Determining Whether to Include Life Insurance in the Estate Tax Calculation

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Calculating the Value of an Estate

Valuing Estate Assets

Estate Taxes and Estate Administration

Administering the estate of a loved one in San Diego comes with many responsibilities and challenges. One such duty is to calculate and pay any estate tax that is owed by the estate to the IRS or to the state of California. Figuring out the size of the estate for these purposes can be confusing if you have never performed this task in the past. One type of asset that is often the cause of such confusion is a life insurance policy.

Typically, a nice benefit of a life insurance policy is that the proceeds will pass to beneficiaries income-tax free. These proceeds, however, may be subject to the estate tax of your loved one.

Proceeds from the life insurance policy of your loved one will be included in his or her estate for purposes of calculating the estate tax that is owed if any of the following scenarios apply:

  1. The proceeds of the policy were made payable to the executor of the estate, either at the direction of the beneficiary designation form or due to the designation being left blank or invalid.
  2. The decedent transferred ownership over the life insurance policy to someone else, and that transfer took place less than three years prior to death.
  3. The decedent had an “incident of ownership” over the insurance policy at the time he or she passed away.

If only the last scenario is applicable to your loved one’s estate, you will have to determine whether any incidents of ownership existed at the time he or she passed. Incidents of ownership include any of the following:

  1. The ability to name beneficiaries
  2. The ability to change beneficiaries
  3. The ability to borrow against the cash reserves of the policy
  4. The right to terminate the policy
  5. The right to assign the policy

If incidents of ownership existed, you will have to include the value of the proceeds when calculating your loved one’s estate. This could result in an estate tax being owed either to the IRS or to the state.

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Scott Grossman

Scott Grossman


The Grossman Law Firm, APC · 525 B Street, Suite 1500, San Diego, CA 92101 · (951) 523-8307