Life insurance is designed to be income tax free to the beneficiary, but depending on who is name as the owner, it cam be included in the decedents estate. The policy owner is often the insured person, but could be another “interested” person. The policy owner owns and controls the cash value and is the only one who can make changes to the policy. Although the benefits are tax free, if the insured retains any incidence of ownership”, the policy proceeds can be included in their gross estate.
Many of you might feel your assets are well under the amount that is needed to force you into paying estate taxes. But, keep in mind, you must add the amount of your life insurance to the total of your other assets. This might have a negative effect and put you over the threshold, resulting in your having to pay estate taxes, when otherwise you would not have to.
To alleviate the problem of having your life insurance proceeds included in your estate, you can transfer ownership to another entity. This could be a spouse, an adult child, or an irrevocable life trust. The transfer must be done at least three years prior to your death to be valid. Once an irrevocable trust is established, it cannot be rescinded or modified in any way.