Internal Revenue Service
Revenue Ruling
Rev. Rul. 76-261
1976-2 C.B. 276
Section 2042 -- Life Insurance
Caution: Revoked by Rev. Rul. 84-179
IRS Headnote
Life insurance policy in trust; incidents of ownership. A decedent who had
purchased a life insurance policy on his life, transferred complete
ownership to his wife, and upon her death, as trustee of a residuary trust
for the benefit of their children that included the policy, could use the
loan value to pay premiums, elect to receive annual dividends, borrow on
the policy and assign or pledge it, and determine how the proceeds were
paid, possessed sufficient incidents of ownership to require inclusion of
the policy proceeds in his estate.
Full Text
Rev. Rul. 76-261
Advice has been requested whether, under the circumstances described below,
the insured-decedent possessed sufficient incidents of ownership in an
insurance policy held in a fiduciary capacity to require inclusion of the
policy proceeds in the gross estate under section 2042 of the Internal
Revenue Code of 1954.
In 1957 the decedent, H, purchased an insurance policy on decedent's life.
Decedent's spouse, W, was named beneficiary. In 1962 H transferred complete
ownership of the policy to W and added the names of their children as
beneficiaries. In 1971 W died. In W's will, H was named executor of W's
estate and trustee of a residuary trust established for the benefit of
their children. The insurance policy on H's life was included in W's
residuary estate.
H, as trustee, was granted absolute and unfettered discretion to distribute
the current income from the trust to the beneficiaries or accumulate the
income and add it to corpus. In addition, H, as trustee, was empowered in
the management and investment of the trust property to do any and all
things that a natural person, free from disability of every kind, might
legally do with or in respect of such person's own property. Under the
terms of the policy, the owner could elect to have the proceeds made
payable according to various plans, use the loan value to pay the premiums,
borrow on the policy, assign or pledge the policy, and elect to receive the
annual dividends.
In 1974, H died and a successor trustee was named.
Section 2042(2) of the Code provides, in pertinent part, as follows:
The value of the gross estate shall include the value of all property--
* * * * *
(2) RECEIVABLE BY OTHER BENEFICIARIES.--To the extent of the amount
receivable * * * as insurance under policies on the life of the decedent
with respect to which the decedent possessed at his death any of the
incidents of ownership, exercisable either alone or in conjunction with any
other person.
Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that:
For purposes of this paragraph, the term "incidents of ownership" is not
limited in its meaning to ownership of the policy in the technical legal
sense. Generally speaking, the term has reference to the right of the
insured or his estate to the economic benefits of the policy. Thus, it
includes the power to change the beneficiary, to surrender or cancel the
policy, to assign the policy, to revoke an assignment, to pledge the policy
for a loan, or to obtain from the insurer a loan against the surrender
value of the policy, etc.
Section 20.2042-1(c)(4) of the regulations provides:
A decedent is considered to have an "incident of ownership" in an insurance
policy on his life held in trust if, under the terms of the policy, the
decedent (either alone or in conjunction with another person or persons)
has the power (as trustee or otherwise) to change the beneficial ownership
in the policy or its proceeds, or the time or manner of enjoyment thereof,
even though the decedent has no beneficial interest in the trust.
In enacting section 811(g) of the Internal Revenue Code of 1939 (the
predecessor of section 2042(2) of the 1954 Code), Congress introduced, but
failed to define, the term "incidents of ownership." However, the Senate
Finance Committee listed in its report the types of powers and interests
that Congress meant to be included within the scope of the term. S. Rep.
No. 1631, 77th Cong., 2d Sess. 235 (1942), 1942-2 C.B. 677. The powers and
interests there listed are virtually the same as those now included in
section 20.2042-1(c)(2) of the regulations.
At the time of the enactment of section 2042 of the Code, the Senate
Finance Committee strongly inferred that Congress intended section 2042 to
parallel the statutory scheme governing the interests and powers that will
cause other types of property to be included in a decedent's estate under
other Code sections, particularly sections 2036 and 2038. S. Rep. No. 1622,
83rd Cong., 2d Sess. 124 (1954). Under these sections, it is the decedent's
power at the time of death to affect the beneficial interest or enjoyment
of the property, or the income therefrom, that requires inclusion, even
though the decedent had no right to receive any of the economic benefits.
That Congress had such an intent was recognized by the courts in Skifter v.
Commissioner, 468 F. 2d 699 (2d Cir. 1972), a case involving an insured
decedent's possession of certain incidents of ownership in a fiduciary
capacity, and in Lumpkin v. Commissioner, 474 F. 2d 1092 (5th Cir. 1973), a
case involving a decedent's incidents of ownership not held in a fiduciary
capacity.
The court stated in Lumpkin that "by using the 'incidents of ownership'
term Congress was attempting to tax the value of life insurance proceeds
over which the insured at death still possessed a substantial degree of
control." Then, drawing upon cases decided under the predecessors of
sections 2036 and 2038 of the Code, the court concluded that the decedent
possessed "substantial control" over the time and manner of enjoyment of
the proceeds because of the right conferred upon him to elect optional
modes of settlement (his only right) under a group term life insurance
policy. The court held this right to be an incident of ownership within the
meaning of section 2042(2) despite the fact that the decedent could not
benefit himself or his estate. See Rose v. United States, 511 F. 2d 259
(5th Cir. 1975); United States v. Rhode Island Hospital Trust Company, 355
F. 2d 7 (1st Cir. 1966).
Further, the fact that a decedent's control over the insurance is subject
to fiduciary restraints over its exercise does not automatically deprive it
of the substantiality required for inclusion of the value of the proceeds
in the gross estate. Section 20.2042-1(c)(4) of the regulations
specifically provides that a decedent is considered to have an "incident of
ownership" in a policy held in trust if the decedent has the power (as
trustee or otherwise) to change the time or manner of enjoyment, even
though the decedent has no beneficial interest in the trust.
In Skifter, the Court of Appeals for the Second Circuit concluded that
section 20.2042-1(c)(4) of the regulations must be read to apply only to
reservations of powers by the transferor as trustee. The Service will not
follow this holding nor the dictum to the same effect in Fruehauf v.
Commissioner, 427 F. 2d 80 (6th Cir. 1970). However, in Lumpkin, the Court
of Appeals for the Fifth Circuit, in holding that the value of insurance
proceeds was includible in the gross estate, stated that "it is enough if
at death the decedent merely possessed an incident of ownership, the means
by which he came into possessing being irrelevant." The principle of
Lumpkin was again applied in Rose, another case involving incidents of
ownership held in a fiduciary capacity, where the court pointed out:
* * * Under section 2036 Congress specifically levied the estate tax upon
interests retained by a decedent in connection with an incomplete transfer;
and section 2038 is similar in effect. Under section 2042, however,
Congress applied the tax to insurance over which a decedent possessed any
incidents of ownership. The difference in statutory language is
significant. * * * We agree with the Second Circuit that section 2042
"roughly parallels" its cousin sections of the Estate Tax Code in regard to
the substantiality of the decedent's control which is prerequisite to
includibility in decedent's gross estate. But we cannot ignore Congress'
conspicuous variety in statutory idiom, so as to make the tax treatment of
insurance identical with the taxation of other interests: section 2042 was
not drawn in terms to catch only retained incidents of ownership, and we
find no basis to infer such a design. * * *
Similarly, the court in Terriberry v. United States, 517 F. 2d 286 (5th
Cir. 1975), cert. denied, 44 U.S.L.W. 3530 (Mar. 22, 1976), held that the
insurance proceeds on the decedent's life were includible in the decedent's
gross estate under section 2042 of the Code where the decedent's wife
transferred the policies to a revocable trust of which the decedent was a
co-trustee.
In the instant case, the decedent, as trustee, through the right to elect
optional modes of settlement, borrow on the policy, and withdraw dividends
pursuant to the terms of the trust and the insurance policy, had a
substantial degree of control over the time and enjoyment of the policy
proceeds. Such control was an incident of ownership within the meaning of
section 2042(2) of the Code.
Accordingly, since the insured-decedent possessed an incident of ownership
in the insurance policy at the time of death, the proceeds of such
insurance are includible in decedent's gross estate, even though held only
in a fiduciary capacity.
