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 Rev. Rul. 77-48

1977-1 C.B. 292

Section 2511 -- Gift Tax

IRS Headnote

Life insurance proceeds; simultaneous deaths of spouses. An individual who owned an insurance policy on his spouse's life naming the trustee of a living trust as beneficiary, and who pursuant to local law was presumed to have survived his spouse when they died simultaneously, is deemed to have made a gift of the insurance proceeds to the trustee subject to the provisions of section 2501 of the Code and such proceeds are also includible in his gross estate under section 2036.

Full Text

Rev. Rul. 77-48

Advice has been requested as to the Federal gift and estate tax consequences in the following situation where an individual owned an accidental death insurance policy on the life of the individual's spouse and both individuals died under circumstances where there was no evidence that they died otherwise than simultaneously.

A, and A's spouse, B, were domiciled in and died in State X. On January 1, 1975, B established an irrevocable living trust and named Bank Y as trustee. Under the terms of the trust, the income is payable to B for life. At B's death the income is payable to A for life. At the death of A, the corpus of the trust is payable to the issue of A and B. The trust instrument provides that the trust is to be administer under the laws of State X. If A and B die under circumstances where there is no sufficient evidence that they have died otherwise than simultaneously, however, the trust provides that for the purposes of the trust agreement A is presumed to have survived B.

A purchased a 100x dollar accidental death insurance policy on the life of B. The policy had no cash value. The beneficiary designated under the terms of the policy was Bank Y under the trust agreement dated January 1, 1975, but A retained the power to change the beneficiary.

On January 1, 1976, A and B died in circumstances where there was no evidence that they died otherwise than simultaneously.

The local law of State X pertaining to simultaneous deaths follows the provisions of the Uniform Simultaneous Death Act. The general rule under the local law is that when the title to property or the devolution thereof depends upon priority of death and there is no sufficient evidence that the persons have died otherwise than simultaneously, the property of each person shall be disposed of as if each person had survived, except as provided otherwise in the Act. The rule pertaining to insurance policies provides that when the insured and the beneficiary in a policy of life or accident insurance have died and there is no sufficient evidence that they have died otherwise than simultaneously, the proceeds of the policy shall be distributed as if the insured had survived the beneficiary. The local law provides, however, that the above rules shall not apply in the case of wills, living trusts, deeds, or contracts of insurance, or any other situation where provision is made for distribution of property different from the provisions of the Act, or where provision is made for a presumption as to survivorship which results in a distribution of property different from the provisions of the Act.

The questions presented are (1) whether, for Federal gift tax purposes, A made a gift of the insurance proceeds to the trust; and (2) whether, for Federal estate tax purposes, any portion of the insurance proceeds is includible in A's gross estate.

Section 2501 of the Code imposes a tax on the transfer of property by gift during a calendar quarter by any individual. Section 2511 provides that, subject to certain limitations, the gift tax applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible.

Section 25.2511-1(c) of the Gift Tax Regulations provides that:

* * * all transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax. * * *

Section 25.2511-1(e) of the regulations provides that:

If a donor transfers by gift less than his entire interest in property, the gift tax is applicable to the interest transferred. * * *

Section 25.2511-2(b) of the regulations provides, in part, as follows:

As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.

Section 25.2511-2(f) of the regulations provides that:

The relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by the death of the donor (the statute being confined to transfers by living donors), is regarded as the event which completes the gift and causes the tax to apply. * * *

Section 25.2512-1 of the regulations, pertaining to the valuation of gifts, provides, in part:

The value of property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. * * * All relevant facts and elements of value as of the time of the gift shall be considered.

Section 25.2512-9(a)(1) of the regulations provides, in part:

Where the donor transfers property in trust or otherwise and retains an interest therein, the value of the gift is the value of the property transferred less the value of the donor's retained interest.

Section 25.2512-9 provides actuarial tables for the valuation of annuities, life estates, terms of years, remainders, and reversionary interests, transferred after December 31, 1970.

As pointed out in Morgan v. Commissioner, 309 U.S. 78 (1940), 1940-1 C.B. 229: "State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed." Applying this principle in the instant case, A's initial designation of Bank Y as the beneficiary of the insurance proceeds upon the death of B was not a transfer of any interest in the insurance proceeds at the time of designation. A retained ownership of the insurance policy and at any time until the death of either A or B, A had the power to change the designation of beneficiary to anyone else. Thus, at most, the original designation of Bank Y as beneficiary of the insurance proceeds was an incomplete transfer of property within the meaning of section 25.2511-2(b) of the regulations. However, since under the applicable state law, A, as the owner of the insurance policy, is deemed to have survived B (the insured), A's power to change the beneficiary terminated at B's death and the insurance proceeds become irrevocably payable to Bank Y. In Goodman v. Commissioner, 156 F. 2d 218 (1946), the Second Circuit held that under similar circumstances, a gift became complete upon the termination of a power to revoke a trust where a taxpayer made a gift in trust of her interest in certain insurance policies on the life of her husband which became irrevocable upon the death of her husband. Accordingly, at B's death A made a completed transfer of property within the meaning of section 2511 of the Code that is subject to the Federal gift tax under section 2501.

Since A is deemed to have survived B and thus A became the life tenant with respect to the property that A transferred to the trust, A's retained life interest in the transferred property (not subject to the gift tax) would ordinarily be ascertained by using the actuarial factors set forth in section 25.2512-9 of the regulations. However, because A survived B for only a theoretical instant, the valuation of A's retained life estate does not lend itself to a mere mechanical application of actuarial factors. Rather, A's retained life estate should be valued in accordance with the general rules for the valuation of property exchanged between a willing buyer and a willing seller, both having reasonable knowledge of all relevant facts, as provided in section 25.2512-1 of the regulations.

In Estate of Lion v. Commissioner, 438 F. 2d 56 (4th Cir. 1971), a husband and wife were both killed in an airplane crash under circumstances where there was no sufficient proof to determine the order of their deaths. The husband's will stated a presumption of his wife's survivorship in the event of simultaneous deaths, or deaths under circumstances making proof of order of their deaths insufficient. In denying the wife's estate a credit under section 2013 of the Code for taxes paid on a prior transfer of property, the court stated that where at the time of the transferror's death it would have been unmistakable to one in possession of the facts that the transferee's life would be radically shorter than predicted in actuarial tables, the value of the transferred life estate may be reduced. On this reasoning, the court held that any life interest received by the transferee terminated moments after it vested, if it did vest, and therefore its value was properly determined to be zero, and it was unnecessary to apply actuarial tables.

The above reasoning is equally applicable here since the Federal estate and gift tax are "in pari materia and must be construed together" (Sanford v. Commissioner, 308 U.S. 39 (1939), 1939-2 C.B. 340). Therefore, since A's retained life estate in the trust had a zero value, the amount of A's gift is 100x dollars, the value of the insurance proceeds paid to Bank Y.

Considering the Federal estate tax consequences of the instant case, section 2036 of the Code provides, in part, as follows:

The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death--

(1) the possession or enjoyment of, or the right to the income from, the property, * * *

Section 20.2036-1(a) of the Estate Tax Regulations provides, in part, as follows:

If the decedent retained or reserved an interest or right with respect to all of the property transferred by him, the amount to be included in his gross estate under section 2036 is the value of the entire property, less only the value of any outstanding income interest which is not subject to the decedent's interest or right and which is actually being enjoyed by another person at the time of the decedent's death.

A transfer of property will be taxable under section 2036 of the Code if the transferor retains either the possession or enjoyment of, or the right to the income from, the property for life or the equivalent statutory period. The transferred property does not have to actually produce any income, or be actually enjoyed by the transferor in order to be taxable. All that is required is that the transferor retain the "right" to the income from, or the possession or enjoyment of, the transferred property.

For Federal tax purposes, one who contributes property to a trust created by another is the real grantor of the trust to the extent of the contributions made. In a case where such a contributor is also a beneficiary, the contributor is considered as having retained or reserved the interests and powers given to the contributor/beneficiary under the terms of the trust. Rev. Rul. 55-683, 1955-2 C.B. 603. See Estate of Dora N. Marshall, 51 T.C. 696 (1969), where, as restitution for a prior debt owed to the decedent by the decedent's spouse, the decedent's spouse transferred securities to certain trusts and gave the decedent a life income interest therein. The Tax Court held that in substance and practical effect the decedent had transferred the property to the trusts to the extent of the decedent's claim for restitution against the spouse. The transaction, therefore, constituted a transfer by the decedent with a retained life income interest within the meaning of section 2036 of the Code. See also, Farmers and Merchants Bank of Los Angeles v. United States, 125 F. Supp. 587 (S.D. Cal. 1954), where the decedent was held to be the trustor or settlor of three trusts created by the decedent's child to the extent of the value of the property transferred to the trusts by the decedent. Under the terms of the trusts, the decedent had life income interests and as a result the value of the properties so transferred was included in the decedent's gross estate pursuant to section 811(c) of the Internal Revenue Code of 1939 (the predecessor to section 2036 of the Code).

At the death of B, the proceeds of the insurance policy on the life of B passed to the trust that B established. A, as purchaser and owner of the insurance policy, was the grantor of the trust to the extent of the value of the proceeds of 100x dollars. Under the local law and the terms of the trust, A is deemed to have survived B for the purposes of distributing the income of the trust. Consequently, for the theoretical instant during which A survived B, A possessed the right to the income from the trust for life.

Accordingly, for the purposes of section 2036 of the Code, to the extent of the value of the insurance proceeds, A made a transfer in trust under the terms of which A retained for life, or for a period not ascertainable without reference to A's death, or for a period which did not in fact end before A's death, the right to the income from such transferred property. Therefore, the value of the insurance proceeds of 100x dollars is includible in A's gross estate.