For federal estate tax purposes, life insurance proceeds are included in the insured's gross estate when the insured:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
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.
Why the other options are wrong
- B) Marital status does not determine estate inclusion; the controlling factor is whether the insured held incidents of ownership in the policy at death. Ownership control is decisive. Marriage is not the test.
- C) Paying the premiums alone does not include the proceeds in the estate; ownership control, not premium payment, is what triggers inclusion under §2042. Premium payment is irrelevant here. Control is what matters.
- D) Naming a trust as beneficiary does not itself cause inclusion; what matters is whether the insured retained incidents of ownership over the policy. The beneficiary choice is not the test.
Memory hook
Keep control, pay estate tax on the proceeds — incidents of ownership are the trigger.