American Nat. Bank and Trust Co. of Rockford, Ill. v. U.S.

• Decision Date: 02 November 1987
• Docket Number: No. 87-1407,87-1407
• Citation: 832 F.2d 1032
• Parties: -6164, 87-2 USTC P 13,738 AMERICAN NATIONAL BANK AND TRUST COMPANY OF ROCKFORD, ILLINOIS, as executor of the Estate of Bruce F. Olson, deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1032

832 F.2d 1032

60 A.F.T.R.2d 87-6164, 87-2 USTC P 13,738

AMERICAN NATIONAL BANK AND TRUST COMPANY OF ROCKFORD ILLINOIS, as executor of the Estate of Bruce F Olson, deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 87-1407.

United States Court of Appeals Seventh Circuit.

Argued Sept. 18, 1987.

Decided Nov. 2, 1987.

David R. Hodgman, Schiff Hardin & Waite, Chicago, Ill., for plaintiff-appellant.

Robert A. Bernstein, Dept. of Justice, Washington, D.C., for defendant-appellee.

Before BAUER, Chief Judge, and CUMMINGS and POSNER, Circuit Judges.

POSNER, Circuit Judge.

This appeal presents a potentially recurrent question, though not one on which we have been able to find any reported decisions. Suppose a life insurance policy is assigned to the insured's spouse, and later the spouse relinquishes all rights under the policy as a condition of the insured's being allowed to obtain a bigger policy, and the new policy is not assigned. Can the spouse nevertheless be deemed the owner of the new policy, in whole or part, whether as a matter of contractual interpretation or by virtue of the rules relating to constructive trusts or to resulting trusts, and thereby keep the proceeds of the new policy out of the estate of the insured for federal estate tax purposes?

In 1975 Bruce Olson, a 58-year-old executive, insured his life under a group policy that the Montgomery Ward Life Insurance Company had issued to his employer. A year later Olson assigned the policy to his wife. The assignment (which the employer referred to as an "absolute assignment") stated:

For love and affection and no other valuable consideration, the assignor hereby absolutely and forever assigns and transfer[s] to the assignee ownership of the insurance on the life of the Insured provided under the captioned group life policy and evidenced by the captioned certificate, together with all proceeds thereof and benefits, claims, and advantages whatsoever, now due or hereafter to arise or to be had or made by virtue thereof.... The assignment includes all additional insurance, if any, that may be provided in the future under said group life insurance evidenced by said certificate.

In 1978 Olson's employer obtained another group life policy, this one from Standard of America, which offered substantially more insurance for the select group of employees, including Olson, who were eligible for it. Concretely, it offered Olson $1.5 million versus $600,000 under the Montgomery Ward policy. Although eligibility was not limited to employees insured under the Montgomery Ward policy (the estate misstates the record in arguing that it was), to enroll under the new policy any employee who was insured under the old one--plus the policy owner, if the insured had assigned the policy to another person, as Mr. Olson had done--had to cancel coverage under the old policy by signing an election form. The form made clear that the new policy was indeed new, and not merely a continuation of the old:

The new Executive Life Insurance Program [the Standard of America policy] will be includable in the employee's gross taxable estate under Federal Statute and regulation. An absolute assignment of this new Executive Life Insurance Program will be required to begin the process of removing these insurance proceeds from the employee's taxable estate, and the 3 year waiting period will commence with the date of this new assignment.

The reference to a "3 year waiting period" was an allusion to 26 U.S.C. Sec. 2035(a), which provides that property transferred by a decedent three or fewer years before his death (including a life insurance policy owned by him) remains a part of his estate for purposes of federal estate tax. See Bittker, Federal Taxation of Income, Estates and Gifts p 127.8 (1984).

Since participation in the new program was optional, Olson and his wife could have continued under the Montgomery Ward policy. Indeed, the form from which we have quoted said that "employees whose health may not permit a renewal of the 3-year waiting [period] should consider this new 3-year waiting period [running from the date of an absolute assignment of the new policy] in making their decision." But Olson and his wife went ahead and signed the election form. Four months later he was dead. Although he had not assigned the new policy to Mrs. Olson (or anyone else, for that matter), she was the beneficiary, and Standard of America duly paid her the $1.5 million insurance proceeds. The Olson estate did not include this money in its estate tax return, and the Internal Revenue Service assessed a deficiency. The estate paid it, then brought this suit for a refund. The parties filed cross-motions for summary judgment, the district court entered judgment for the government, and the estate appeals.

The estate argues that the Standard of America policy was one of the "benefits, claims, and advantages whatsoever, now due or hereafter to arise or to be had or made by virtue" of the Montgomery Ward policy, and hence was assigned to Mrs. Olson as part of the "absolute assignment" of that policy three years and 13 days before Mr. Olson died. (Had the assignment occurred 13 days later, it would not have removed any proceeds covered by the assignment from Olson's estate.) We disagree. The policy issued by Standard of America was not a dividend, proceed, or other fruit of the policy Montgomery Ward had issued. It was a different policy offered by a different insurance company. More important, it was not conditioned on the employee's having been insured under the Montgomery Ward policy, and hence in no sense was it an advantage "due or hereafter to arise or to be had or made by virtue of" that policy. Most important, it was available to the Olsons only on condition that they terminated the earlier policy and thereby extinguished all the rights that Mrs. Olson had under it. She gave up the policy, fruits and all, for good consideration, namely the expectation--which was realized, and shortly too--that she would obtain a greater death benefit under the new policy. That benefit was greater even after payment of the estate tax on the proceeds of the second policy.

The estate is right to stress the all-inclusive character of the language used to convey the fruits of the Montgomery Ward policy to the assignee. But since the Standard of America policy was available to employees not enrolled under the Montgomery Ward policy, was conditioned on the extinguishing of all rights arising under that policy, and hence was intended to be an alternative rather than a dividend or add-on to it, we do not see how the Standard of America policy could be thought a benefit or advantage arising from the earlier policy. The proceeds of the new policy, therefore, did not pass to Mrs. Olson by virtue of the original assignment. Mr. Olson was the owner of the new policy, and since it was never assigned it was still his property on the day he died.

The estate makes an alternative argument, that Mrs. Olson was the beneficial owner of a resulting trust in the new policy. The trust is said to have come into being when she relinquished her rights under the old policy and her husband enrolled under the new one, and to be measured by the proceeds that she would have received under the old policy; she argues that those proceeds, at least, should be excluded from the taxable estate. It might seem that this argument, even if sound, could not help her, because the events alleged to have created the resulting trust occurred only four months before Mr. Olson's death and thus well within the period in which transfers are ineffectual to divest the transferor of ownership for purposes of federal estate tax. However, if there was a resulting trust this means that Mr. Olson never transferred the ownership of the part of the new policy impressed by the trust--she owned that part right from the start. But there was no resulting trust under Illinois law, which the parties agree governs the question.

A resulting trust must be distinguished from a constructive trust, the latter being a device for preventing unjust enrichment. Its effect is to require a person who has acquired property by fraud or other inequitable conduct to convey it to the true owner. See, e.g., People ex rel. Hartigan v. Candy Club, 149 Ill.App.3d 498, 502, 103 Ill.Dec. 167, 170, 501 N.E.2d 188, 191 (1986). If Mrs. Olson had paid for the assignment of the Montgomery Ward policy, and her husband duped her into surrendering the policy by a...