Is An Insurance Policy Part Of An Estate?

In some cases, life insurance proceeds can be subject to estate tax, even if you do not own the policy at the time of your death.

The proceeds of insurance on a decedent's life payable to a named beneficiary are subject to estate tax if the decedent possessed any incidents of ownership in the policy at the time of death. "Incidents of ownership" include the power to:

Change the beneficiary

  • Surrender or cancel the policy
  • Assign the policy
  • Revoke an assignment
  • Pledge the policy for a loan
  • Obtain from the insurer a loan against the surrender value of the policy

Under certain circumstances, the IRS considers a decedent to have an incident of ownership in a policy held in trust even though the decedent has no beneficial interest in the trust. This applies if, under the terms of the policy, the decedent has the power to change the beneficial ownership in, or the time or manner of enjoyment of, the policy or its proceeds.

Now the IRS has ruled that a grantor's retention of the power to acquire an insurance policy held in trust by substituting other assets of equal value will not, by itself, cause the value of the insurance policy to be includable in the grantor's estate.

However, the grantor cannot exercise substitution power in a manner that can shift benefits among the trust beneficiaries. So long as the trustee has the power to reinvest the corpus, or body, of the trust and a duty of impartiality with regard to the beneficiaries, the grantor should not be able to shift benefits among beneficiaries.

Read more in Revenue Ruling 2011-28.

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