CFP

Use Of Life Insurance In Estate Planning - Incidents of Ownership

Incidents of Ownership
A person (including trustees), has incidents of ownership if they have the right to change beneficiaries on the policy, borrow from the cash value or change or modify the policy in any manner. This occurs even if the person chooses not to act on it and even if they don't borrow from the policy, the ability to do so gives the insured incidents of ownership.

Sometimes the IRS will look for any incidents of ownership by a person who gifts a life insurance policy to another person or entity. When transferring a policy, the original owner must forfeit all legal rights and must not pay the premiums to keep the policy in force. Also, upon completion of the transfer, if the insured or transferor dies within three years of the date from which the policy was transferred, the life insurance proceeds will be included in the gross value of the original owner's estate (called the three year rule).


Look out!
This rule prevents individuals from gifting assets to their descendants or other parties once death is forthcoming in an attempt to avoid estate taxes.





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