To keep life insurance proceeds out of the insured's gross estate for federal estate tax purposes, the insured must:
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Under IRC §2042, estate inclusion depends on whether the insured held any incidents of ownership at death. To remove the proceeds from the estate, the insured must give up all incidents of ownership — the right to change the beneficiary, borrow, surrender, assign, or otherwise control the policy. Merely naming a new beneficiary, ceasing premium payments, or giving up one right is insufficient; any retained incident of ownership keeps the proceeds in the estate. An absolute assignment or an irrevocable trust transfer that strips all control is the common estate-planning technique.
Why the other options are wrong
- A) Changing the beneficiary does not remove the policy from the estate because the insured typically retains ownership rights, which are themselves incidents of ownership. Ownership still remains with the insured.
- B) Stopping premium payments does not transfer ownership; if the insured still owns and controls the policy, the proceeds remain in the estate at death. Control is what creates inclusion.
- D) Retaining the right to change the beneficiary is itself an incident of ownership that keeps the proceeds in the estate. That retained right alone is fatal to exclusion. One retained right is enough.
Memory hook
To escape the estate, hand over every ownership string — one retained string is enough to include it.