Nancy C. Terriberry, Bruce T. Terriberry and Sarasota Bank & Trust Co., on Behalf of the Estate of G. Gilson Terriberry v. United States

517 F.2d 286, 36 A.F.T.R.2d (RIA) 6496, 1975 U.S. App. LEXIS 13226

• Court: Court of Appeals for the Fifth Circuit
• Decided: August 8, 1975
• Docket: 74-2898
• Status: Published

Opinions

Mr. Justice CLARK:

At issue on this appeal is some $16,000 in federal estate taxes paid by appellee, Mrs. Nancy Terriberry, upon the death of her husband, Gilson Terriberry, on seven insurance policies transferred to her some years ago and covering his life. Upon Gilson’s death, the Government claimed that he had sufficient “incidents of ownership” in the policies within the meaning of 26 U.S.C. § 2042(2)¹ to require that the proceeds be included in his estate for tax purposes. Mrs. Terriberry paid the tax and brought this suit in United States District Court for the Middle District of Florida to recover the payment. The District Court concluded that the incidents of ownership were too remote to make the proceeds includable jn Gilson’s estate. Though recognizing the apparently good faith efforts of appellee and her late husband at the time 0f the original transfer to avoid this problem, we nevertheless hold the instant case controlled by In re: Estate of Lumpkin, 474 F.2d 1092 (5th Cir. 1973) and Rose v. United States, 511 F.2d 259 (5th Cir., 1975).

I.

The record stipulations indicate that in the 1940’s Gilson transferred to his wife, Nancy, the absolute and sole ownership of seven insurance policies on his life worth some $115,000. Subsequently, the Terriberrys moved to Florida after his retirement. In 1964, having heard that probate costs were high, they inquired as to how the impact of such expenses might be lessened and were advised to create separate inter vivos, revocable trusts. Each of the Terriberrys wished to retain control of their respective estates but were advised that Florida law required that someone other than a grantor-beneficiary be named co-trustee of such a trust. A form of trust agreement was drawn by counsel in which Gilson and Nancy named each other as co-trustees of their respective trusts, along with the Sarasota Bank as successor trustee of each. Nancy desired to transfer the seven insurance policies to the trust. Before executing the trust instrument, she wrote to each of the two insurance companies who carried the policies, enclosing a copy of the agreement and advising them of her intentions. In a letter of June 15, 1964, she stated:

The purpose of the wording for my Agreement is to make it clear that I have all the incidents of ownership of the policies on my husband’s life and, without the consent of any Trustee(s) or beneficiary, may exercise any option, etc., given under these contracts. Should I predecease my husband, all incidents of ownership become vested in the Trustee(s) and further, if my husband is a Trustee or Co-Trustee, ownership will not vest in him as an individual but only in his representative capacity.

Five policies issued by Mutual Benefit, however, included special settlement options which allowed the policy value to be paid out as an annuity. Regarding these provisions, Nancy further stated in her letter to that company:

As mentioned in my letter of March 3, while one or both of my husband and myself are living we might wish to take advantage of the very old annuity options in some or all of the contracts particularly in case of a violent inflation. These rates should be available to either the cash value or the maturity value. Your letter of March 5, indicates that these options and rates would be available under the arrangements we are preparing.

Mutual Benefit had earlier informed her:

Ordinarily, settlement options are available only to beneficiaries who are natural persons taking in their own right and not to trustees or other fiduciaries. However, in your case if you or Mr. Terriberry were the trustee we would be willing at the surrender or maturity of the policy to permit such trustee to elect a settlement option based on your life or the life of your husband provided you or your husband, as the case may be, is then the beneficiary of the trust and the right to take such action is included in the trust. In such a situation, the one of you who acts would merely be electing an option as trustee for yourself instead of directly as an individual.

In response to the June letter, Mutual Benefit stated:

Mr. Stoddart [Associate Counsel of the Company] believes it would be more appropriate for you to transfer ownership of the policies on your life as well as on the life of your husband to the trustees at this time. We could then furnish papers for such ownership for your signature to become a part of the policies. Under such an agreement your signature would be required to any changes in the policies during your lifetime or if you were incompetent or deceased by the trustees acting at that time. The life income option in the policy contract would be available on your life, if living, otherwise on the life of your husband.

In July of 1964, Nancy executed the trust agreement and transferred the insurance policies to it. Included among the trust’s provisions were the following:

“ARTICLE III

“The Grantor hereby agrees to transfer ownership of the life insurance contracts listed on the schedule of property attached hereto to the Trustee(s) in, but only in, its fiduciary capacity and not as individuals, and further to designate the individual and/or corporate Trustee(s) as the beneficiaries of such contracts of insurance. With respect to said insurance contracts, the Grantor agrees to pay the premiums and other charges, if any, necessary to keep such insurance in force without any duty on the part of any Trustee(s) herein named to see to the payment of same.

“With respect to said insurance contracts it is, however, expressly understood and agreed as follows:

“1. That the transfer of ownership by the Grantor to the Trustee(s) of such insurance contracts shall not vest ownership of such contracts in the Grantor’s husband, G. Gilson Terriberry, individually but only in his fiduciary capacity.

“2. That the Grantor’s husband, G. Gilson Terriberry, in the administration and ownership of said contracts of insurance, as Trustee or Co-Trustee hereunder, is expressly prohibited from exercising any of the incidents of ownership thereof in his individual capacity and further prohibited from making any use, disposition, retention or other control thereof, either individually or as Trustee or Co-Trustee, except as herein directed.

“3. To the extent permitted by the contracts of insurance and the insuring companies, but only to the extent that ownership of the contracts of insurance shall not become vested in the Grantor’s husband, G. Gilson Terriberry as an individual, the Grantor and her husband, G. Gilson Terriberry, or either of them, as Trustee(s) may upon surrender or maturity of the insurance contracts elect a settlement option based upon the life of either the Grantor or her said husband, G. Gilson Terriberry, Provided, they or either of them are, at the time of the election of such settlement option, a beneficiary of the trust.”

In addition, the agreement provided in Article II that Nancy had the unfettered right to revoke or amend her trust or to remove any trustee at any time.

The settlement option was never exercised, and Gilson died on May 21, 1968. The Government assessed all seven policies as his property and this suit followed.

II.

The Internal Revenue Service has issued regulations interpreting 26 U.S.C. § 2042(2), in part, as follows:

(4) A decedent is considered to have an “incident of ownership” in an insurance policy on his life held in trust if, under the terms of the policy, the decedent (either alone or in conjunction with another person or persons) has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has no beneficial interest in the trust. Moreover, assuming the decedent created the trust, such a power may result in the inclusion in the decedent’s gross estate under section 2036 or 2038 of other property transferred by the decedent to the trust if, for example, the decedent has the power to surrender the insurance policy and if the income otherwise used to pay premiums on the policy would become currently payable to a beneficiary of the trust in the event that the policy were surrendered.

Applying this approach to the circumstances of the instant case, the Government takes the position that Gilson’s right as a trustee to elect a settlement option under Article 111(3) of the trust agreement is a power to change “the time or manner of enjoyment” of the insurance policy and is therefore an “incident of ownership” under § 2042(2). We agree. Under recent precedent in this Circuit, appellee cannot escape the inexorable sweep of that provision of the Code.

Two years ago, this Circuit held that the proceeds of an insurance policy was includable in the gross estate even though the only power exercisable by an insured was the right to elect among certain limited settlement options. In re Estate of Lumpkin, 474 F.2d 1092 (5th Cir. 1973). More recently, in Rose v. United States, 511 F.2d 259 (5th Cir. 1975), Judge Goldberg concluded that an insured cannot relieve himself of liability under § 2042(2) by transferring ownership of the policies to a trust and merely assuming a fiduciary capacity as a trustee. The facts in the instant case lie at the logical junction of Rose and Lump-kin, and no significance can be attached to the intervention of a third party as trust grantor.

Appellee strenuously urges that Art. 111(2) of the trust agreement expressly prohibited her husband “from exercising any of the incidents of ownership” of the policies and that, hence, he was effectively prevented from electing any settlement option. We cannot accept appellee’s ingenious nullification of the express provisions of Article 111(3) by this proferred reliance on Article III(2)’s all-purpose incantation or on its sister phrases in Article III(l) or 111(3). Similarly we are unpersuaded by the existence of an absolute power in Nancy as grantor to revoke the trust or to remove her husband as trustee. The critical moment is the date of decedent’s death, cf. Lober v. United States, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed. 15 (1953), and it is enough that the power remained in existence at that point, even though unused and defeasible, cf. Johnstone v. Commissioner, 76 F.2d 55 (9th Cir. 1935). The fact of the matter is that she did not remove him as trustee and he died, possessed of a power to affect the time and manner of enjoyment of the proceeds of a life insurance policy on his own life.² Under our cases,³ this brings the situation within § 2042(2), and we are obliged to reverse.

Reversed.

1 . Section 2042 provides: “The value of the gross estate shall include the value of all property — . . (2) 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.

2 . The estate failed to introduce any evidence to show that similar lifetime settlement options were not available with respect to the two Connecticut Mutual policies, as it was of course obliged to do if it were to show its entitlement to a refund.

3 . To the extent that Skifter v. Commissioner, 468 F.2d 699 (Second Cir. 1972), and Estate of Fruehauf v. Commissioner, 427 F.2d 80 (6th Cir. 1970), recognize a different rule, this Circuit has chosen not to follow them. See Lumpkin, supra, 474 F.2d at 1097, n. 18. Nor is the Eighth Circuit’s decision in Swanson Jr. et al. v. Commissioner, 518 F.2d 59 apposite to the instant case.