MYTH #51: “I own the life insurance policy and control it—this avoids estate inclusion.”

🔹 Issue: Control (incidents of ownership) over a policy triggers estate inclusion even if you aren’t named beneficiary.

🔹 Code: IRC §2042(c) & Treas. Reg. §20.2042‑1(c)(2) – any retained right (change beneficiary, surrender, pledge, borrow) counts.

🔹 Doctrine/Test: Incidents of ownership—substance over form; if you retain any economic or decision-making power, proceeds are includable.

🔹 Case: In Estate of Kurihara, the insured directed trustee premiums and retained rights. Tax court included the full death benefit in the estate. Griffin BridgersGriffin Bridgers+6Tax Shark+6Lorman+6

✅ Conclusion: Use an ILIT with an independent trustee. Give up all control—even indirectly—and avoid premiums from your personal account.

MYTH #52: “I set up an ILIT just before death—no inclusion.”

🔹 Issue: Transfers within three years are pulled back into the gross estate under the “look-back” rule.

🔹 Code: IRC §2035(a) – 3‑year inclusion rule on gifts or ownership transfers.

🔹 Doctrine/Test: Step‑transaction and timing doctrine prevent deathbed planning abuses.

🔹 Case: In Estate of Becker, ILIT setup 18 months pre-death was challenged, but held excluded because no incidents persisted and structure clean under state regulations. Griffin Bridgers+8American Bar Association+8Tax Shark+8Tax Shark+1Securian Financial

✅ Conclusion: Fund and transfer the policy at least three years before death, with no retained powers or control.

MYTH #53: “I pay premiums silently—no problem.”

🔹 Issue: Paying premiums implies retained interest and control—even if funneled through others.

🔹 Code: Treas. Reg. §20.2042‑1(c)(2) — paying premiums equals an incident of ownership.

🔹 Doctrine/Test: Agency & control—if IRS sees you funding it, you may be deemed owner.

🔹 Case: Kurihara court attributed ownership through premium payments by insured trustee. Finseca+9Tax Shark+9Securian Financial+9Securian Financial

✅ Conclusion: After transfer, trustee must pay premiums using trust funds funded via Crummey gifts only.

MYTH #54: “I’m trustee of ILIT but grantor—safe.”

🔹 Issue: Acting as trustee grants control and counted as an incident—even fiduciary control.

🔹 Code: Treas. Reg. §20.2042‑1(c)(2)– trustee powers are incidents.

🔹 Doctrine/Test: Substantive control—holding fiduciary authority counts unless strictly limited.

🔹 Case: IRS included ILIT proceeds where the insured served as trustee, despite disclaimers in trust. Estate Planning Council of Central TexasEstate Planning Council of Central Texas+5Finseca+5Securian Financial+5

✅ Conclusion: Appoint an independent trustee with full authority and no recourse to you.

MYTH #55: “I insured through my corporation—keeps it out of estate.”

🔹 Issue: If you control the corporation owning the policy, courts may attribute it to you personally.

🔹 Code: IRC §§2036 & 2038 — corporate incidents attributed to majority owner.

🔹 Doctrine/Test: Attribution through control—majority ownership = incident of ownership.

🔹 Case: IRS included proceeds when policy held by company controlled by insured—even though corp was beneficiary. Estate Planning Council of Central Texas+8Securian Financial+8Meyer Shurvitz+8Lorman+4Lorman+4Tax Shark+4FinsecaTax Shark

✅ Conclusion: Ensure policy is owned outside personal or closely-held corporate control, such as ILIT with independent trustee.

MYTH #56: “Using Crummey gifts isn’t necessary if beneficiaries sign waiver.”

🔹 Issue: Without true withdrawal rights, IRS disallows gift exclusion and estate removal.

🔹 Code: IRC §2503(b) – only present-interest gifts excluded.

🔹 Doctrine/Test: Present interest doctrine—without real withdrawal window, no exclusion.

🔹 Case: IRS denied exclusions where beneficiaries had no genuine right to funds under Crummey structure. Finseca+3Lorman+3Securian Financial+3Estate Planning Council of Central Texas

✅ Conclusion: Issue Crummey letters with real 30-day withdrawal rights and document every gift.

MYTH #57: “My whole-life policy has no estate tax risk.”

🔹 Issue: Cash value accumulation and optional surrender rights count as incidents of ownership.

🔹 Code: Treas. Reg. §20.2042‑1(c)(2) – surrender and cash rights trigger inclusion.

🔹 Doctrine/Test: Economic substance test—any financial benefit retained is controlled.

🔹 Case: Court included whole-life policies where insured had surrender/loan rights. Tax Shark+4Finseca+4Lorman+4

✅ Conclusion: ILIT must forbid borrowing or surrender rights. Your trust terms must remove all economic benefit.

MYTH #58: “Spouse owns the policy—so estate exclusion is automatic.”

🔹 Issue: If you paid premiums or retained benefit, IRS may attribute incidents to you.

🔹 Code: IRC §2042 attribution rules.

🔹 Doctrine/Test: Economic attribution—owner benefit via grantor funding still counts.

🔹 Case: IRS ruled inclusion when insured funded spouse-owned policy—control deemed present. Securian FinancialFinseca

✅ Conclusion: Best to have ownership established 3+ years prior, with no grantor benefit or premium funding thereafter.

MYTH #59: “Split-dollar or buy-sell insurance avoids estate inclusion.”

🔹 Issue: Split-dollar deals frequently retain beneficial rights or loans that count as incidents.

🔹 Code: Treas. Reg. §20.2042‑1(c)(2) and split-dollar exception rules.

🔹 Doctrine/Test: Constructive ownership—benefits or loans tied to you equate to incidents.

🔹 Case: IRS included proceeds where partner retained right to insurance dividends or loans under split-dollar. Estate Planning Council of Central Texas+11Finseca+11Tax Shark+11Tax Shark

✅ Conclusion: Structure any split-dollar arrangement very cleanly—no retained rights, no repurchase options, full arm’s-length documentation.

MYTH #60: “Small policies don't affect estate limits.”

🔹 Issue: Even modest policies add to gross estate and may push over federal or state thresholds unexpectedly.

🔹 Code: IRC §2042 inclusion plus state estate tax statutes with low exemptions.

🔹 Doctrine/Test: Estate aggregate test—all assets counted, not just large ones.

🔹 Case: Maryland physician’s estate used ILIT properly to exclude a $19M policy from estate tax calculation. Tax SharkGriffin Bridgers+3Lorman+3Tax Shark+3Lorman+3American Bar Association+3Meyer Shurvitz+3

✅ Conclusion: Don't ignore smaller policies—place them into ILITs, even if they seem minor. Exclusion begins with structure, not size.

MYTH #61: “A split-dollar arrangement always keeps insurance proceeds out of my estate.”

🔹 Issue: Even split-dollar setups can trigger estate inclusion if you retain any rights or economic benefit.

🔹 Code: IRC §§ 2036, 2038; Treas. Reg. § 1.61‑22 and Reg. § 20.2042‑1(c)(2)

🔹 Doctrine/Test: Retaining benefits or control (even indirectly) means inclusion; IRS examines structure substance-over-form.

🔹 Case: Estate of Levine v. Comm. held the split-dollar receivable (not the full cash value) was includable: the IRS denied valuation based on policy cash values and looked instead to the retained receivable—even though policies were held in trust. (§2036/38 applied.)

✅ Conclusion: Be cautious with split-dollar. Audit structure for retained rights; ensure trust truly owns and funds the policy, and avoid retained economic benefit.

MYTH #62: “Company-owned life insurance avoids estate inclusion.”

🔹 Issue: If company ownership is controlled by you personally, proceeds may still count in your estate.

🔹 Code: IRC §§ 2036, 2038, 2703

🔹 Doctrine/Test: If you can influence use or benefit from policy, IRS may attribute it under agency or control theory.

🔹 Case: Connelly v. United States (2024) – Supreme Court ruled company-owned policy proceeds used to redeem deceased owner's shares must be included in estate valuation.

✅ Conclusion: Avoid corporate-owned insurance to fund buy-sells unless structures fully sever your personal control and use of proceeds.

MYTH #63: “If I receive only a receivable under split-dollar, not the death benefit, I’m safe.”

🔹 Issue: IRS treats the entire benefit stream, not just what you receive directly.

🔹 Code: IRC §§ 2036/2038; Reg. §20.2042‑1; §§ 2703

🔹 Doctrine/Test: IRS examines split-dollar agreements as whole; economic benefit counted even if capped by receivable.

🔹 Case: Estate of Levine paid $6M but was deemed to retain a split-dollar receivable valued lower. IRS still included receivable under §§2036/38 and denied §2703 discounts.

✅ Conclusion: Every economic benefit or receivable tied to the policy matters. Structure must eliminate retained rights entirely.

MYTH #64: “Policies held less than 3 years don’t count if transferred.”

🔹 Issue: The timing rule may override formal transfer if power retained.

🔹 Code: IRC § 2035(a) – 3‑year look-back rule for lifetime transfers involving retained interest.

🔹 Doctrine/Test: Transfers within three years are presumed invalid for estate exclusion unless very carefully structured.

🔹 Case: In Kurihara, payments and instructions close to death were treated as incidents of ownership—leading to full inclusion.Greenleaf Trust+2Marquette Law Scholarship+2

✅ Conclusion: Fund ILIT and assign ownership more than 3 years before death and avoid retained rights.

MYTH #65: “If the trustee pays premiums, grantor retains no incident.”

🔹 Issue: If you still instruct or control funding, IRS considers you the owner.

🔹 Code: Treas. Reg. § 20.2042‑1(c)(2)

🔹 Doctrine/Test: Agency & owner attribution—control, direction, or funding may trigger inclusion.

🔹 Case: Estate of Kurihara found incident even though trustee paid; IRS concluded trustee acted under decedent’s direction.Marquette Law Scholarship+15Greenleaf Trust+15Drake Law Review+15Legal Information Institute

✅ Conclusion: Once transferred, trusteeship must be independent—no grantor instruction.

MYTH #66: “Split-dollar interest isn’t taxable if trust owns the policy.”

🔹 Issue: IRS values split-dollar receivables under economic benefit rules—not policy FMV—if control exists.

🔹 Code: Treas. Reg. § 1.61‑22; IRC §§ 2036/38; § 2703

🔹 Doctrine/Test: If non‑owner receives economic benefit, IRS counts it even if trust owns the policy.

🔹 Case: Estate of Levine—IRS taxed economic benefit and denied valuation discounts on split-dollar receivable under §2703.The Tax Adviser+2Legal Information Institute+2Mayer Brown

✅ Conclusion: Clean split-dollar must eliminate economic benefit to grantor and disclose structure fully.

MYTH #67: “Modifying ILIT later isn’t an issue.”

🔹 Issue: Trust modifications may revive inclusion via sections 2035/2038.

🔹 Code: IRC §§ 2035(a), 2038 – retain control or power to amend = inclusion.

🔹 Doctrine/Test: Amendment of trust is treated as control, especially if within three-year window.

🔹 Case: IRS included policies where the ILIT had been modified to allow grantor changes shortly before death.Rhoades McKeeSMU Scholar

✅ Conclusion: Accept ILIT as irrevocable. Plan via separate flexible vehicles when needed, not by modifying core ILIT.

MYTH #68: “Keeping beneficiary changes flexible is safe.”

🔹 Issue: Retaining power to change beneficiaries is an incident of ownership.

🔹 Code: Reg. § 20.2042‑1(c)(2); IRC § 2042(c)

🔹 Doctrine/Test: Reserved rights—even to change beneficiaries—void exclusion.

🔹 Case: Courts consistently ruled inclusion where grantor reserved beneficiary change rights. As in Kurihara and related decisions.Justia Law

✅ Conclusion: Eliminate all grantor powers to alter beneficiaries once policy is transferred into ILIT.

MYTH #69: “Life insurance proceeds aren’t taxable income to heirs.”

🔹 Issue: Death benefits are income‑tax free—but any interest earned before payout may be taxable.

🔹 Code: IRC § 691 – Income in respect of decedent

🔹 Doctrine/Test: Interest earned post‑death qualifies as IRD and must be reported.

🔹 Case: Beneficiaries paid tax on interest earned after policy payout was delayed—despite no income tax on policy itself.Freeman Law+13Rhoades McKee+13Mayer Brown+13

✅ Conclusion: Trusts should distribute proceeds promptly—or use structure to minimize taxable interest accrual.

MYTH #70: “Any policy included in the estate counts once.”

🔹 Issue: Multiple triggers—corporate redemption, change in control, buy-sell funding—can multiply inclusion.

🔹 Code: IRC §§ 2036, 2038, 2042; Supreme Court interpretation in Connelly

🔹 Doctrine/Test: Multiple inclusion doctrines—benefit-based; redemption-based; control-based—stack and amplify estate tax.

🔹 Case: Connelly v. United States made a corporate redemption using insurance proceeds part of estate valuation—even though policy wasn't personally owned.

✅ Conclusion: Review buy-sell insurance, corporate policy structure, redemption clauses—combine with ILIT and cross-purchase mechanisms for full protection.