Question

Five years ago, Jason purchased a $400,000 life insurance policy on his life. For each of the following, indicate how much of the $400,000 policy proceeds are included in his gross estate.

a) The proceeds are payable to his estate.

b) The proceeds were paid to his daughter, but Jason retained the right to change beneficiaries.

c) $100,000 of the proceeds are used to pay debts of his estate with the balance paid to his daughter. Jason retained no rights in the policy.

Answer 1

Life insurance can make up a large part of your taxable estate if you own the policy. If you have certain powers over a policy (called "incidents of ownership"), you are considered the owner of the policy.

Policy proceeds are also included if they are payable to the estate or the proceeds are receivable by another for the benefit of the estate.

Incidents of Ownership

If you have certain rights over a life insurance policy, the policy proceeds will be included in your estate. Rights that are considered incidents of ownership include the right to name or change the beneficiary.

1)4,00,000 is includable in Jason Estate and chargeable to Estate tax as the policy amount is payable to his estate.

2)In this case, he has a right to change the beneficiary so he has ownership on such policy, then it has to be includable in Jason Estate and chargeable to Estate tax.

3)In this case, no amount is includable in Jason Estate, Balance (4,00,000-1,00,000) is includable in his daughter's estate.