Tax TreatmentQuestion 230 of 315
Which of the following BEST keeps a life insurance death benefit out of the insured's federal gross estate?
a.Naming the insured's spouse as primary beneficiary
b.Paying premiums with after-tax dollars rather than pre-tax dollars
c.Having an Irrevocable Life Insurance Trust (ILIT) own the policy, with the insured holding no incidents of ownership
d.Choosing a settlement option that pays interest only
Explanation
Under IRC §2042 the death proceeds are included in the insured's gross estate whenever the insured holds any incidents of ownership. Transferring ownership to an ILIT (and avoiding the §2035 three-year look-back) is the standard estate-planning technique to remove the policy from the gross estate. Naming a spouse defers but does not avoid estate inclusion; how premiums are paid does not change §2042 inclusion.
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