REVENUE RULE 94-69

1994-2 C.B. 241, 1994-46 I.R.B. 6.

Internal Revenue Service
Revenue Ruling

LIFE INSURANCE TRANSFERRED TO SPOUSE OF LOUISIANA DECEDENT

Published: November 14, 1994

Section 2042. Proceeds of Life Insurance, 26 CFR 20.2042-1: Proceeds of life insurance.
(See Also Section 2511; 25.2511-1.)

Life insurance transferred to spouse of Louisiana decedent. Proceeds of life insurance purchased out of community funds and transferred to a spouse by a Louisiana decedent are not includible in decedent's gross estate under section 2042 of the Code.

Revenue Rules (1953) 48 and 232 revoked.

ISSUES

(1) If a Louisiana decedent purchased an insurance policy during marriage, named the spouse as owner of the policy, and paid all premiums from community funds, are the proceeds of insurance on the decedent's life includible in the decedent's gross estate under s 2042 of the Internal Revenue Code?

(2) If the surviving spouse of the Louisiana decedent has designated a third party as beneficiary of the insurance policy on the decedent's life, does the decedent's death cause the surviving spouse to make a gift under s 2511?

FACTS

D, who was domiciled in Louisiana, purchased a life insurance policy on D's life. D designated S, D's spouse, as owner of the policy, which conferred all of the incidents of ownership in the policy on S. D and S paid all of the premiums on the policy from community funds. S continued to hold all of the incidents of ownership in the policy until D's death. Upon D's death, the insurance proceeds were paid to a child who S had designated as the beneficiary of the policy.

LAW AND ANALYSIS

Issue 1

Section 2042(2) provides that the proceeds of insurance on a decedent's life payable to a named beneficiary are includible in the decedent's gross estate if the decedent possessed any incidents of ownership in the policy at the time of death.

Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that the term "incidents of ownership" is not limited to ownership of the policy in the technical legal sense, but 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. Section 20.2042-1(c)(5) explains that state law determines whether a decedent held incidents of ownership in a life insurance policy.

In general, if life insurance is acquired by a spouse domiciled in a community property state during marriage and premiums are paid from community funds, the incidents of ownership and the rights to proceeds constitute community property rights. Freedman v. United States, 382 F.2d 742 (5th Cir.1957); Davis v. Prudential Insurance Co. of America, 331 F.2d 346 (5th Cir.1964). Under those circumstances, one-half of the proceeds is includible in the decedent's gross estate. Section 20.2042-1(c)(5).

In Louisiana, however, life insurance that has been purchased with community funds and is owned by one spouse is treated differently than in other community property states. Under Louisiana law, the presumption that property in the possession of either spouse during a marriage is community property does not apply to a life insurance policy transferred by or between spouses. See La.R.S. Art. 22:1521 (1992).

In Catalano v. United States, 429 F.2d 1058, at 1060 (5th Cir.1969), the court held that, under Louisiana law, life insurance policies that are on the life of a husband and are unconditionally owned by the wife are, as a matter of law, deemed part of her separate estate. In holding that insurance policies in Louisiana are contractual in nature and not regulated by the Civil Code, the Fifth Circuit followed the long-standing position of the Louisiana Supreme Court. See Sizeler v. Sizeler, 127 So. 388 (La.1930); Succession of Desforges, 64 So. 978 (La.1914) Lambert v. Penn Mutual Life Insurance Co., 24 So. 16 (La.1898); Putnam v. New York Life Insurance Co., 7 So. 602 (La.1890); Pilcher v. New York Life Insurance Co., 33 La.Ann. 322 (La.1881). The use of community funds to pay the premiums on a life insurance policy held as the separate property of one spouse in Louisiana does not cause any of the incidents of ownership to be attributed to the community and does not affect the separate property status of the policy. Bergman v. Commissioner, 66 T.C. 887, at 893 (1976); Estate of Saia v. Commissioner, 61 T.C. 515 (1974); Estate of Marks v. Commissioner, 94 T.C. 720, at 724 (1990).

Under the facts presented, D transferred the ownership of the policy to S and retained none of the incidents of ownership. As a result of the application of Louisiana law, S became the sole owner and holder of the incidents of ownership. The payment of premiums on the policy from community funds does not affect the status of the policy in Louisiana as the separate property of S. Accordingly, the proceeds are not includible in D's gross estate under s 2042.

However, if an insurance contract in Louisiana were to specifically provide that the policy is held by both spouses as their community property, one-half of the incidents of ownership would be attributable to the insured spouse and, upon the death of the insured spouse, one-half of the proceeds would be includible in the decedent's gross estate as provided in §20.2042-1(c)(5).

Issue 2

Section 2501 imposes a tax on the transfer of property by gift by an individual. Section 2511 provides that the tax imposed by s 2501 applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

Section 25.2511-1(a) of the Gift Tax Regulations explains that a taxable transfer may include the assignment of the benefits of an insurance policy. Section 25.2511-2 provides that the gift tax is an excise upon the donor's act of making the transfer and is measured by the value of the property passing from the donor. A completed gift occurs when the donor has parted with dominion and control so as to leave the donor with no power to change its disposition. A gift is incomplete to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries.

Section 25.2511-1(h)(9) illustrates that, if community property is used to purchase insurance on the life of a spouse and a third person is revocably designated as beneficiary, the death of the insured results in a completed gift by the surviving spouse of one-half of the proceeds of the policy at the time of the death of the insured.

However, as explained above, an insurance policy unconditionally owned by one spouse in Louisiana is the separate property of that spouse. Thus, in Louisiana, if the insurance policy is the separate property of the surviving spouse who held all incidents of ownership including the power to change the designated beneficiary of the policy, the gift from the surviving spouse to the beneficiary becomes a completed gift of the total amount of the proceeds at the decedent's death.

In the present case, S made a completed gift to the beneficiary when D died. The value of the gift is the amount of the insurance proceeds paid to the beneficiary.

However, if an insurance contract in Louisiana specifically provides that the policy is held by both spouses as their community property, the surviving spouse of the insured makes a completed taxable gift of only that spouse's one- half community interest in the proceeds to the designated beneficiary at the decedent's death.

HOLDINGS

(1) If a Louisiana decedent purchased an insurance policy during marriage, named the spouse as owner of the policy, and paid all premiums from community funds, none of the proceeds are includible in the decedent's gross estate under s 2042(2).

(2) If the surviving spouse of the Louisiana decedent has designated a third party as beneficiary of the insurance policy on the decedent's life, the surviving spouse makes a gift of the proceeds to the beneficiary at the decedent's death under s 2511.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 48, 1953-1 C.B. 392, and Rev. Rul. 232, 1953-2 C.B. 268 are revoked. Rev. Rul. 48 held that a married person domiciled in Louisiana or Texas who is insured by a life insurance policy, who has designated a beneficiary other than the insured or the spouse of the insured, and who pays the premiums with community funds, possesses incidents of ownership in the policy as a community asset. Upon the death of the insured, one-half of the proceeds of the policy is included in the insured's gross estate for federal estate tax purposes and the remaining one-half of the proceeds becomes a completed gift by the spouse of the insured for federal gift tax purposes. Rev. Rul. 232 considers certain factual situations not covered in Rev. Rul. 48. The holdings in Rev. Rul. 232 are consistent with those in Rev. Rul. 48.

Although the holdings in Rev. Rul. 48 with respect to spouses domiciled in Texas are unchanged, the results are adequately addressed in §§ 20.2042-1(c)(5) and 25.2511-1(h)(9), and, thus, are not addressed in this ruling.

If an insurance policy on the life of a Louisiana decedent who dies before May 15, 1995, was acquired by the decedent before November 14, 1994, the decedent's estate can rely upon the estate tax holdings in Rev. Rul. 48 and Rev. Rul. 232 in determining the amount of the life insurance proceeds includible in the decedent's gross estate. If an insurance policy on the life of a Louisiana decedent who dies before May 15, 1995, was acquired by the spouse of the decedent before November 14, 1994, the spouse can rely upon the gift tax holdings in Rev. Rul. 48 and Rev. Rul. 232 in determining the amount of any gift made as a result of the decedent's death.

DRAFTING INFORMATION

The principal author of this revenue ruling is Dale S. Carlton of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Dale S. Carlton on (202) 622-3090 (not a toll-free call).

Rev. Rul. 94-69, 1994-2 C.B. 241, 1994-46 I.R.B. 6.