How are death benefits from a life insurance policy, where the decedent held incidents of ownership, regarded for tax purposes?

Death benefits from a life insurance policy where the decedent retained incidents of ownership are not subject to federal income tax. This means that the beneficiaries receive the full amount of the death benefit without any income tax liability on that amount. The Internal Revenue Service considers life insurance death benefits to be a form of financial protection and therefore does not tax them as income.

However, it's important to note that while the death benefits are free from federal income tax, they can be included in the decedent's gross estate for estate tax purposes. In the case where the decedent had incidents of ownership, it may also lead to estate tax implications. Therefore, the response reflecting the death benefits being exempt from federal income tax accurately describes their tax treatment without implying any estate tax consideration. This understanding is crucial for estate planning and navigating the tax consequences of life insurance.