Section 2042 inclusion refers to the estate tax rule under Internal Revenue Code Section 2042 that governs when life insurance proceeds are included in a decedent's gross estate. Death benefits are includible if the proceeds are payable to or for the benefit of the decedent's estate, or if the decedent possessed any incidents of ownership in the policy at death, such as the power to change beneficiaries, assign the policy, borrow against cash value, or surrender the contract. Even indirect or shared powers over a policy can constitute incidents of ownership. When Section 2042 applies, the full amount of the death benefit may be subject to estate tax, which can significantly increase the overall tax burden for large policies issued on wealthy individuals.

Advisors and estate planners evaluate Section 2042 inclusion whenever they design ownership structures for large life insurance policies. To avoid estate inclusion, they often recommend using irrevocable life insurance trusts (ILITs) or third-party ownership, ensuring the insured retains no incidents of ownership. When reviewing existing coverage, they look for policy powers held by the insured, such as the ability to change beneficiaries or pledge the policy as collateral, and may recommend ownership changes if appropriate. Planners also consider how Section 2042 interacts with Sections 2035, 2036, and 2038. Explaining Section 2042 inclusion helps clients understand why who owns the policy matters as much as who is insured, and why careful structuring is essential for estate tax efficiency.