[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of January 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR20.2042-1]

[Page 336-339]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 20_ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954--Table of Contents
 
Sec.  20.2042-1  Proceeds of life insurance.

    (a) In general. (1) Section 2042 provides for the inclusion in a 
decedent's gross estate of the proceeds of insurance on the decedent's 
life (i) receivable by or for the benefit of the estate (see paragraph 
(b) of this section) and (ii) receivable by other beneficiaries (see 
paragraph (c) of this section). The term ``insurance'' refers to life 
insurance of every description, including death benefits paid by 
fraternal beneficial societies operating under the lodge system.
    (2) Proceeds of life insurance which are not includable in the gross 
estate under section 2042 may, depending upon the facts of the 
particular case, be includable under some other section of Part III of 
Subchapter A of Chapter 11. For example, if the decedent possessed 
incidents of ownership in an insurance policy on his life but 
gratuitously transferred all rights in the policy in contemplation of 
death, the proceeds would be includable under section 2035. Section 2042 
has no application to the inclusion in the gross estate of the value of 
rights in an insurance policy on the life of a person other than the 
decedent, or the value of rights in a combination annuity contract and 
life insurance policy on the decedent's life (i.e., a ``retirement 
income'' policy with death benefit or an ``endowment'' policy) under 
which there was no insurance element at the time of the decedent's death 
(see paragraph (d) of Sec.  20.2039-1).
    (3) Except as provided in paragraph (c)(6), the amount to be 
included in the gross estate under section 2042 is the full amount 
receivable under the policy. If the proceeds of the policy are made 
payable to a beneficiary in the form of an annuity for life or for a 
term of years, the amount to be included in the gross estate is the one 
sum payable at death under an option which could have been exercised 
either by the insured or by the beneficiary, or if no option was 
granted, the sum used

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by the insurance company in determining the amount of the annuity.
    (b) Receivable by or for the benefit of the estate. (1) Section 2042 
requires the inclusion in the gross estate of the proceeds of insurance 
on the decedent's life receivable by the executor or administrator, or 
payable to the decedent's estate. It makes no difference whether or not 
the estate is specifically named as the beneficiary under the terms of 
the policy. Thus, if under the terms of an insurance policy the proceeds 
are receivable by another beneficiary but are subject to an obligation, 
legally binding upon the other beneficiary, to pay taxes, debts, or 
other charges enforceable against the estate, then the amount of such 
proceeds required for the payment in full (to the extent of the 
beneficiary's obligation) of such taxes, debts, or other charges is 
includable in the gross estate. Similarly, if the decedent purchased an 
insurance policy in favor of another person or a corporation as 
collateral security for a loan or other accommodation, its proceeds are 
considered to be receivable for the benefit of the estate. The amount of 
the loan outstanding at the date of the decedent's death, with interest 
accrued to that date, will be deductible in determining the taxable 
estate. See Sec.  20.2053-4.
    (2) If the proceeds of an insurance policy made payable to the 
decedent's estate are community assets under the local community 
property law and, as a result, one-half of the proceeds belongs to the 
decedent's spouse, then only one-half of the proceeds is considered to 
be receivable by or for the benefit of the decedent's estate.
    (c) Receivable by other beneficiaries. (1) Section 2042 requires the 
inclusion in the gross estate of the proceeds of insurance on the 
decedent's life not receivable by or for the benefit of the estate if 
the decedent possessed at the date of his death any of the incidents of 
ownership in the policy, exercisable either alone or in conjunction with 
any other person. However, if the decedent did not possess any of such 
incidents of ownership at the time of his death nor transfer them in 
contemplation of death, no part of the proceeds would be includible in 
his gross estate under section 2042. Thus, if the decedent owned a 
policy of insurance on his life and, 4 years before his death, 
irrevocably assigned his entire interest in the policy to his wife 
retaining no reversionary interest therein (see subparagraph (3) of this 
paragraph), the proceeds of the policy would not be includible in his 
gross estate under section 2042.
    (2) For purposes of this paragraph, the term ``incidents of 
ownership'' is not limited in its meaning to ownership of the policy in 
the technical legal sense. Generally speaking, the term has reference to 
the right of the insured or his estate to the economic benefits of the 
policy. Thus, it includes the power to change the beneficiary, to 
surrender or cancel the policy, to assign the policy, to revoke an 
assignment, to pledge the policy for a loan, or to obtain from the 
insurer a loan against the surrender value of the policy, etc. See 
subparagraph (6) of this paragraph for rules relating to the 
circumstances under which incidents of ownership held by a corporation 
are attributable to a decedent through his stock ownership.
    (3) The term ``incidents of ownership'' also includes a reversionary 
interest in the policy or its proceeds, whether arising by the express 
terms of the policy or other instrument or by operation of law, but only 
if the value of the reversionary interest immediately before the death 
of the decedent exceeded 5 percent of the value of the policy.

As used in this subparagraph, the term ``reversionary interest'' 
includes a possibility that the policy or its proceeds may return to the 
decedent or his estate and a possibility that the policy or its proceeds 
may become subject to a power of disposition by him. In order to 
determine whether or not the value of a reversionary interest 
immediately before the death of the decedent exceeded 5 percent of the 
value of the policy, the principles contained in paragraph (c) (3) and 
(4) of Sec.  20.2037-1, insofar as applicable, shall be followed under 
this subparagraph. In that connection, there must be specifically taken 
into consideration any incidents of ownership-held by others immediately 
before the decedent's death which would affect the value of the 
reversionary interest. For example, the

[[Page 338]]

decedent would not be considered to have a reversionary interest in the 
policy of a value in excess of 5 percent if the power to obtain the cash 
surrender value existed in some other person immediately before the 
decedent's death and was exercisable by such other person alone and in 
all events. The terms ``reversionary interest'' and ``incidents of 
ownership'' do not include the possibility that the decedent might 
receive a policy or its proceeds by inheritance through the estate of 
another person, or as a surviving spouse under a statutory right of 
election or a similar right.
    (4) A decedent is considered to have an ``incident of ownership'' in 
an insurance policy on his life held in trust if, under the terms of the 
policy, the decedent (either alone or in conjunction with another person 
or persons) has the power (as trustee or otherwise) to change the 
beneficial ownership in the policy or its proceeds, or the time or 
manner of enjoyment thereof, even though the decedent has no beneficial 
interest in the trust. Moreover, assuming the decedent created the 
trust, such a power may result in the inclusion in the decedent's gross 
estate under section 2036 or 2038 of other property transferred by the 
decedent to the trust if, for example, the decedent has the power to 
surrender the insurance policy and if the income otherwise used to pay 
premiums on the policy would become currently payable to a beneficiary 
of the trust in the event that the policy were surrendered.
    (5) As an additional step in determining whether or not a decedent 
possessed any incidents of ownership in a policy or any part of a 
policy, regard must be given to the effect of the State or other 
applicable law upon the terms of the policy. For example, assume that 
the decedent purchased a policy of insurance on his life with funds held 
by him and his surviving wife as community property, designating their 
son as beneficiary but retaining the right to surrender the policy. 
Under the local law, the proceeds upon surrender would have inured to 
the marital community. Assuming that the policy is not surrendered and 
that the son receives the proceeds on the decedent's death, the wife's 
transfer of her one-half interest in the policy was not considered 
absolute before the decedent's death. Upon the wife's prior death, one-
half of the value of the policy would have been included in her gross 
estate. Under these circumstances, the power of surrender possessed by 
the decedent as agent for his wife with respect to one-half of the 
policy is not, for purposes of this section, an ``incident of 
ownership'', and the decedent is, therefore, deemed to possess an 
incident of ownership in only one-half of the policy.
    (6) In the case of economic benefits of a life insurance policy on 
the decedent's life that are reserved to a corporation of which the 
decedent is the sole or controlling stockholders, the corporations' 
incidents of ownership will not be attributed to the decedent through 
his stock ownership to the extent the proceeds of the policy are payable 
to the corporation. Any proceeds payable to a third party for a valid 
business purpose, such as in satisfaction of a business debt of the 
corporation, so that the net worth of the corporation is increased by 
the amount of such proceeds, shall be deemed to be payable to the 
corporation for purposes of the preceeding sentence. See Sec.  20.2031-
2(f) for a rule providing that the proceeds of certain life insurance 
policies shall be considered in determining the value of the decedent's 
stock. Except as hereinafter provided with respect to a group-term life 
insurance policy, if any part of the proceeds of the policy are not 
payable to or for the benefit of the corporation, and thus are not taken 
into account in valuing the decedent's stock holdings in the corporation 
for purposes of section 2031, any incidents of ownership held by the 
corporation as to that part of the proceeds will be attributed to the 
decedent through his stock ownership where the decedent is the sole or 
controlling stockholder. Thus, for example, if the decedent is the 
controlling stockholder in a corporation, and the corporation owns a 
life insurance policy on his life, the proceeds of which are payable to 
the decedent's spouse, the incidents of ownership held by the 
corporation will be attributed to the decedent through his stock 
ownership and the proceeds will be included in his gross estate under 
section 2042. If in

[[Page 339]]

this example the policy proceeds had been payable 40 percent to 
decedent's spouse and 60 percent to the corporation, only 40 percent of 
the proceeds would be included in decedent's gross estate under section 
2042. For purposes of this subparagraph, the decedent will not be deemed 
to be the controlling stockholder of a corporation unless, at the time 
of his death, he owned stock possessing more than 50 percent of the 
total combined voting power of the corporation. Solely for purposes of 
the preceding sentence, a decedent shall be considered to be the owner 
of only the stock with respect to which legal title was held, at the 
time of his death, by (i) the decedent (or his agent or nominee); (ii) 
the decedent and another person jointly (but only the proportionate 
number of shares which corresponds to the portion of the total 
consideration which is considered to be furnished by the decedent for 
purposes of section 2040 and the regulations thereunder); and (iii) by a 
trustee of a voting trust (to the extent of the decedent's beneficial 
interest therein) or any other trust with respect to which the decedent 
was treated as an owner under Subpart E, Part I, Subchapter J, Chapter I 
of the Code immediately prior to his death. In the case of group-term 
life insurance, as defined in the regulations under section 79, the 
power to surrender or cancel a policy held by a corporation shall not be 
attributed to any decedent through his stock ownership.

[T.D. 6296, 23 FR 4529, June 24, 1958; 25 FR 14021, Dec. 31, 1960 as 
amended by T.D. 7312, 39 FR 14949, Apr. 29, 1974; T.D. 7623, 44 FR 
28800, May 17, 1979]