Proceeds of life insurance policies on the decedent’s life are includable in the gross estate if the proceeds are: 1) payable to (or for the benefit of) the decedent’s estate, or 2) payable to any other beneficiary, but only if the decedent’s possessed incidents of ownership (practical power, directly or indirectly, to control the existence of the policy, to rearrange the economic interests therein, or to affect the benefits payable thereof) in the policy at the time of death. For purposes of estate tax, life insurance is defined in the Code as a life insurance contract under applicable state law that’s cash value does not exceed the net single premium cost for the coverage provided, premiums don’t exceed a guideline premium limitation, and under which benefits fall within the “cash value corridor” (the benefit cannot be less than a percentage of the specified cash value range).
Ordinarily, the entire value of the insurance proceeds is taxed. Thus, where the proceeds are payable in a lump sum, the lump sum amount is included in the insured’s estate. If the proceeds are payable in installments, the taxable amount is the present fair market value of the installment obligation. Still, when an insurance policy on a decedent’s life is purchased with community property funds it is treated as a community asset (each spouse having a one half interest). Consequently, one-half of the proceeds are taxable in the insured’s estate.
Is life insurance includable in a decedent’s gross estate? was last modified: February 12th, 2021 by David Klasing