To allow a deduction for the amount of the premiums paid on a life insurance contract the beneficiary of which is a trust established for the benefit of a disabled individual, and for other purposes.

Summary: Amends the Internal Revenue Code to permit an individual income tax deduction for premiums paid or incurred by the taxpayer for a life insurance contract having as its exclusive beneficiary the trust of disabled members of the taxpayer's family.  Sets forth qualifying criteria for such contracts and for their beneficiary trusts.

SECTION 1. SPECIAL TAX TREATMENT FOR CERTAIN LIFE INSURANCE CONTRACTS 
              AND TRUSTS RELATING TO DISABLED INDIVIDUALS.

    (a) Deduction Allowed.--Part VII of subchapter B of chapter 1 of 
the Internal Revenue Code of 1986 (relating to additional itemized 
deductions for individuals) is amended by redesignating section 220 as 
section 221 and by inserting after section 219 the following new 
section:

``SEC. 220. PREMIUMS ON LIFE INSURANCE FOR THE BENEFIT OF DISABLED 
              INDIVIDUALS.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction an amount equal to the aggregate qualified 
life insurance premiums paid or incurred by the taxpayer during the 
taxable year.
    ``(b) Definitions and Special Rule Relating to Qualified Disabled 
Individual's Life Insurance.--For purposes of this section--
            ``(1) Qualified life insurance premiums.--The term 
        `qualified life insurance premium' means the premium under a 
        qualified disabled individual's life insurance contract.
            ``(2) Qualified disabled individual's life insurance 
        contract.--The term `qualified disabled individual's life 
        insurance contract' means any life insurance contract which 
        meets the following requirements on each day (on which such 
        contract is in effect) of the taxpayer's taxable year:
                    ``(A) The exclusive beneficiary of the contract is 
                a qualified disabled individual's trust.
                    ``(B) All individuals who are named (at the time 
                such trust is established) as the income beneficiaries 
                of the trust are disabled individuals.
                    ``(C) The contract insures--
                            ``(i) the life of the taxpayer,
                            ``(ii) in the case of a taxpayer who is 
                        married, the life of the spouse of the taxpayer 
                        or the lives of the taxpayer and the spouse, or
                            ``(iii) in the case of a taxpayer who is 
                        divorced, the life of the former spouse of such 
                        taxpayer or the lives of the taxpayer and the 
                        former spouse.
                    ``(D) All incidents of ownership in the contract 
                are held by the taxpayer.
                    ``(E) The face amount of the contract does not 
                exceed $1,000,000.
            ``(3) Disabled individual.--The term `disabled individual' 
        means, with respect to any calendar year, any individual--
                    ``(A) who is unable, by reason of any medically 
                determinable physical or mental impairment which can be 
                expected to result in death or which has lasted or can 
                be expected to last for a continuous period of not less 
                than 10 years, to engage in the performance of personal 
                services for which such individual would have been paid 
                not less than the amount which is equal to 2 times the 
                full-time minimum wage amount for such calendar year 
                (or, in the case of an individual who has not attained 
                age 18, who suffers from any medically determinable 
                physical or mental impairment of comparable severity), 
                and
                    ``(B) whose adjusted gross income for such calendar 
                year does not exceed the amount which is equal to 2 
                times the full-time minimum wage amount for such 
                calendar year.
            ``(4) Full-time minimum wage amount.--The term `full-time 
        minimum wage amount' means an amount equal to the amount of 
        gross income an individual would earn if such individual were 
        employed and paid for 2,000 hours of service during any 
        calendar year at the minimum wage rate applicable for such 
        calendar year under section 6(a)(1) of the Fair Labor Standards 
        Act of 1938 (29 U.S.C. 206(a)(1)).
            ``(5) Limitation and special rule on number of policies 
        taken into account per disabled individual.--If the taxpayer 
        has more than 1 life insurance contract which, but for this 
        paragraph, would be qualified disabled individual's life 
        insurance contracts for any taxable year with respect to any 
        disabled individual--
                    ``(A) only one of such contracts may be treated as 
                a qualified disabled individual's life insurance 
                contract for such taxable year, and
                    ``(B) the taxpayer shall designate which of such 
                contracts shall be so treated for such taxable year.
    ``(c) Qualified Disabled Individual's Trust Defined.--For purposes 
of this section--
            ``(1) In general.--The term `qualified disabled 
        individual's trust' means a trust created or organized in the 
        United States which may accumulate income or distribute corpus 
        and all the income beneficiaries of which are one or more 
        individuals each of whom is a disabled individual at the time 
        such trust is established; but only if the written governing 
        instrument creating the trust meets the following requirements:
                    ``(A) At all times each trustee is a bank (as 
                defined in section 408(n)), a life insurance company, a 
                member in good standing of the bar of the highest court 
                of any State, or a member of the family of any income 
                beneficiary of the trust.
                    ``(B) At all times at least one trustee is a person 
                who is not a member of the family of any income 
                beneficiary of the trust.
                    ``(C) If at any time the trust has more than 3 
                trustees serving concurrently, at least one-third of 
                all such trustees are persons who are not members of 
                the family of any income beneficiary of the trust.
                    ``(D) Before the death of the last to die of all 
                individuals who are income beneficiaries of the trust, 
                the corpus of the trust and any net accumulated income 
                of the trust may be distributed only for the benefit of 
                such individuals.
            ``(2) Member of the family defined.--The term `member of 
        the family' means, with respect to any individual, any spouse, 
        former spouse, parent, child, grandchild, brother, or sister of 
        such individual. For purposes of the preceding sentence, the 
        term `parent' includes the stepmother and stepfather of such 
        individual and any individual who has legally adopted such 
        individual.
    ``(d) Tax Treatment of Distributions From Trust.--
            ``(1) Amount distributed excluded from gross income of 
        disabled individual.--Notwithstanding section 662(a), gross 
        income of an individual who is an income beneficiary of a 
        qualified disabled individual's trust does not include any 
        amount distributed from such trust to such individual in a 
        calendar year in which such individual is a disabled 
        individual.
            ``(2) Section 661 deduction and credit or refund for taxes 
        deemed distributed allowed.--Notwithstanding the application of 
        paragraph (1) to any distribution from a qualified disabled 
        individual's trust to the individual for whose benefit such 
        trust was established--
                    ``(A) the amount of such distribution shall be 
                allowed as a deduction for such trust to the extent 
                such deduction is otherwise allowable under section 
                661, and
                    ``(B) the amount of taxes deemed distributed to the 
                income beneficiaries under section 666(b) and (c) 
                shall, under regulations prescribed by the Secretary, 
                be available to the trust as a credit against the 
                trust's income tax liability computed without such 
                credit or as a refund of the trust's income tax 
                payments previously made. The taxable year or years of 
                the trust for which such credit or refund shall be 
                applicable shall be determined under the same 
                regulations.''
    (b) Deduction Allowable Whether or Not Taxpayer Itemizes Other 
Deductions.--Subsection (a) of section 62 of such Code is amended by 
inserting after paragraph (13) the following new paragraph:
            ``(14) Premiums on life insurance for the benefit of 
        disabled individuals.--The deduction allowed by section 220.''
    (c) Insurance Contract Proceeds Excluded From Gross Estate of 
Holder and Included in Gross Estate of Beneficiary of Trust.--Section 
2042 of such Code (relating to estate tax treatment of the proceeds of 
life insurance) is amended--
            (1) by striking out ``The value of the gross estate'' and 
        inserting in lieu thereof ``(a) In General.--The value of the 
        gross estate'', and
            (2) by adding at the end thereof the following new 
        subsection:
    ``(b) Proceeds of Qualified Disabled Individual's Life Insurance 
Contract.--For purposes of this chapter--
            ``(1) Exclusion from estate on death of insured.--If a life 
        insurance contract on the life of the decedent is a qualified 
        disabled individual's life insurance contract (within the 
        meaning of section 220(b)(2)) on the date of the decedent's 
        death and on at least 80 percent of the days on which such 
        contract is in effect, the value of the gross estate of the 
        decedent shall not include any portion of the proceeds of such 
        contract.
            ``(2) Inclusion in estate on death of beneficiary of 
        trust.--On the death of the last to die of all individuals who 
        are the income beneficiaries of a qualified disabled 
        individual's trust (as defined in section 220(c)), an amount 
        equal to the sum of--
                    ``(A) any remaining portion of the corpus of the 
                trust which is attributable to the proceeds of any 
                qualified disabled individual's life insurance 
                contract, and
                    ``(B) any remaining accumulated income of the trust 
                which is attributable to such proceeds,
        shall be included in the gross estate of such individual and 
        shall be subject to the tax imposed under section 2001 in the 
        manner provided in paragraph (3).
            ``(3) Paragraph (2) amount subject to tax at highest 
        rate.--The amount of the tax imposed under section 2001(a) on 
        the taxable estate of any individual referred to in paragraph 
        (2) shall be the sum of the amounts computed separately as 
        follows:
                    ``(A) The amount determined under section 2001(b) 
                for the amount of the taxable estate reduced by the 
                amount which is attributable to the amount included in 
                the gross estate under paragraph (2) (taking into 
                account any deduction allowed with respect to such 
                paragraph (2) amount).
                    ``(B) The amount determined for the amount of such 
                taxable estate which is attributable to the amount 
                included in the gross estate under paragraph (2) 
                (taking into account any such deduction) by applying 
                the highest rate provided in section 2001(c) to such 
                amount.''
    (d) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 of such Code is amended by striking the last 
item and by inserting the following new items:

                              ``Sec. 220. Premiums on qualified 
                                        disabled individual's life 
                                        insurance contracts.
                              ``Sec. 221. Cross reference.''
    (e) Effective Date.--The amendments made by this section shall 
apply with respect to premiums under a qualified disabled individual's 
life insurance contract paid or incurred after the close of the 1st 
calendar year ending after the date of the enactment of this Act, in 
taxable years ending after the close of such year.