Estate of Margrave v. Commissioner

71 T.C. 13, 1978 U.S. Tax Ct. LEXIS 44

• Court: United States Tax Court
• Decided: October 10, 1978
• Docket: Docket No. 2210-76
• Status: Published

Opinions

Tannenwald, Judge:

Respondent determined a deficiency of $11,176.45 in the estate tax of petitioner, subject to credit for State death taxes paid. The issue is whether the gross estate of decedent should include the proceeds of an insurance policy on the life of decedent.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Decedent, Robert B. Margrave, died testate on April 29,1973. At his death, he resided in Omaha, Nebr. His last will and testament, dated June 16,1966, was admitted to probate by the County Court of Douglas County, Nebr., on June 14, 1973. Petitioner filed its Federal estate tax return with the Internal Revenue Service Center, Ogden, Utah, on January 14,1974.

The United States National Bank of Omaha (the bank), a corporation with its principal place of business in Omaha, Nebr., on the date the petition was filed herein, is the executor of decedent’s estate. The bank is also the trustee of the Robert B. Margrave Revocable Trust (the trust), created by decedent on June 16,1966.

Under the terms of the trust, decedent was the income beneficiary and, during his lifetime, had the unqualified right to modify or revoke the trust.

On January 29, 1970, Glenda Margrave, decedent’s wife, applied for a 20-year decreasing term life insurance policy on decedent’s life. Decedent, as the insured, signed the application. The policy was issued by Western Life Insurance Co. on March 12, 1970. Under the terms of the policy, the beneficiary was, in the absence of any change, “as designated in the application.” The bank, as trustee of the trust, was named beneficiary in the application.¹ The benficiary was never changed. During the term of the policy, i.e., the life of decedent, “all benefits, rights and privileges available or exercisable [under the policy]” were vested in decedent’s wife as owner and she paid the premiums with her own funds.

Upon the decedent’s death, the proceeds of the insurance policy in the amount of $84,583 were paid to the bank as trustee of the trust.

OPINION

The question before us is whether the proceeds of insurance on the life of a decedent, which are payable to an inter vivos trust established by the decedent, are includable in the gross estate either under section 2042 or section 2041,² where (a) the decedent’s wife was at all times the owner of all the rights under the policy, and (b) the decedent retained the unqualified right, during his lifetime, to modify or revoke the trust.

We turn first to the question of includability of the life insurance proceeds under section 2042, which provides in relevant part:

SEC. 2042. PROCEEDS OF LIFE INSURANCE.

The value of the gross estate shall include the value of all property—

(1) Receivable by the executor. — To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent.

(2) Receivable by other beneficiaries. — To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent 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. * * *

Respondent argues that decedent possessed at his death sufficient “incidents of ownership” so as to require includability under section 2042(2)³ and the regulations thereunder. We disagree.

The regulations specify that “the term ‘incidents of ownership’ is not limited in its meaning to ownership of the policy in the technical legal sense,” and that the focus is on “the right of the insured or his estate to the economic benefits of the policy.” Sec. 20.2042-l(c)(2), Estate Tax Regs.

As we see it, the key question is what power did decedent possess during his lifetime to control the disposition of the policy or of the proceeds. See United States v. Rhode Island Hospital Trust Co., 355 F.2d 7, 11 (1st Cir. 1966). Mrs. Margrave was the owner of the policy and as such “all benefits, rights, options and privileges available or exercisable [thereunder] during the lifetime of [decedent]” were vested in her. Those powers could be exercised without decedent’s consent. See Morton v. United States, 457 F.2d 750, 754 (4th Cir. 1972). In this respect, the cases where the decedent’s right to prevent a change in the beneficiary of a policy (either by way of a requirement of his consent or a veto power) was held to be an incident of ownership are clearly distinguishable. See Commissioner v. Karagheusian’s Estate, 233 F.2d 197 (2d Cir. 1956), revg. on this issue 23 T.C. 806 (1955); Schwager v. Commissioner, 64 T.C. 781 (1975). Similarly distinguishable are those cases where the policies themselves were part of the corpus of a trust and the decedent-trustee, albeit only in his fiduciary capacity, had limited but irrevocable rights with respect to the policies or the proceeds thereof. Compare Terriberry v. United States, 517 F.2d 286 (5th Cir. 1975),⁴ Rose v. United States, 511 F.2d 259 (5th Cir. 1975), Estate of Lumpkin v. Commissioner, 474 F.2d 1092 (5th Cir. 1973), revg. 56 T.C. 815 (1971), and Estate of Fruehauf v. Commissioner, 427 F.2d 80 (6th Cir. 1970), affg. 50 T.C. 915 (1968), with Estate of Connelly v. United States, 551 F.2d 545 (3d Cir. 1977), and Shifter v. Commissioner, 468 F.2d 699 (2d Cir. 1972), affg. 56 T.C. 1190 (1971).

Prior to decedent’s death, the designation of the trustee as beneficiary created only an expectancy that it would continue to remain such until the policy became payable. See Farwell v. United States, 243 F.2d 373, 377 (7th Cir. 1957). Thus, decedent’s interest in the trust as regards the policy proceeds was merely a power over an expectancy subject to the absolute whim of the policy owner, Mrs. Margrave,⁵ and was, by the terms of the trust itself, extinguished at the moment of his death. See Estate of Pyle v. Commissioner, 36 T.C. 1017, 1020 (1961), affd. 313 F.2d 328 (3d Cir. 1963). This simply does not constitute an incident of ownership.

Respondent next contends that decedent’s power to modify or revoke the trust constituted a general power of appointment with the result that the proceeds of the policy are includable in his gross estate under section 2041.⁶ Again, we disagree.

Unquestionably, decedent’s unqualified power to modify or revoke the trust falls within the scope of a general power of appointment. Maytag v. United States, 493 F.2d 995 (10th Cir. 1974); sec. 20.2041-1(b)(1), Estate Tax Regs. The question before us is whether, at the moment of decedent’s death, there was “any property” to which that power of appointment attached. Thus, we need not concern ourselves with cases, relied upon by respondent, where the property was in existence and the issue was whether the instrument involved constituted a power of appointment (Keeter v. United States, 461 F.2d 714 (5th Cir. 1972);⁷ Sheaffer v. Commissioner, 12 T.C. 1047 (1949)), or whether a power of appointment was created on or before October 21, 1942 (United States v. Turner, 287 F.2d 821 (8th Cir. 1961); United States v. Merchants National Bank of Mobile, 261 F.2d 570 (5th Cir. 1958); Estate of Rosenthal v. Commissioner, 34 T.C. 144 (1960)).

By the terms of the policy, the trustee had only the right to receive the proceeds and this right was subject to Mrs. Margrave’s power, as the owner of the policy, to change the designation of the trustee as beneficiary. The trustee, therefore, did not have an enforceable right to the proceeds, as it might have had if the beneficiary designation had been irrevocable — a right which could have been treated as “property” subject to the decedent’s power of appointment. Clearly, during his lifetime, decedent did not have the ability to “enlarge or shift the beneficial interest” (see sec. 20.2041(b)-(l), Estate Tax Regs.) in “any property.” He could not confer any benefit upon anyone, including himself or his creditors. As a consequence, prior to his death, decedent had no more" than a power over an expectancy. See our discussion of the “incidents of ownership” issue at pp. 16-17 supra.

Nor do we think that decedent’s death breathed life into his power of appointment. To be sure, that event terminated Mrs. Margrave’s rights in the policy and the proceeds became payable to the trustee to be disposed of pursuant to the trust’s terms. That event also terminated decedent’s power to modify or revoke the trust. The fact is, however, that the right to the proceeds did not become vested in the trustee until death had actually occurred. Until that moment, Mrs. Margrave could have changed the beneficiary designation and destroyed decedent’s control of the proceeds via the trust and, therefore, the capacity of the trustee to receive the proceeds.

In Johnstone v. Commissioner, 76 F.2d 55 (9th Cir. 1935), affg. 29 B.T.A. 957 (1934), the decedent was found to have a taxable general power of appointment with respect to property in trust, although the surviving donor retained a right to alter or modify the trust which terminated at the decedent-donee’s death. However, that case is distinguishable since, unlike the situation herein, the trust corpus, i.e., the “property,” was in existence at the time of the decedent-donee’s death.

The situation herein is analogous to that which existed in Connecticut Bank & Trust Co. v. United States, 465 F.2d 760 (2d Cir. 1972). In that case, one of the issues was whether the value of an action for wrongful death was property “with respect to which the decedent [had] at the time of his death a general power of appointment.” The applicable State law gave the right of action to the executor or administrator and provided that any recovery was to be distributed under the terms of the decedent’s will. In holding for the taxpayer, the court stated “at the very least, property subject to a sec. 2041 power of appointment must be in existence prior to the time of the decedent’s death.” 465 F.2d at 764. See also Lang v. United States, 356 F. Supp. 546 (S.D. Iowa 1973); Rev. Rul 75-126, 1975-1 C.B. 296; Rev. Rul. 75-127,1975-1 C.B. 297.

A further analogy can be found in cases involving the-question of includability of a death benefit payable by an employer to a beneficiary designated by a deceased employee, who had the right to change the designation, where the employer could modify or terminate the plan at any time prior to the employee’s death. In Dimock v. Corwin, 19 F. Supp. 56 (E.D.N.Y. 1937), affd. on other issues 99 F.2d 799 (2d Cir. 1938), affd. 306 U.S. 363 (1939), the court concluded that, in such a situation, the employee had “merely a privilege extended to him by his employer, which was subject to withdrawal or modification at any time” (see 19 F. Supp. at 59), with the result that there was no property in which the decedent had an interest at the time of his death and, therefore, the death benefit was not includable in the decedent’s gross estate under the provisions of section 302(a) of the Kevenue Act of 1926 (the predecessor of section 2033). Subsequent cases recognize that the crucial distinction in this area is whether the decedent had irrevocable rights under the plan (see Estate of Bahen v. Commissioner, 305 F.2d 827, 831 (Ct.Cl. 1962); Estate of Garber v. Commissioner, 271 F.2d 97, 101-102 (3d Cir. 1959), affg. T.C. Memo. 1958-121)) or whether he possessed only a hope or expectancy that the plan would be continued (see Estate of Albright v. Commissioner, 42 T.C. 643 (1964), revd. on another issue 356 F.2d 319 (2d Cir. 1966); Estate of Barr v. Commissioner, 40 T.C. 227, 232-234 (1963); Estate of Gamble v. Commissioner, 69 T.C. 942, 947 (1978)). See also Lowndes, Kramer & McCord, Federal Estate and Gift Taxes, pp. 28-30 (3d ed. 1974). The fact that these cases were decided under, section 2033 (or its 1939 Code predecessor), rather than section 2041, is not significant since it is necessary, under both sections, to determine whether there was “property” in existence at the decedent’s death in which decedent had an interest (sec. 2033) or with respect to which the decedent had a general power of appointment (sec. 2041).

In sum, we hold that decedent’s power of appointment, with respect to the proceeds of the policy involved herein, covered no more than an expectancy so that there was not “any property” to which it attached. Consequently, such proceeds are not includable in decedent’s estate under section 2041.

Because of other adjustments in the notice of deficiency, which are not in issue herein,

Decision will be entered under Rule 155.

Reviewed by the Court.

1 The application further provided that if the beneficiary was not “living,” the proceeds would be ‘ payable to the estate of the insured. The estate could have become the primary beneficiary of the, proceeds if the decedent had, prior to his death, either revoked the trust, i.e., so that it was not' “living,” or amended it to make his estate the remainderman and Mrs. Margrave had not changed the beneficiary designation. The respondent makes no argument that the proceeds should be includable in decedent’s gross estate on account of such contingent designation. The trustee was named as beneficiary of other insurance policies on the life of the decedent which were included in decedent’s gross estate because the decedent was the owner.

2 All references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended and in effect on the date of death. In the notice of deficiency, respondent stated that sec. 2038 provided an alternative basis for his determination. On brief, respondent concedes that sec. 2038 is inapplicable to the proceeds in question. ¹

3 Respondent does not argue that the proceeds should be included in the gross estate by application of sec. 2042(1), and there is nothing in the record to indicate that the trust was under a legal obligation “to pay taxes, debts, or other charges enforceable against the estate.” Sec. 20.2042-l(bXl), Estate Tax Regs. See also United States v. First National Bank & Trust Co. of Minneapolis, 133 F.2d 886 (8th Cir. 1943); Freedman v. United States, 382 F.2d 742, 744 n. 5 (5th Cir. 1967).

4 We recognize that, in this case, the decedent’s power as trustee was substantively revocable in the-sense that the decedent’s widow, who was the grantor of the trust, could have removed him as trustee. See Terriberry v. United States, 517 F.2d 286, 289-290 (5th Cir. 1975). The critical fact, however, is that so long as he was the trustee, decedent had direct control of the policies and, thus, could be said to have incidents of ownership in the policies themselves within the meaning of the statute and applicable regulations. See sec. 2042; sec. 20.2042-l(c), Estate Tax Regs. In the instant case, the decedent had no such direct control. Cf. Rose v. United States, 511 F.2d 259, 265 n. 14 (5th Cir. 1975).

5 Insofar as the record indicates, there was no agreement or understanding between decedent and Mrs. Margrave with respect to the disposition of the policy or of proceeds, and respondent has not made any suggestion along these lines. Any attempt to infer a prearranged agreement or understanding can rest only on an automatic inference based upon the marital relationship, a course which the Court has in the past declined to pursue. Cf. Estate of Gutchess v. Commissioner, 46 T.C. 554 (1966).

6 Sec. 2041 provides in relevant part:

SEC. 2041. POWERS OF APPOINTMENT.

(a) In General. — The value of the gross estate shall include the value of all property—

[[Image here]]

(2) Powers created after October 21, 1942. — To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21,1942, or with respect to which the decedent has at any time exercised,or released such a power of appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent’s gross estate under sections 2035 to 2038, inclusive. For purposes of this paragraph (2), the power of appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised.

*******

(b) Definitions. — For purposes of subsection (a)—

(1) General power of appointment. — The term “general power of appointment” means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate; except that—

(A) A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.

(B) A power of appointment created on or before October 21,1942, which is exercisable by the decedent only in conjunction with another person shall not be deemed a general power of appointment.

(C) In the case of a power of appointment created after October 21,1942, which is exercisable by the decedent only in conjunction with another person—

(i) If the power is not exercisable by the decedent except in conjunction with the creator of the power — such power shall not be deemed a general power of appointment.

(ii) If the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to exercise of the power in favor of the decedent — such power shall not be deemed a general power of appointment. For the purposes of this clause a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent’s power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent’s power.

(iii) If (after the application of clauses (i) and (ii)) the power is a general power of appointment and is exercisable in favor of such other person — such power shall be deemed a general power of appointment only in respect of a fractional part of the property subject to such power, such part to be determined by dividing the value of such property by the number of such persons (including the decedent) in favor of whom such power is exercisable.

For purposes of clauses (ii) and (iii), a power shall be deemed to be exercisable in favor of a person if it is exercisable in favor of such person, his estate, his creditors, or the creditors of his estate.

7 Contra, Second National Bank of Danville, Illinois v. Dallman, 209 F.2d 321 (7th Cir. 1954).