Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-100

1975-1 C.B. 303

IRS Headnote

Life insurance policy; community property. A Texas-resident husband and wife had owned for some time, as community property, an ordinary life insurance policy on the husband's life designating their children as beneficiaries. The wife predeceased her husband by 10 days, her entire estate was bequeathed to the children, and there was no settlement of her interest in the policy prior to the husband's death. The amount includible in the wife's gross estate is one-half the value of the policy on the date of her death determined by the terminal-reserve method under section 20.2031-8(a)(2) of the regulations and one-half the value of the policy proceeds is includible in the husband's gross estate. Rev. Rul. 48 modified.

Full Text

Rev. Rul. 75-100

Advice has been requested as to the amount includible in the respective gross estates of a husband and his predeceased wife by reason of their ownership, as community property, of a policy of insurance on the life of the husband, under the circumstances described below.

The husband, H, and his wife, W, were residents of the State of Texas. They owned, as community property, an insurance policy on the life of H in the face amount of 250x dollars. The policy was an ordinary life policy issued in 1958 for which annual level premiums were payable. Their children were designated as beneficiaries. On June 4, 1966, W died, bequeathing her entire estate to the children. Ten days later and prior to the settlement of W's estate (including her interest in the policy of insurance), H died.

Section 2033 of the Internal Revenue Code of 1954 provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of death.

Section 20.2031-8(a)(2) of the regulations provides for the valuation of an insurance policy on the life of a person other than the decedent when, at the date of decedent's death, the contract has been in force for some time and further premium payments are to be made. The value may be approximated by adding to the interpolated terminal reserve at the date of the decedent's death the proportionate part of the gross permium last paid before the date of the decedent's death which covers the period extending beyond that date.

Section 2042 of the Code provides for the inclusion in the gross estate of the proceeds of insurance under policies on the life of a decedent with respect to which he 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)(5) of the regulations provides that in determining whether the decedent possessed any incidents of ownership in a policy or any part of a policy, regard must be given to the effect of the State or other applicable law upon the terms of the policy. That section continues:

For example, assume that the decedent purchased a policy of insurance on his life with funds held by him and his surviving wife as community property, designating their son as beneficiary but retaining the right to surrender the policy. Under the local law, the proceeds upon surrender would have inured to the marital community. Assuming that the policy is not surrendered and that the son receives the proceeds on the decedent's death, the wife's transfer of her one-half interest in the policy was not considered absolute before the decedent's death. Upon the wife's prior death, one-half of the value of the policy would have been included in her gross estate. Under these circumstances, the power of surrender possessed by the decedent as agent for his wife with respect to one-half of the policy is not, for purposes of this section, an "incident of ownership," and the decedent is, therefore, deemed to possess an incident of ownership in only one-half of the policy.

Under Texas law, all property acquired during marriage by either husband or wife, except by gift, devise, or inheritance, is community property. In Texas, a life insurance policy is property and when purchased with community funds is a community asset. Commissioner v. Chase Manhattan Bank, 259 F. 2d 231 (5th Cir. 1958), cert. denied, 359 U.S. 913 (1959); Freedman v. United States, 382 F. 2d 742 (5th Cir. 1967).

In considering a 1957 amendment to Article 23(l), Texas Revised Civil Statutes, that enlarged the statutory definition of "property" to include "insurance policies and the effects thereof," the Supreme Court of Texas in Brown v. Lee, 371 S.W. 2d 694, 696 (Tex. 1963), a simultaneous death case in which the insured husband was presumed under Texas law to have survived the beneficiary wife, stated:

. . . the right to receive insurance proceeds payable at a future but uncertain date is "property." Such property is said to be in the nature of a chose in action which matures at the death of the insured.

The court then went on to explain, at 696, the effect of the 1957 Texas legislative amendment on the property rights of a spouse in an unmatured life insurance policy purchased with community funds:

When purchased with community funds, the ownership of the unmatured chose logically belongs to the community, unless it has been irrevocably given away under the terms of the policy. . . . [I]n the present case, where settlement of the deceased wife's community interest in the policies was not made prior to the death of the insured and her heirs were not guilty of laches in failing to seek such compensation, the wife's community interest was never extinguished and the policies retained their community status up to the time of maturity. Consequently, the proceeds are community.

The Brown case involved intestate succession, neither the wife nor the husband having made wills. However, the court, at 698, stated that ". . . if the wife had written a will, her one-half of the [life insurance] proceeds would have passed to her devisees instead of her statutory heir. . . ."

Similarly, in the instant case, there was no settlement of W's community interest in the life insurance policy (between H and her legatees) between the time of her death and that of H ten days later, nor were the legatees of W's estate guilty of laches in failing to seek such a settlement. Thus, W's one-half community interest in the unmatured policy passed to her legatees under Texas law.

Accordingly, the amount includible in W's gross estate under section 2033 of the Code by reason of her community interest in the unmatured policy of insurance on the life of H is one-half the value of the policy on the date of her death. This amount should be determined under section 20.2031-8(a)(2) of the regulations by adding to one-half the interpolated terminal reserve value of the policy at the date of W's death one-half the proportionate part of the gross premium last paid before her death that covers the period beyond the date of death.

Further, the amount includible in H's gross estate under section 2042 of the Code by reason of his community interest in the policy is one-half the value of the proceeds of the policy.

Rev. Rul. 48, 1953-1 C.B. 392, which holds that when a wife predeceases her husband, one-half the cash surrender value of a community-owned policy of insurance on his life is includible in her gross estate as her interest in the community asset, is hereby modified to remove the implication that one-half the "cash surrender value" is the includible "value of the policy" at the date of the death of the uninsured spouse.