B. ?Incidents of ownership: ?If you possess any incidents of ownership at the time of your death (or transfer those incidents of ownership within three years of your death), the face amount will be included in your taxable estate and subject to estate taxes (see Treasury Reg. 20.2042-1(c)). ?This refers to the right of the insured or the insured's estate to the economic benefits of the policy.
? ? It includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain a loan against the policy cash surrender value. ?Certain reversionary interests in a trust may constitute an incident of ownership.
Hence, to successfully exclude life insurance from your taxable estate, you cannot own the policy nor possess any incidents of ownership in the policy. ?The best way to accomplish this is to have the policy purchased from inception by someone older than you. ?The best owner is an Irrevocable Life Insurance Trust (ILIT) discussed in greater detail in Chapter 6.
Excerpt from The Complete Guide to Estate and Financial Planning in Turbulent Times (Collaborative Press, 2011) - Walt Dallas, Contributing Author
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