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 Rev. Rul. 75-70

1975-1 C.B. 301

IRS Headnote

Life insurance proceeds; assigned policy. A decedent who had assigned all of his right, title, and interest in an insurance policy on his life to his wife as owner and beneficiary but retained the power to prevent the change of beneficiary to, or assignment of, the policy to anyone not having an insurable interest in his life possessed incidents of ownership and the policy proceeds are includible in his gross estate under section 2042 of the Code.

Full Text

Rev. Rul. 75-70

Advice has been requested regarding the extent to which the value of the proceeds of a policy of insurance on the life of a decedent is includible in his gross estate, under section 2042 of the Internal Revenue Code of 1954, under the circumstances described below.

In 1967, the decedent, assigned to his wife as owner and beneficiary all of his right, title and interest in a $50,000 policy of insurance on his life. However, at the time of the assignment, the decedent executed a rider to the insurance policy which provided that, without his written consent, his wife could not designate as beneficiary of the policy anyone who did not have an insurable interest in the decedent's life, nor could she assign the policy to anyone without such an interest.

The decedent died testate in 1971, without any surviving blood relatives. He bequeathed his entire probate estate to his surviving spouse. She also received the $50,000 amount of insurance proceeds. At the time of his death, the decedent's probate estate was valued at $600,000. His debts and charges amounted to $60,000, including a $50,000 unsecured debt that he had owed to a business creditor for several years.

The question presented is whether the decedent possessed incidents of ownership in the life insurance policy; and if so, whether it is, nonetheless, excludible from the value of his gross estate by reason of the nominal nature of his ownership.

Section 2042 of the Code provides that the value of the gross estate shall include the value of all property to the extent of the amount receivable as insurance under policies on the life of the decedent by (1) the executor, and (2) all other beneficiaries, with respect to which the decedent possessed at his 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, in part, as follows: "* * * 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."

For estate tax purposes, a power to consent to or veto the exercise of an incident of ownership by another is distinct from a power to initiate such exercise unilaterally, but there is little practical difference between the two. It is clear that by requiring that his written consent be obtained before the policy could be assigned or a change of beneficiary effected, the decedent had effectively retained substantial control over some of the incidents of ownership. The fact that his power could be exercised only after the wife had first taken action does not alter the basic nature of the decedent's veto right (by withholding his consent) as a joint power exercisable by the decedent in conjunction with another person within the meaning of section 2042 of the Code.

In disposing of a similar issue under section 811(g)(2)(B) of the 1939 Code (now section 2042 of the 1954 Code), the Court of Claims in Goldsteins Estate v. United States, 122 F. Supp. 677 (1954), stated that "To say that [decedent's] control was 'negative' or in the nature of a veto power, does not diminish its effectiveness as an incident of ownership. It was, during his life, exactly equivalent to the control of the [owner and] beneficiary. Neither could act without the concurrence of the other." See also Karaheusian v. Commissioner, 233 F. 2d 197 (2d Cir. 1956). There, a woman took out insurance on her husband's life which she transferred to a trust which she reserved the power to alter or amend in any way with the written consent of her husband and daughter. In holding the insurance taxable in the husband's estate on the basis that he possessed incidents of ownership, the court stated that "It makes no difference whether under the trust instrument the decedent may initiate changes or whether he must merely consent to them."

Since it is clear that the decedent possessed incidents of ownership in the policy of insurance on his life, the remaining question is whether the insurance proceeds are excludible from the value of his gross estate by reason of the nominal nature of his ownership.

In Commissioner v. Noel, 380 U.S. 678 (1965), Ct. D. 1893, 1965-2 C.B. 371, the insured decedent applied for two round-trip policies of air travel accident insurance on his life while at the airport awaiting a foreign flight. The policies were validated by the sales clerk who then, acting on the decedent's instructions, turned them over to the decedent's wife with whom they remained until after the decedent's death. The decedent was killed when the plane crashed less than three hours after take-off.

In pertinent part, the taxpayer argued that the policies were not includible in the decedent's gross estate because his power to change the beneficiary was illusory since as a practical matter, the decedent would have been unable to exercise that right during the flight. In holding the policies includible, the Supreme Court observed that possession of incidents of ownership "depends on a general, legal power to exercise ownership, without regard to the owner's ability to exercise it at a particular moment."

In United States v. Rhode Island Hospital Trust Co., 355 F. 2d 7 (1st Cir. 1966), the insured decedent had never physically possessed a policy of insurance on his life that had been in effect for thirty-four years prior to his death. Nevertheless, the court held that he possessed incidents of ownership within the meaning of section 2042 of the Code. After examining the Congressional action that led to the elevation of incidents of ownership as the appropriate criterion for determining taxation, the court stated that "[T]hey very phrase 'incidents of ownership' connotes something partial, minor, or even fractional in its scope. It speaks more of possibility than of probability." Continuing, the court observed as follows: "Viewed against this background, what power did decedent possess? This is the relevant question--not how did he feel or act. Did he have a capacity to do something to affect the disposition of the policy if he had wanted to?"

In this case, the decedent had no relatives with an insurable interest in his life, and he had more than sufficient assets to satisfy the debt of the one creditor who did have such an interest. (In the case of life insurance, an insurable interest is a reasonable ground, founded upon the relation of the parties to each other, either pecuniary or of blood or affinity, to expect some benefit or advantage from the continuance of the life of the assured. See Blacks Law Dictionary 942 (4th ed. 1951).) Hence, even though it was very improbable that the decedent would ever have exercised the incidents of ownership by vetoing an action of his wife, he nevertheless had the legal capacity to affect the disposition of the insurance proceeds. Also, while the decedent was never able to exercise the incidents of ownership at any particular moment--since his wife had to first take the type of action that required his consent--he nevertheless possessed the legal power to exercise the incidents of ownership in conjunction with his wife if she ever chose to change the beneficiary of the policy or to assign it.

Accordingly, in this case the decedent died possessed of incidents of ownership in the policy of insurance on his life and the full value of the proceeds is includible in his gross estate under section 2042 of the Code.