Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 68-47

1968-1 C.B. 300

Sec. 641

Sec. 6012

IRS Headnote

A trust is not created where, under a settlement agreement, a life insurance company retains the proceeds of an insurance policy at its maturity, commingles such proceeds with its other funds, and pays a fixed rate of interest to the beneficiaries. Therefore, a fiduciary income tax return is not required to be filed.

Full Text

Rev. Rul. 68-47

Advice has been requested whether a trust is created and the filing of a fiduciary income tax return is required under the circumstances described below.

A purchased a single premium life insurance contract on his life from the Y life insurance company. A settlement agreement was subsequently entered into between A and Y as to the manner of payments upon A's death. The agreement provided that all of the insurance proceeds would be retained by Y as `trustee' and that Y would pay a fixed rate of interest to the beneficiaries of the policy. The proceeds would eventually be paid to the heirs of the beneficiaries without regard to any appreciation or depreciation. Y reserved the right to mingle the proceeds of the insurance policy with its general corporate funds.

Upon A's death, Y began making the payments of interest to the beneficiaries in accordance with the settlement agreement.

Section 641(a) of the Internal Revenue Code of 1954 provides that the taxes imposed on individuals shall apply to the taxable income of any kind of property held in trust.

Where, under a settlement agreement, an insurance company instead of paying a lump-sum to the beneficiary at the maturity of the policy makes deferred payment, is obligated to pay a fixed rate of interest and not the income from investment of the proceeds, the beneficiaries have no interest in any appreciation or depreciation of the proceeds, and the company is not required to and does not segregate the proceeds but commingles such proceeds with its other funds and merely undertakes to make the payment out of its general fund, the company is not a trustee. This is true even though the insurance company agrees to pay the proceeds to itself as trustee, if it is also agreed that the proceeds shall not be segregated from the other assets of the company. A debt and not a trust is created. Sections 12 and 87, Scott on Trusts , Second Edition; sections 12 and 87, Restatement of Trusts , Second Edition.

Accordingly, under the foregoing circumstances, a trust is not created and, therefore, Y is not required to file a fiduciary income tax return under section 1.6012-3 of the Income Tax Regulations.