A life insurance policy names the insured's estate as the beneficiary. At the insured's death, the proceeds:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Proceeds payable to the estate still qualify for the IRC Section 101(a) income tax exclusion, so they are generally not subject to income tax. However, the proceeds are included in the insured's gross estate for federal estate tax purposes because the insured held incidents of ownership and the estate is the beneficiary, and the money also becomes subject to probate administration and the claims of creditors. Naming an estate, therefore, sacrifices the probate-avoidance and creditor-protection advantages of a direct beneficiary designation, while the income tax exclusion itself remains intact.
Why the other options are wrong
- B) Naming the estate as beneficiary does not revoke the income tax exclusion. IRC Section 101 still applies, so the proceeds are generally not subject to income tax even when they flow into the estate.
- C) There is no automatic double taxation. Income tax and estate tax are separate systems; the income exclusion still applies, while estate tax exposure depends on the size of the taxable estate and available exemptions.
- D) An estate may be named as a beneficiary, and insurers regularly pay proceeds to estates. The designation is legally valid, though it is usually less advantageous than naming an individual.
Memory hook
Estate as beneficiary: income tax still waived, but probate, creditors, and estate tax all step in.