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.

Ownership and Beneficiary Consideration

Related Articles
  1. Insurance

    How To Avoid Taxation On Life Insurance Proceeds

    Decrease the value of your taxable estate and prevent the tax man from getting you one last time.
  2. Insurance

    Understanding The Insurance Transfer-For-Value Rule

    If you are banking on your life insurance payout being tax-free, you may be in for a surprise.
  3. Managing Wealth

    Mistakes to Avoid When You Own Life Insurance

    How to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
  4. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  5. Retirement

    How Survivorship Life Insurance Works

    Should you buy a survivorship life insurance policy?
  6. Financial Advisor

    How Life Insurance Settlements Are Evolving

    The life insurance industry marches forward by offering more ways that consumers can access the death benefits in their policies. Here's one of the newest.
  7. Managing Wealth

    Profit From Unwanted Life Policies With Life Settlement

    With a life settlement you could cash in on your policy money now.
  8. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  9. Financial Advisor

    Why the Wealthy Should Buy Lots of Life Insurance

    Wealthy clients have an enviable problem — managing, preserving and growing wealth. Properly structured life insurance can help with these goals.
  10. Insurance

    Life Insurance: How To Get the Most Out Of Your Policy

    There are many benefits to owning a life insurance policy - if you get the right one for you.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center