Rev. Rul. 81-14

1981-1 C.B. 456, 1981-2 I.R.B. 26.

                       Internal Revenue Service
                                 Revenue Ruling

       TRANSFERS; LIFE INSURANCE ON ANOTHER; WITHIN THREE YEARS OF DEATH

                          Published: January 12, 1981

SECTION 2035.--ADJUSTMENTS FOR GIFTS MADE WITHIN 3 YEARS OF DECEDENT'S DEATH

  Transfers; life insurance on another; within three years of death. The proceeds of an insurance policy on the life of another are includible in a decedent's gross estate if the decedent assigns that policy within three years of death and the insured predeceases the decedent.

ISSUE

  For purposes of section 2035 of the Internal Revenue Code, what amount is includible in D's gross estate when D has assigned a policy on the life of another within three years of death and the insured predeceases the decedent, under the circumstances described below?

FACTS

  The decedent, D, as owner of a life insurance policy on A's life, possessed all the incidents of ownership in the policy, including the right to change beneficiaries.  The face value of the policy was $30,000.  On April 1, 1980, D gratuitously assigned the policy to B.  At the time of the assignment the interpolated terminal reserve value of the policy was $4,500.  D filed a gift tax return for the assignment and reported $4,500 as the value of the gift, but no gift tax was paid because D had not exhausted the unified credit.

  A, the insured, died on April 5, 1980.  D died on April 10, 1980, within three years of the assignment to B.  D's executor included $4,500 in D's gross estate as a transfer within three years of death.

LAW AND ANALYSIS

  Section 2035(a) of the Internal Revenue Code generally provides that the gross estate shall include the value of all property interests transferred by a decedent within three years before death.

  Section 20.2035-1(e) of the regulations provides that the value of property includible in a decedent's gross estate under section 2035 of the Code is its fair market value at the time of decedent's death or alternate valuation date, if applicable.  The purpose of this regulation and section 2035 is to tax the property transferred within three years of death as if the transfer had not been made and the decedent had held the property until his death.  Estate of Arthur H. Hull, 38 T.C. 512, 528 (1962), acq. 1964-2 C.B. 6, rev'd on other grounds, 325 F.2d 367 (C.A. 3rd Cir. 1963);  Humphrey v. Commissioner, 162 F.2d 1 (5th Cir. 1947);  Liebmann v. Hassett, 148 F.2d 247 (1st Cir. 1945).

  If D had not transferred the policy and if D had named himself beneficiary, the proceeds of the policy would have been payable to D at A's death and would have been reflected in D's gross estate at D's death.

  Alternatively, if D had not transferred the policy but had named another as beneficiary, the proceeds would have been includible in D's estate under section 2035 of the Code.  D would have made a completed transfer of the proceeds, subject to the gift tax, at the time of A's death.  See Rev. Rul. 73- 207, 1973-1 C.B. 409.

  Thus, if D had not transferred the policy, the proceeds would have been included in D's estate at death.  Therefore, the full amount of the proceeds received by B on the death of A is includible in D's gross estate under section 2035 of the Code.

HOLDING

  The entire value of the proceeds is includible in D's gross estate under section 2035 of the Code.

Rev. Rul. 81-14, 1981-1 C.B. 456, 1981-2 I.R.B. 26.