Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-84

1970-1 C.B. 188

IRS Headnote

The value of trust corpus established with proceeds of insurance on the life of decedent's predeceased husband is not includible in her estate under section 2036(a) of the Code where the insurer consents to a court authorized lump-sum distribution in lieu of monthly payments.

Full Text

Rev. Rul. 70-84

Advice has been requested whether the value of a trust corpus established with the proceeds of insurance on the life of decedent's predeceased husband is includible in the decedent's gross estate under section 2036(a) of the Internal Revenue Code of 1954 under the circumstances described below.

The decedent's husband died leaving insurance policies on his life in the face amount of $80,000. Before his death, he had selected an option whereby his wife would receive a monthly payment of $325 for her life rather than a lump sum of $80,000. Under the option if she should die prior to the expiration of 20 years following the husband's death, the payment would be made to her children for the remainder of that period. In any event, the insurance company's obligations under the policies would terminate upon the death of the wife, or at the end of the 20-year period, whichever was later. Shortly after the insured's death, the wife obtained a court order authorizing her to receive a lump sum distribution of the insurance proceeds individually and as guardian for her minor children. The order further stipulated that the proceeds would be placed in trust with the greater of the annual net income or the original entitlement of $325 per month to be paid to the decedent for life and any funds remaining at her death to be paid equally to her children. Following the issuance of the court order, the insurance company consented to the decedent's request for a lump-sum distribution of the insurance proceeds.

Section 2036(a) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein transferred by the decedent without consideration, by trust or otherwise, under which he has retained for his life the possession or enjoyment of, or the right to the income from, the property.

The court order authorizing the distribution did not expand the decedent's control over the property since the insurance company could have still refused to alter the settlement option selected by the decedent's husband. Once the insurance company gave the decedent possession of the entire insurance proceeds in a lump sum, she was bound by her stipulation to the court and her fiduciary and contractual obligations to act merely as the middleman between the insurance company, which was the actual transferor, and the trustee-bank, which took title of the life interest in the corpus for the benefit of the decedent and remainder interest for the benefit of the decedent's children.

In Estate of Susie C. Haggett v. Commissioner, 14 T.C. 325 (1950), acquiescence, C.B. 1950-2, 2, a decedent purchased an annuity contract on her husband's life with certain cash that was given to her for that purpose by her husband. The contract provided that if the wife died after the death of the husband and before the investment in the contract had been recovered, the remainder should be paid in a lump sum to the surviving grandchildren or if none were living, to the executor of the wife's estate. Even though the decedent in that case was to receive payments for life under the annuity, the Tax Court held that the commuted value of the annuity contract was not includible in her gross estate under predecessor of section 2036(a) of the 1954 Code because her husband was the actual transferor, the decedent never having held any taxable interest in the annuity contract that could be the subject of a transfer.

In the Haggett case, the fact that the decedent was in temporary possession of the cash used to purchase the annuity was not considered significant for Federal estate tax purposes. Similarly, in the present case, the fact that the decedent gained and relinquished temporary possession of the entire insurance proceeds does not mean that she made a transfer of them within the meaning of section 2036(a) of the Code. The decedent here was merely a life beneficiary of these proceeds.

Accordingly, it is held that the value of the trust corpus is not includible in the decedent's gross estate under section 2036(a) of the Code. See Rev. Rul. 66-86, C.B. 1966-1, 216, which holds that the life beneficiary and remaindermen of property received from a decedent may establish a trust with that property without bringing it into the life beneficiary's gross estate under section 2036(a) of the Code.