Rev. Rul. 84-179
1984-2 C.B. 195, 1984-53 I.R.B. 7.
Internal Revenue Service
Revenue Ruling
LIFE INSURANCE POLICY IN TRUST; DECEDENT AS TRUSTEE; INCIDENTS OF
OWNERSHIP
Published: December 31, 1984
Section 2042. - Proceeds of Life Insurance, 26 CFR 20.2042-1: Proceeds of
life insurance.
Life insurance policy in trust; decedent as trustee; incidents of
ownership. A decedent, to whom powers over an insurance policy were
transferred in trust, did not have incidents of ownership in the policy if
the decedent's powers could not be exercised for the decedent's benefit,
and the decedent did not transfer the policy or any consideration for
purchasing or maintaining the policy to the trust. Rev. Rul. 76-261
revoked.
ISSUE
For purposes of section 2042(2) of the Internal Revenue Code, does an
insured decedent possess incidents of ownership in an insurance policy if
the decedent transferred all incidents of ownership to another person who,
in an unrelated transaction, transferred all incidents of ownership to
another person who, in an unrelated transaction, transferred the policy in
trust and, at death, the decedent was a trustee with discretionary powers
which, although broad, could not be exercised for D's personal benefit?
FACTS
In 1960, D, the decedent, purchased an insurance policy on D's life and
transferred all incidents of ownership to D's spouse. The spouse designated
their adult child as the policy beneficiary.
The spouse died in 1978 and, by will, established a residuary trust for
the benefit of the child. D was designated as trustee. The insurance policy
on D's life was included in the spouse's residuary estate and was
transferred to the testamentary trust. The drafting of the spouse's will to
provide for the residuary trust and the appointment of D as trustee were
unrelated to D's transfer of the policy to the spouse.
As trustee, D had broad discretionary powers in the management of the
trust property and the power to distribute or accumulate income. 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
annual dividends. The terms of the will did not preclude D from exercising
these rights, although D could not do so for D's own benefit. D paid the
premiums on the policy out of other trust property.
D was still serving as trustee when D died in 1984.
LAW AND ANALYSIS
Section 2042(2) of the Code provides that the value of the gross estate
includes the value of all property to the extent of the amount receivable
as insurance under policies on the life of the decedent by beneficiaries
(other than the executor), with respect to which the decedent possessed at
date of death any of the incidents of ownership in the policies,
exercisable either alone or in conjunction with any other person.
Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that the
meaning of the term 'incidents of ownership' is not confined to ownership
of the policy in the technical legal sense. The term includes the power to
change the beneficiary, to surrender or cancel 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 that a decedent is
considered to have an incident of ownership in a policy held in trust if
under the terms of the policy the decedent (either alone or in conjunction
with another person) 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.
The legislative history of section 2042 indicates that Congress intended
section 2042 to parallel the statutory scheme governing those powers that
would cause other types of property to be included in a decedent's gross
estate under other Code sections, particularly sections 2036 and 2038. S.
Rep. No. 1622, 83rd Cong., 2d Sess. 124 (1954). See Estate of Skifter v.
Commissioner, 468 F.2d 699 (2d Cir. 1972).
Sections 2036(a)(2) and 2038(a)(1) concern lifetime transfers made by the
decedent. Under these sections, it is the decedent's power to affect the
beneficial interests in, or enjoyment of, the transferred property that
required inclusion of the property in the gross estate. Section 2036 is
directed at those powers retained by the decedent in connection with the
transfer. See, for example, United States v. O'Malley, 383 U.S. 627 (1966),
1966-2 C.B. 526. Section 2038(a)(1) is directed at situations where the
transferor-decedent sets the machinery in motion that purposefully allows
fiduciary powers over the property interest to
subsequently return to the transferor-decedent, such as by an incomplete
transfer. See Estate of Reed v. United States, Civil No. 74-543 (M.D. Fla.,
May 7, 1975); Estate of Skifter v. Commissioner, above cited, at 703-05.
In accordance with the legislative history of section 2042(2), a decedent
will not be deemed to have incidents of ownership over an insurance policy
on decedent's life where decedent's powers are held in a fiduciary
capacity, and are not exercisable for decedent's personal benefit, where
the decedent did not transfer the policy or any of the consideration for
purchasing or maintaining the policy to the trust from personal assets, and
the devolution of the powers on decedent was not part of a prearranged plan
involving the participation of decedent. This position is consistent with
decisions by several courts of appeal. See Estate of Skifter; Estate of
Fruehauf v. Commissioner, 427 F.2d 80 (6th Cir. 1970); Hunter v. United
States, 624 F.2d 833 (8th Cir. 1980). But see Terriberry v. United States,
517 F.2d 286 (5th Cir. 1975), cert. denied, 424 U.S. 977 (1976); Rose v.
United States, 511 F.2d 259 (5th Cir. 1975), which are to the contrary.
Section 20.2042-1(c)(4) will be read in accordance with the position
adopted herein.
The decedent will be deemed to have incidents of ownership over an
insurance policy on the decedent's life where decedent's powers are held in
a fiduciary capacity and the decedent has transferred the policy or any of
the consideration for purchasing and maintaining the policy to the trust.
Also, where the decedent's powers could have been exercised for decedent's
benefit, they will constitute incidents of ownership in the policy, without
regard to how those powers were acquired and without consideration of
whether the decedent transferred property to the trust. Estate of Fruehauf;
Estate of Skifter, above cited at 703. Thus, if the decedent reacquires
powers over insurance policies in an individual capacity, the powers will
constitute incidents of ownership
even though the decedent is a transferee.
In the present situation, D completely relinquished all interest in the
insurance policy on D's life. The powers over the policy devolved on D as a
fiduciary, through an independent transaction, and were not exercisable for
D's own benefit. Also, D did not transfer property to the trust. Thus, D
did not possess incidents of ownership over the policy for purposes of
section 2042(2) of the Code.
HOLDING
An insured decedent who transferred all incidents of ownership in a
policy to another person, who in an unrelated transaction transferred
powers over the policy in trust to the decedent, will not be considered to
possess incidents of ownership in the policy for purposes of section
2042(2) of the Code, provided that the decedent did not furnish
consideration for maintaining the policy and could not exercise the powers
for personal benefit. The result is the same where the decedent, as
trustee, purchased the policy with trust assets, did not contribute assets
to the trust or maintain the policy with personal assets, and could not
exercise the powers for personal benefit.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 76-261, 1976-2 C.B. 276, is revoked.
Rev. Rul. 84-179, 1984-2 C.B. 195, 1984-53 I.R.B. 7.
