Incidents of Ownership

Possessed incidents of ownership in the policy at the time of death — Under IRC §2042, life insurance proceeds are included in the insured's gross estate if the insured possessed any incidents of ownership in the policy at death. Incidents of ownership include the right to change the beneficiary, borrow against the policy, surrender it, assign it, or revoke an assignment. Merely paying premiums or being unmarried does not pull the proceeds into the estate if the insured holds no incidents of ownership. The estate inclusion is separate from the income tax treatment of the proceeds, so tax-free income treatment and estate inclusion can both exist.

National insurance concept

Transfer all incidents of ownership in the policy to another person and retain none — Under IRC §2042, estate inclusion depends on whether the insured held any incidents of ownership at death. To remove the proceeds from the estate, the insured must give up all incidents of ownership — the right to change the beneficiary, borrow, surrender, assign, or otherwise control the policy. Merely naming a new beneficiary, ceasing premium payments, or giving up one right is insufficient; any retained incident of ownership keeps the proceeds in the estate. An absolute assignment or an irrevocable trust transfer that strips all control is the common estate-planning technique.

National insurance concept