165 / How are proceeds of community property life insurance treated in the insured’s estate?

Generally speaking, community property is recognized for federal tax purposes as belonging one-half to each spouse. Consequently, if life insurance proceeds are community property, when the insured spouse dies first, only one-half of the proceeds are includable in that spouse’s gross estate regardless of whether they are payable to that spouse’s estate, the surviving spouse, or some other beneficiary.¹ Where community proceeds are payable to the insured’s estate, only one-half is considered receivable by or for the benefit of the decedent’s estate; the other half is received on behalf of the insured’s spouse. Where community proceeds are payable to a beneficiary other than the insured’s estate, the fact that under local community property law the insured had management powers over the insurance is not construed to mean that the insured possessed incidents of ownership ( Q 86) in the insured’s spouse’s community half.² Local community property law determines the nature and extent of ownership of policy proceeds and policy rights. (With respect to life insurance issued under U.S. government programs, see Q 174. See Q 169 for estate tax results where deaths of insured and spouse occur simultaneously.)