Estate Planning: Documents, Transfer Tax, and Life Insurance Ownership
This domain tests whether you can move property at death efficiently: which documents control, how the transfer tax system works, and why ownership of a life policy decides whether proceeds are taxed.
Documents and probate
A will controls probate assets and names a guardian for minors; intestacy statutes decide when there is no will. A revocable living trust avoids probate and manages incapacity but does not save estate tax. A durable power of attorney handles financial matters; a health care proxy and HIPAA authorization handle medical decisions. Beneficiary designations on life insurance and retirement accounts override the will, which is why outdated designations are a common malpractice claim.
Transfer tax framework
The federal estate and gift tax is unified, with a lifetime exclusion of $13,990,000 in 2025 and an annual gift exclusion of $19,000 per donor per donee. Unlimited marital and charitable deductions apply. Portability lets a surviving spouse claim the deceased spouse's unused exclusion by filing Form 706. The GST tax adds a separate exemption for skip-person transfers. Gifts complete when the donor gives up control; Crummey withdrawal powers let trust contributions qualify for the annual exclusion.
Life insurance in the estate
Under IRC 2042, proceeds are included in the gross estate if the insured held incidents of ownership or the proceeds are payable to the estate. An irrevocable life insurance trust removes the policy, but IRC 2035 pulls back a policy transferred within three years of death. Inherited assets generally receive a step-up in basis under 1014, while lifetime gifts carry over the donor's basis under 1015.
Worked example. A client transfers a $2 million policy to an ILIT on March 1 and dies 18 months later. The three-year rule applies, so the full $2 million is included in the gross estate and the ILIT fails its purpose. Had the insured survived three years and held no incidents of ownership, the proceeds would pass outside the estate and be available for liquidity without estate tax.
Traps
Assuming a revocable trust saves estate tax; ignoring beneficiary designations; forgetting that the three-year rule applies to policies transferred, not to policies purchased directly by the trust with its own funds.