CFP Estate Planning Practice Exam – Prep, Study Guide & Practice Questions

The proceeds from life insurance are included in the gross estate of the decedent if the owner of the policy transferred it within five years of their death. This inclusion is due to the provisions laid out in the Internal Revenue Code, specifically under IRC § 2035, which states that any transfers of life insurance within three years prior to death are treated as part of the gross estate. However, for transfers made between three and five years before death, while the assets can still be included under certain circumstances, the general treatment aligns with the principle of ensuring that the transfer doesn't circumvent estate tax liabilities.

Therefore, when life insurance proceeds are transferred within five years before a decedent's death, those proceeds are typically included in the gross estate when assessing tax obligations. This is intended to prevent individuals from transferring valuable assets to avoid estate taxes. Thus, the correct understanding of how these proceeds are treated directly reflects the IRS's rules on estate inclusions and tax considerations for the decedent's estate.