Policy gift tax valuation is the process of determining the value of a life insurance policy when it is transferred as a gift, usually to another individual or to an irrevocable life insurance trust (ILIT). For U.S. gift tax purposes, the Internal Revenue Service generally requires that the value of an in-force policy be based on its interpolated terminal reserve plus any unearned premium, rather than simply the cash surrender value or total premiums paid. This actuarial measure is intended to approximate the fair market value of the contract, taking into account future obligations and embedded guarantees. Accurate policy gift tax valuation is essential when parents transfer policies to children, when ownership is moved into an ILIT for estate tax planning, or when existing business policies are reassigned as part of restructuring. Proper valuation ensures gifts are correctly reported on Form 709, helps track use of lifetime exemption and annual exclusion amounts, and reduces the risk of IRS challenge or unexpected gift tax exposure.

In real-world planning, policy gift tax valuation typically arises when an advisor helps a client shift an existing policy into an irrevocable trust to remove death benefits from the taxable estate or to change ownership among family members or business entities. The advisor coordinates with the carrier to request a policy value statement as of a specific gift date, showing the interpolated terminal reserve and unearned premium figure required for gift tax reporting. That value is then provided to the client's CPA or estate attorney to complete the accurate gift tax return. Advisors also monitor whether ongoing premium payments will be treated as additional gifts to the new owner or trust and how those payments interact with annual exclusions and Crummey notices in ILITs. By understanding policy gift tax valuation concepts and processes, advisors can ensure that ownership changes support long-term estate, business, and wealth-transfer goals without creating avoidable compliance problems or tax surprises for affluent clients and their heirs.