Life insurance death benefits paid directly to individual beneficiaries are generally not subject to federal income tax, making them one of the most tax-efficient wealth transfer vehicles available. However, if you own the policy at death and the total estate exceeds the federal estate tax exemption ($13.61 million in 2024), the death benefit may be subject to estate tax. Irrevocable Life Insurance Trusts (ILITs) are commonly used in California to keep large policies outside the taxable estate.