Opinion
Docket No. 2502.
1944-12-12
ESTATE OF LOUIS J. DORSON, IRVING TRUST COMPANY, GERTRUDE L. DORSON AND DAVID C. DORSON, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Alfred B. Nathan, Esq., for the petitioners. Henry C. Clark, Esq., for the respondent.
The proceeds of policies of insurance on decedent's life which he had transferred irrevocably in trust several years prior to his death for the benefit primarily of his three children, reserving no property rights in the policies, held, not includible in his gross estate under either section 811(c) or 811(g)(2), Internal Revenue Code. Alfred B. Nathan, Esq., for the petitioners. Henry C. Clark, Esq., for the respondent.
This proceeding involves an estate tax deficiency of $48,994.62. Among other lesser adjustments not in controversy the respondent has added to the value of decedent's net estate as reported $178,648.94 representing the net value of the corpus of an insurance trust which decedent created in 1936, four years prior to his death. Whether the proceeds of the policies assigned to the trust are includible in decedent's gross estate is the only question for our determination.
The facts have been stipulated.
FINDINGS OF FACT.
Decedent died testate on December 16, 1939. His will was probated in the New York Surrogate's Court, County of New York. An estate tax return was filed with the collector of internal revenue for the third district of New York.
On September 11, 1935, decedent created a trust, naming his wife, Gertrude L. Dorson, and Abraham A. Silberberg as trustees, and transferred to the trust seventeen policies of insurance on his life. Fifteen of these policies were issued by the Equitable Life Assurance Society, hereinafter referred to as Equitable Life, one by the Mutual Life Insurance Co., hereinafter referred to as Mutual Life, and one by the New York Life Insurance Co., hereinafter referred to as New York Life. All of the issuing companies are mutual life insurance companies. The trust was declared to be for the benefit of decedent's three children, Richard M. Dorson, Audrey M. Dorson, and Marjorie Dorson. The trustees were to hold the insurance policies during decedent's lifetime and pay any dividends thereon to his wife. Upon decedent's death they were to receive the amount payable on the policies and divide it into three equal parts and hold one of such parts for the benefit of each of the three children. Each of such parts was to be interest-bearing securities ‘suitable for trust investment.‘
The trustees were to ‘apply and use‘ as much of the income from the son's part as they should deem proper and necessary for his support, education, and maintenance during his lifetime. Upon the son's death the remainder was to be distributed to his lawful issue, if any, and, if none, it was to go in equal parts to the trusts for the daughters. The two other one-third parts were likewise to be invested and held for the benefit of the two daughters. The trustees were to use as much of the income as they deemed proper and necessary for the support, education, and maintenance of the daughters until they should attain the age of 30 years. Each daughter was to receive one-third of the principal and accumulated interest of her trust at that age, one-half of the remainder when she should attain the age of 35, and the balance when she should attain the age of 40.
In the event of the death of either of the daughters before the payment to her of any share of the trust fund, such share was to go to her lawful issue, or, if none, it was to be added to the trust fund of the other daughter.
The trust agreement conferred upon the trustees the ordinary powers of fiduciaries in the management and administration of the trust funds, after decedent's death, and further provided that:
SIXTH: The Trustees shall in no way be responsible for the validity of said policies of insurance, nor for any acts of the Grantor relating to or in connection with said policies, nor for any failure on the part of the Insurance Companies to pay said policies as and when the same become due and payable. In the event that for any reason it shall become necessary, in the opinion of the Trustees, to institute any legal proceedings to enforce the payment of said policies of life insurance, the Trustees are authorized and empowered to institute such proceedings and to employ necessary counsel therefor and to pay, out of the principal of the trust, all necessary charges and expenses and counsel fees. The Trustees are also authorized to compromise and adjust all claims arising on and/or out of said policies, or any of them, upon such terms and conditions as the Trustees may deem just, and the decision of the Trustees shall be binding and conclusive upon all persons interested therein.
In the trust agreement decedent reserved no power to revoke the trust or to change the beneficial interests and reserved no property rights whatever in the insurance policies. Decedent delivered all of the policies in question to the trustee Silberberg at or about the time the trust agreement was executed and all of the policies were held by Silberberg continuously until after the decedent's death. Silberberg notified the insurance companies of the assignment of the policies to the trust and furnished them with copies of the trust agreement prior to February 1, 1936.
The policies in question were all taken out by decedent during the years 1910 to 1927, inclusive. They were originally all twenty-payment policies and were in the aggregate face amount of $249,500. Some of the policies were made payable to decedent's estate, some to his children, and some to his mother, with the right reserved to the decedent to change the beneficiaries or assign the policies. Three of the policies of an aggregate face amount of $20,000 were fully paid up at the time of their assignment to the trust. Between the dates of July 27 and August 3, 1935, five of the policies in the aggregate amount of $67,000 were converted into fully paid up policies of a lesser aggregate amount. After the trust was created and prior to the date of decedent's death, two more of the policies in the aggregate amount of $28,000 became fully paid up. At the time of the decedent's death fourteen of the policies were payable, on their face, to decedent's three children, one was payable to his executors or administrators, and the remaining two were payable to the trustees.
All of the premiums paid on the policies, both before and after their assignment to the trust, were paid by decedent out of his personal funds. No provision for the payment of premiums on any of the policies was made in the trust agreement.
Three of the policies provided for disability payments to decedent in the case of total disability. Under two of such policies the disability payments amounted to $50 per month each and under the other $1,000 per year.
Between the dates of August 5, 1932, and July 9, 1935, decedent obtained loans from the Equitable Life on seven of its policies, all of which he repaid prior to June 2, 1939. Upon decedent's request certain of the dividends on the Mutual Life policy and the New York Life policy, after their assignment to the trust, in the respective amounts of $202.99 and $186, were applied against the annual premiums due on such policies. The dividends on the fifteen Equitable Life policies for the period March 25, 1936, to December 8, 1939, amounting to $6,692.42, were paid by checks made payable to the trustees jointly. Some of those checks, in the aggregate amount of $1,548.12, were endorsed by both trustees and the proceeds thereof turned over to decedent's wife. The remaining checks, amounting in the aggregate to $5,144.30, were endorsed in the names of the trustees by decedent and deposited by him in his personal bank account. After the decedent's death his wife, who was one of executors, filed a personal claim against the estate for the dividends on the Equitable Life policies which decedent had appropriated for his own use, as well as those on the other two policies which had been applied in payment of annual premiums. In making such claim decedent's wife represented that decedent had obtained and used the dividends in question without her knowledge or consent. The Surrogate's Court allowed the claim, after a hearing in which all the interested parties were represented.
Shortly after decedent's death Silberberg notified his cotrustee, decedent's wife, that he was unwilling to serve longer as a trustee. Decedent's wife has continued to act as trustee up to the present time.
Acting as trustee, decedent's wife made demand on the insurance companies immediately after the decedent's death for all of the proceeds of the seventeen above described policies. The insurance companies were willing to make payment to the trustees jointly, but not to decedent's wife as sole trustee. As to seven of its policies, Equitable Life refused to make any payment to the trustees on the ground that those policies were not assignable (to the trust) by decedent alone and never became vested in the trustees.
Thereafter, and in 1940, decedent's wife, acting in her individual capacity and as trustee, together with her and decedent's three children, brought suit in the New York Supreme Court, New York County, against the three insurance companies and Silberberg, to procure the resignation and discharge of Silberberg as trustee and to compel the payment of the proceeds of the policies to decedent's wife as sole remaining trustee under the trust agreement. The Commissioner of Internal Revenue was not a party to the litigation. The case was tried on September 25, 1940, and on October 23, 1940, the court handed down its decision in which it ruled (1) that the trustee Silberberg should be permitted to resign; (2) that Gertrude L. Dorson should be continued as sole remaining trustee under the trust agreement; (3) that all of the policies specified in the trust indenture were assignable by the decedent alone; (4) that all of the policies were assigned to the trustees by the decedent; and (5) that decedent's wife, as the sole remaining trustee, was entitled under the trust agreement to the proceeds of all of the seventeen policies, plus interest. No appeal was ever taken in the case.
Decedent left a net estate, as disclosed in the estate tax return, of $192,643.44, exclusive of the proceeds of the above described insurance policies. In determining the deficiency herein the respondent has added to the value of the net estate as reported $178,648.94 representing the value of the policies in question, less an ‘Unused exemption‘ of $39,000. He stated in his deficiency notice that:
The value of the corpus of the trust created by the decedent on September 11, 1935 is includable in the gross estate as insurance under Section 811(g) of the Internal Revenue Code, or in the alternative, such value of the trust is includable under Section 811(c) of the Internal Revenue Code as a transfer made in contemplation of death, or intended to take effect in possession or enjoyment at or after death, or a transfer under which the decedent retained for his life the enjoyment of or the income from the property.
OPINION.
SMITH, Judge:
Respondent now concedes, and it is so stipulated, that the assignment of the policies to the trust was not a transfer made in contemplation of death. He contends in his brief, however, that it was a transfer which took effect at decedent's death; that decedent never surrendered his control over the policies during his lifetime; that decedent's death shifted the economic benefits under the policies; and that the proceeds are ‘part of decedent's gross estate under Section 811(c) as a transfer to take effect at his death and also under Section 811(g) as life insurance payable to 'other beneficiaries'.‘
Section 811(c) and (g) of the Internal Revenue Code provides in material part as follows:
SEC. 811. GROSS ESTATE.
(c) TRANSFERS IN CONTEMPLATION OF, OR TAKING EFFECT AT DEATH.— To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, 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, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this subchapter;
(g) PROCEEDS OF LIFE INSURANCE.
(2) RECEIVABLE BY OTHER BENEFICIARIES.— To the extent of the amount received by all other beneficiaries as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, or (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. For the purposes of clause (A) of this paragraph, if the decedent transferred, by assignment or otherwise, a policy of insurance, the amount paid directly or indirectly by the decedent shall be reduced by an amount which bears the same ratio to the amount paid directly or indirectly by the decedent as the consideration in money or money's worth received by the decedent for the transfer bears to the value of the policy at the time of the transfer. For the purposes of clause (B) of this paragraph, the term ‘incident of ownership‘ does not include a reversionary interest.
While some of the policies in question were taken out by decedent prior to the effective date of the Revenue Act of 1918, they are not to be excluded from the gross estate under the rule of Bingham v. United States, 296 U.S. 211, and Industrial Trust Co. v. United States, 296 U.S. 220, since the insured reserved the right to change the beneficiaries up to the time he assigned the policies to the trust. See Levy's Estate v. Commissioner, 65 Fed.(2d) 412; Newman v. Commissioner, 76 Fed.(2d) 449; Guaranty Trust Co. of New York et al., Executors, 33 B.T.A. 1225.
For the proceeds of the policies to be includible in decedent's gross estate under any of the provisions of the statute the decedent at the time of his death must have retained some of the incidents of ownership therein which passed by reason of his death. Chase National Bank v. United States, 278 U.S. 327.
T.D. 5032, Cumulative Bulletin 1941-1, p. 427, dated January 10, 1941, amended article 27 of Regulations 80 to read as follows:
ART. 27. Insurance receivable by other beneficiaries.— The amount in excess of $40,000 of the aggregate proceeds of all insurance on the decedent's life not receivable by or for the benefit of his estate must be included in his gross estate as follows:
(1) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) after January 10, 1941, the date of Treasury Decision 5032, and
(2) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) on or before January 10, 1941, and with respect to which the decedent possessed any of the legal incidents of ownership at any time after such date or, in the case of a decedent dying on or before such date, at the time of his death.
Legal incidents of ownership in the policy include, for example, the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. The insured possesses a legal incident of ownership if his death is necessary to terminate his interest in the insurance, as, for example if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him.
As to the policies here under consideration, our question is whether by transferring them to the trustees under the trust agreement decedent irrevocably divested himself of all property rights in them, including the right to change the beneficiaries or to pledge or surrender the policies. If so, then the proceeds of the policies must be excluded from his gross estate. See Anna Rosenstock, 41 B.T.A. 635, and cases therein cited.
We held in the Rosenstock case that the proceeds of life insurance which the insured had irrevocably assigned to his wife prior to his death were not includible in his gross estate. In our opinion we said that:
* * * In the instant case, the assignment of the three policies was made by gift and thus the assignee, insured's wife, falls in the class above referred to of ‘all other beneficiaries.‘ However, it is well settled that the proceeds of insurance policies irrevocably belonging to and receivable by ‘beneficiaries‘ other than the insured's estate may not be included in his estate, under section 302(g), supra, where the insured, at date of his death, had no incidents of ownership of the policies (that is, control, possession or enjoyment of the privileges contained in the policies, or the proceeds thereof), the termination of which by reason of his death would constitute an appropriate subject of the estate tax. * * *
The insured in the Rosenstock case had reserved the right, in the policy contracts, to change the named beneficiary, the wife, but we found that under the laws of the State of New York, which governed the property rights in the policies there under consideration, and which likewise govern as to the policies here, the assignment of the policies to the wife divested the insured of all property rights therein, including the right to change the beneficiary. See Jacobs v. Strumwasser, 84 Misc.Rep. 28; 145 N.Y.S. 916; Anderson v. Northwestern Mutual Life Ins. Co., 261 N.Y. 450; 185 N.E. 696; Levy's Estate v. Commissioner, supra.
In the instant case we think that the unconditional and irrevocable assignment of the policies to the trustees divested decedent of all the rights therein, including the right to change the beneficiaries. Such in effect was the ruling of the Supreme Court of New York that the trustees acquired an absolute right to the proceeds of the policies by reason of the assignment. The decision of the court on that question is binding upon us. Blair v. Commissioner, 300 U.S. 5; Freuler v. Helvering, 291 U.S. 35; Eisenmenger v. Commissioner (C.C.A., 8th Cir.), 145 Fed(2d) 103. In the last cited case the court held that a decision of the state court as to such property rights is binding upon us whether the proceeding is adversary or not. However that may be, we think the respondent is wrong in his contention here that the proceeding in which the ruling was obtained was nonadversary.
It is immaterial, we think, as to the question before us, that decedent obtained some of the dividends declared on the policies, after their assignment to the trusts, for his own use. The Surrogate's Court having jurisdiction of the matter ruled that these dividends belonged to the wife and permitted her to recover them from the estate. It has been held that the reservation by the insured of the absolute right to dividends on policies of insurance issued by a mutual insurance company does not amount to a property right which requires the proceeds of the policies to be included in his gross estate. D. W. Blacksher et al., Executors, 38 B.T.A. 998.
Decision will be entered under Rule 50.