Understanding the Goodman Triangle: A Critical Tax Trap in Life Insurance Planning
Avoid Unintended Gift Taxes When Structuring Life Insurance Ownership
When it comes to life insurance planning, most people focus on death benefits, premiums, and protecting loved ones. What often gets overlooked is how the policy is owned and who pays for it—a small oversight that can lead to unintended gift tax consequences. This issue arises in a scenario widely known as The Goodman Triangle.
The Goodman Triangle is a tax trap that happens when there are three different parties involved in a life insurance policy:
The Owner of the policy
The Insured (person whose life is covered)
The Beneficiary (person receiving the death benefit)
When each role is held by a different individual, the IRS may treat the entire death benefit as a taxable gift, even though life insurance death benefits are normally income-tax-free. This is a major problem in family and business planning—yet many policyholders don’t even know it exists.
What Is the Goodman Triangle?
The Goodman Triangle refers to a legal principle established in Goodman v. Commissioner, a 1946 U.S. tax court case. The issue arises when:
Person A owns the policy
Person B is the insured
Person C is the beneficiary
In this situation, when Person B dies, the death benefit gets paid to Person C—even though Person A owned and paid for the policy. This is viewed by the IRS as a gift from the owner (A) to the beneficiary (C). Since the amount could be hundreds of thousands—or even millions—of dollars, the gift triggers federal gift tax rules.
The IRS View: Why It Becomes a Taxable Gift
The IRS treats the life insurance death benefit as transferred property. Under U.S. tax law, a gift occurs when one person transfers property to another without receiving equal value. In a Goodman Triangle setup, the owner never received the benefit—instead, it was transferred to a third party. Because of that, the IRS sees the transfer as a gift, potentially subject to:
Current gift tax (up to 40%)
Filing of IRS Form 709
Reduction of the lifetime gift and estate tax exemption
Example: How the Goodman Triangle Works
Let’s explore a common family scenario that accidentally triggers the Goodman rule.
✅ Scenario
Father (John) owns a $1,000,000 life insurance policy.
Mother (Linda) is the insured.
Daughter (Emily) is listed as the beneficiary.
John makes premium payments every year. When Linda passes away, Emily receives the $1,000,000 tax-free—right?
❌ Wrong.
Because John is still alive and he owned a policy that transferred $1,000,000 to Emily upon Linda’s death, the IRS sees this as John gifting $1,000,000 to his daughter. That means:
Emily receives the death benefit
John must file a gift tax return
The $1,000,000 counts against John’s lifetime estate and gift exemption
If John already used his exemption, this triggers gift tax liability
What started as simple family planning just triggered a major tax problem.
Real-Life Situations Where the Goodman Triangle Appears
| Situation | Example |
|---|---|
| Spouse owns policy on other spouse, child is beneficiary | John owns policy on Linda, beneficiary is their daughter |
| Business partner setup | Partner A owns policy on Partner B, beneficiary is Partner C |
| Grandparent policies | Grandpa owns policy on Dad, beneficiary is grandson |
| Divorce scenarios | Ex-spouse owns policy but children remain beneficiaries |
Why the Goodman Triangle Is Dangerous
Many people unknowingly structure life insurance policies in this three-party setup without realizing the tax consequences. The potential risks include:
Unplanned gift tax penalties
Estate tax exposure
Policy proceeds unintentionally pulled into owner’s estate
IRS audits due to missing gift tax reporting
Court disputes between policy owner and beneficiaries
How to Avoid the Goodman Triangle
Thankfully, avoiding this tax trap is not difficult once you understand how ownership and beneficiaries should be aligned.
✅ Solution 1: Make the Insured the Policy Owner
In our previous example:
Linda (insured) should also be the owner
Emily remains the beneficiary
Since Linda is now both owner and insured, the Goodman Triangle is eliminated.
✅ Solution 2: Use Joint Ownership (For Married Couples)
Joint ownership between spouses can eliminate the triangle—but be cautious of estate inclusion if ownership is not properly structured.
✅ Solution 3: Use an Irrevocable Life Insurance Trust (ILIT)
An ILIT is one of the best long-term strategies to avoid this issue.
ILIT becomes the owner and beneficiary
Family members benefit from policy proceeds tax efficiently
Keeps policy out of taxable estate
Protects beneficiaries from probate and creditors
✅ Solution 4: Match Owner and Beneficiary
As a simple rule:
| Safe Structure | Roles |
|---|---|
| Two-Party Setup | Owner = Insured |
| Trust Ownership | ILIT owns policy |
| Business Buy-Sell Setup | Business owns and is beneficiary |
Corrected Example Using ILIT
Let’s fix the earlier example properly.
Linda (insured) has a $1,000,000 policy
ILIT owns the policy
ILIT is also the beneficiary
Emily is a beneficiary of the ILIT trust
When Linda passes:
✅ The death benefit goes into the ILIT
✅ No gift tax is triggered
✅ No Goodman Triangle
✅ Assets are safely distributed to Emily tax-efficiently
Goodman Triangle and Business Life Insurance
Business owners also fall into this trap in cross-purchase agreements. Example:
Partner A owns policy on Partner B
Partner C is named beneficiary
This structure triggers the Goodman rule. Instead, use:
✅ Entity purchase agreement, or
✅ ILIT if family ownership is involved, or
✅ Buy-sell agreement funding alignment
When Does the Goodman Rule NOT Apply?
| Situation | Safe? | Why |
|---|---|---|
| Owner and insured are same person | ✅ Yes | No transfer between third parties |
| Owner is a trust | ✅ Yes | Trust passes benefit per trust rules |
| Business owns and is beneficiary | ✅ Yes | Single entity holds roles |
| Spouse is owner and beneficiary | ✅ Usually | Marital exclusion applies |
Final Thoughts
Key Takeaways
The Goodman Triangle is a common but avoidable tax problem in life insurance planning. It typically appears when people try to “simplify” ownership or add family beneficiaries without understanding tax law. The consequences can be costly—but with proper planning, it can be avoided 100% of the time.
Never let three different people fill the owner-insured-beneficiary roles
This structure may result in gift tax on the entire death benefit
Use an ILIT or align ownership correctly to avoid tax risks
Always involve a licensed insurance advisor and tax professional