Is life insurance part of probate and the taxable estate?
Key takeaway
Life insurance proceeds generally pass outside probate and can still be part of the taxable estate. Section 2042 includes insurance proceeds receivable by other beneficiaries when the decedent possessed incidents of ownership at death, alone or with another person. A guide describes proceeds as passing outside probate but possibly remaining in the taxable estate for federal estate tax.
Section 2042 and incidents of ownership
Section 2042 includes insurance proceeds receivable by other beneficiaries under policies on the decedent's life where the decedent possessed incidents of ownership at death. The decedent may hold them alone or in conjunction with another person.
The regulation states that section 2042 requires including in the gross estate insurance proceeds not receivable by the estate if the decedent possessed incidents of ownership at death, alone or with another person.
What ownership means in practice
Speakers describe the policy owner as having lifetime control to surrender, sell, gift or change the beneficiary, while the beneficiary receives the death proceeds.
Practitioners describe retained rights such as changing beneficiaries or pledging the policy as incidents of ownership that can cause proceeds to be included in the decedent's estate.
Individual and entity ownership
Extension guidance says life insurance proceeds are considered part of a person's gross estate if that person owns the policy.
An article describes proceeds of a contract owned by an individual as includable in that person's taxable estate. It describes proceeds of a contract owned by an entity outside the taxable estate as possibly not subject to estate tax.