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D. Life insurance proceeds

D. Life insurance proceeds

The policy payoff is part of your private contract with the insurance company, and it should promptly go to whomever you direct, with no court involvement. Proceeds from a policy owned by the decedent to a named person as beneficiary are excluded from federal income tax, as well as state income or death taxes in most states.

BEWARE! BUT if the decedent owns the policy, proceeds are includable in his federal taxable estate, even though paid to somebody else. (This result is avoidable if an irrevocable Trust owns the policy. More later.) The proceeds are likewise includable if the policy owner names his “estate” as beneficiary. The latter beneficiary designation is also a bad idea because it exposes the policy proceeds to creditors of the estate, which would not otherwise happen

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