History of Life Insurance
In the old days, if you purchased life insurance on yourself and continued to pay the premiums on the policy, even if the policy were to be distributed to someone else, the proceeds of the policy would be included in your estate for tax purposes at your death.
In 1954, Congress eliminated this problem by enacting §2042 of the Internal Revenue Code. This section basically says that the proceeds will only be included in your estate at death if you maintain an incident of ownership over the policy.
§2042 - What it means
Treasury regulations say that you have an incident of ownership if you gain a personal benefit from the policy, if you have the power to change the beneficial ownership in the policy or its proceeds, or if you have the power to change the time or manner of enjoyment, even if you have no interest in it.
§2042 - Summary
In summary, if you purchase an insurance policy, you can prevent it from being included in your estate for tax purposes if you:
As a result, estate planners had to develop effective ways of planning for insurance policies.
Life Insurance Trusts