In estate planning, what does having incidents of ownership in a life insurance policy lead to?

Having incidents of ownership in a life insurance policy means that the policyholder retains certain rights and controls over the policy. This can include the ability to change the beneficiary, borrow against the policy, or cancel the policy altogether. When the insured individual dies, the value of the life insurance policy can be included in their gross estate for estate tax purposes if they had any incidents of ownership at the time of death. This inclusion occurs because the IRS considers the policy proceeds as part of the taxable estate given the direct control and benefits retained by the policyholder.

Under the relevant tax laws, if the deceased had incidents of ownership, the full value of the policy is subject to estate taxes, which can significantly affect the overall tax liability of the estate. This is important for individuals to understand when planning their estates, as it can impact the net value passed on to beneficiaries after taxes are accounted for.

In contrast, situations where there are no incidents of ownership could potentially allow for the exclusion of policy proceeds from the gross estate. Therefore, understanding ownership rights is crucial when considering how life insurance will factor into estate planning and the eventual tax implications.