, does the ownership and beneficiary structure match the buy-sell agreement?
- Has the plan been reviewed since the last marriage, divorce, death, business change, or major gift?
How Advisor Insurance Resource® Helps Advisors and Their Clients
Advisor Insurance Resource® is an independent insurance brokerage that works on a referral basis with fee-only and fiduciary financial planners, estate planning attorneys, CPAs, and their clients. Our high net worth life insurance practice focuses on policy design and placement, in-force policy reviews, ILIT funding, and buy-sell funding, with access to more than 100 carriers.
We review ownership and beneficiary structures as part of every case and coordinate directly with the client’s attorney and tax advisor, so issues like the Goodman Triangle are identified before they become liabilities. Learn more about our life insurance planning services, request a life insurance quote, or contact our team to discuss a policy review. Additional planning topics are available in our Knowledge Base.
Frequently Asked Questions
What is the Goodman Triangle in life insurance?
The Goodman Triangle is a life insurance arrangement in which the policy owner, the insured, and the beneficiary are three different parties. At the insured’s death, the owner is treated as making a taxable gift of the full death benefit to the beneficiary. It is named after Goodman v. Commissioner, 156 F.2d 218 (2d Cir. 1946), and is also called the Goodman Rule or the “unholy trinity.”
Is the death benefit still income tax free to the beneficiaries?
Generally, yes. The Goodman Triangle creates a gift tax consequence for the policy owner. It does not, by itself, make the death benefit taxable income to the beneficiaries. Business-owned policies are different: proceeds paid to an employee’s family from a company-owned policy may be treated as a dividend or compensation.
Who reports the gift, and when?
The policy owner reports the gift on IRS Form 709, generally due April 15 of the year after the insured’s death. The gift uses the owner’s lifetime exemption first, and gift tax is owed only on amounts above the exemption.
Does the Goodman Triangle matter if an estate is below $15 million?
Yes. The gift is measured against the policy owner’s lifetime exemption. Even if no tax is due, using that exemption reduces what can pass tax-free from the owner’s own estate later. For owners who have already made large lifetime gifts, the tax can be immediate.
Can an existing Goodman Triangle be corrected?
Usually, yes, as long as the insured is living. Common corrections include changing the beneficiary to the owner, transferring ownership to the beneficiaries or to an ILIT, or, in some cases, making the beneficiary designation irrevocable. Each option has tax and control trade-offs that should be reviewed with the client’s attorney and tax advisor.
Did the Connelly decision change the Goodman Triangle?
No. Connelly v. United States addressed how company-owned life insurance affects the estate tax value of a business. It did not change the Goodman Rule. It does affect which buy-sell structure is best, because a company-owned redemption plan that avoids the Goodman Triangle may now increase the estate tax value of the deceased owner’s shares.
References
- Goodman v. Commissioner, 156 F.2d 218 (2d Cir. 1946): Justia
- Connelly v. United States, 602 U.S. 257 (2024): Justia
- Revenue Ruling 81-166, 1981-1 C.B. 477
- Internal Revenue Code Sections 101(a), 101(j), 302, 1014, 2035, 2042, and 2703; Treasury Regulations Sections 20.2042-1(c)(6) and 25.2512-6
- IRS: Estate Tax and About Form 709
Disclaimer: This article is intended for informational purposes only and should not be construed as legal, tax, or financial advice. Tax figures reflect federal law in effect for 2026 and may change based on future legislation or IRS guidance. Examples are hypothetical and simplified for illustration. Readers should consult their own tax, legal, and financial professionals before making decisions based on this information. Advisor Insurance Resource® does not provide tax or legal advice. All recommendations should be evaluated in the context of individual circumstances and objectives.