6. Estate Tax Issue
If an individual is the owner of a policy, all of the death proceeds are included in the estate. For most individuals, this will not be a problem; however, if the estate is large, unnecessary estate taxes may occur.
Typically, when an individual discovers that ownership of a policy creates an estate tax problem, they transfers ownership to another individual or trust. Unfortunately this usually won't work because the Internal Revenue Code contains a rule that provides that if an insured owns a policy on their life and gives the policy to another person, trust, or entity and then dies within three years of the transfer, the policy proceeds will be included in the estate of the insured and subject to estate taxation.
A simple solution is to purchase a separate insurance policy for the three-year period during which the policy would be subject to estate tax.