Who Should Own a Life Insurance Policy: The Insured, a Spouse, a Child, or a Trust

Who should own a life insurance policy?

The tax code gives no single answer; it attaches a result to each choice. If the insured holds any incident of ownership at death, the proceeds are in the insured’s gross estate (IRC § 2042(2)). If a spouse, child, trust or business owns the policy and the insured holds none, the proceeds are outside it under that section, but the policy’s value is in the owner’s estate if the owner dies first (IRC § 2033).

The alternatives page compares an insurance trust with simpler arrangements and covers when estate-tax inclusion matters at all. This page takes each possible owner in turn and states what the Code and regulations say about that choice.

Owner, insured and beneficiary

A life insurance policy has three roles.

• The owner holds the rights under the contract, such as naming the beneficiary, surrendering the policy, assigning it, or borrowing against it.
• The insured is the person whose death causes the policy to pay.
• The beneficiary receives the proceeds.

One person can fill more than one role, and each federal tax looks at a different one. The estate tax looks at the insured and asks what rights the insured held (§ 2042). The gift tax looks at the owner and asks what the owner gave away. The income tax looks at the recipient: amounts paid under a life insurance contract by reason of the insured’s death are generally excluded from gross income (IRC § 101(a)(1)), with a limit for policies that changed hands for value, covered on the transfer-for-value page.

The insured as owner

This is the arrangement § 2042(2) describes. The gross estate includes amounts receivable by beneficiaries under policies on the decedent’s life “with respect to which the decedent possessed at his death any of the incidents of ownership.” Naming a child or anyone else as beneficiary does not change that result, because the test is what the insured held. The incidents-of-ownership page lists the rights that count.

Proceeds payable to the insured’s own estate are included under a separate paragraph whoever owns the policy (§ 2042(1)).

Inclusion in the gross estate is not the same as tax owed. The basic exclusion amount is $15,000,000 for 2026 (IRC § 2010(c)(3)) and $15,480,000 for 2027 (Rev. Proc. 2026-35).

A spouse as owner

The regulation uses this case as its example of a policy that is outside § 2042. If the decedent owned a policy and, four years before death, irrevocably assigned the entire interest to a spouse and kept no reversionary interest, the proceeds are not included in the decedent’s gross estate under § 2042 (Treas. Reg. § 20.2042-1(c)(1)).

• Gift tax. A gift to a spouse is generally deductible in computing taxable gifts (IRC § 2523(a)). The deduction is not allowed when the spouse is not a U.S. citizen (§ 2523(i)); see gifts to a non-citizen spouse.
• Timing. A policy the insured transfers within three years of death is tested under IRC § 2035(a). The three-year rule page covers it.
• Community property. State law can change who holds the incidents. In the regulation’s example of a policy bought with community funds, the insured is deemed to hold an incident of ownership in only one-half of the policy (§ 20.2042-1(c)(5)).

The cost of this choice appears if the owner-spouse dies first. The gross estate includes all property “to the extent of the interest therein of the decedent at the time of his death” (§ 2033), and a policy on someone else’s life is such property. It is valued by the rules in Treas. Reg. § 20.2031-8(a):

• the value is established through the insurer’s sale of comparable contracts;
• for a policy in force for some time on which further premiums are due, the value may be approximated by adding the interpolated terminal reserve at the date of death to the part of the last premium that covers the period after that date; and
• that approximation may not be used if, because of the unusual nature of the contract, it is not reasonably close to full value.

The insurer reports the figures on Part II of Form 712, which the form says may be filed with the estate-tax return “where decedent owned insurance on life of another.”

The policy then passes under the owner-spouse’s will or state law. The regulation says the mere possibility that the insured might receive a policy “by inheritance through the estate of another person” is not an incident of ownership (§ 20.2042-1(c)(3)). That sentence is about the possibility. On the terms of § 2042(2), an insured who has actually inherited the policy and holds its rights at death is again an insured with incidents of ownership.

An adult child or another individual as owner

The estate-tax analysis is the same as for a spouse. The proceeds are outside § 2042 if the insured holds no incident of ownership, and the policy’s value is in the owner’s estate under § 2033 if the owner dies before the insured. The gift-tax treatment differs because there is no marital deduction.

• Transferring an existing policy is a gift of property, valued under Treas. Reg. § 25.2512-6. See gifting a life insurance policy.
• Premiums the insured keeps paying are gifts to the extent of each premium (Treas. Reg. § 25.2511-1(h)(8)). Where all the incidents of ownership are vested in the owner, the regulation treats the premium payment as a gift of a present interest (Treas. Reg. § 25.2503-3(c), Example (6)), and the annual exclusion covers gifts other than future interests (IRC § 2503(b)). The exclusion is $19,000 per recipient for 2026 (Rev. Proc. 2025-32) and $20,000 for 2027 (Rev. Proc. 2026-35).
• Selling the policy to the child has an income-tax cost. In the regulation’s own example, an insured sells a $100,000 policy to a child for $6,000, and the amount the child may exclude from income at the insured’s death is limited to $6,000 plus later premiums and other amounts the child paid (Treas. Reg. § 1.101-1(g)(1), Example 1).

When the owner and the beneficiary are different people

A policy can have three different people in the three roles: one person owns it, a second is insured, and a third is the beneficiary. The gift-tax regulations give one example of this pattern. Where community property is used to buy insurance on a husband’s life, a third person is revocably named as beneficiary, and state law treats the husband’s death as making the wife’s transfer absolute, “there is a gift by the wife at the time of the husband’s death of half the amount of the proceeds” (Treas. Reg. § 25.2511-1(h)(9)).

The general rules on completed gifts point the same way for an owner outside community property. A gift is incomplete while the donor keeps the power to name new beneficiaries, unless the power is a fiduciary power limited by a fixed or ascertainable standard, and the termination of that power, other than by the donor’s own death, “is regarded as the event that completes the gift” (Treas. Reg. § 25.2511-2(c), (f)). Read together with the example above, these rules suggest that an owner who is not the insured, and who has revocably named someone else as beneficiary, makes a gift of the proceeds to that beneficiary when the insured dies. The regulations do not state that conclusion in a separate example.

On the same reasoning, the question does not arise when the owner is also the beneficiary, because nothing passes from the owner to another person at the insured’s death.

A trust as owner

An irrevocable life insurance trust puts the owner role in a trustee’s hands. The ILIT pillar page explains the structure. Two points belong here.

• The insured as trustee. An insured who, under the terms of the policy, has power, as trustee or otherwise, to change the beneficial ownership of a trust-held policy or its proceeds, or the time or manner of enjoyment, holds an incident of ownership even with no beneficial interest in the trust (Treas. Reg. § 20.2042-1(c)(4)).
• Owner and beneficiary are different roles. A trust that is only the beneficiary of a policy the insured still owns does not change the § 2042(2) result. See naming a trust as beneficiary.

Gifts to the trust to pay premiums raise the present-interest question covered on the funding and Crummey letters pages.

A business as owner

Two provisions apply when an employer or a closely held corporation owns the policy.

Income tax. An “employer-owned life insurance contract” is one owned by a person engaged in a trade or business, who is a beneficiary under it, on the life of someone who was its employee when the contract was issued (IRC § 101(j)(3)). For such a contract issued after August 17, 2006 (subject to the exceptions in that effective-date rule), the amount the policyholder may exclude from income is limited to the premiums and other amounts it paid (§ 101(j)(1); Pub. L. 109-280, § 863(d)). A material change to an older contract can bring it under the rule. The limit is lifted only if notice and consent requirements are met and one of the statute’s exceptions applies. Before the contract is issued, the employee must:

• be notified in writing that the policyholder intends to insure the employee’s life, and of the maximum face amount;
• consent in writing to being insured and to coverage that may continue after employment ends; and
• be informed in writing that the policyholder will be a beneficiary of proceeds payable at the employee’s death (§ 101(j)(4)).

The exceptions cover an insured who was an employee at any time in the 12 months before death, or who was a director or highly compensated when the contract was issued, and amounts paid to the insured’s family, designated beneficiary, a trust for them, or the insured’s estate, or used to buy an equity interest in the policyholder from one of them (§ 101(j)(2)).

Estate tax. A corporation’s incidents of ownership are attributed to an insured who owns more than 50 percent of its voting power, but only for proceeds not payable to or for the benefit of the corporation (Treas. Reg. § 20.2042-1(c)(6)). The incidents-of-ownership page sets out the test, and the business-succession guides cover how owners use insurance in a buy-sell plan.

Ownership choices compared

In every row, proceeds payable to the insured’s estate are included under § 2042(1) regardless of the owner.

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