United States Nat'l Bank v. Comm'r of Internal Revenue (In re Estate of Margrave)

• Citation: 71 T.C. 13
• Decision Date: 10 October 1978
• Docket Number: Docket No. 2210-76.
• Parties: ESTATE of ROBERT B. MARGRAVE, DECEASED, THE UNITED STATES NATIONAL BANK, EXECUTOR and TRUSTEE of THE ROBERT B. MARGRAVE REVOCABLE TRUST, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

71 T.C. 13

ESTATE of ROBERT B. MARGRAVE, DECEASED, THE UNITED STATES NATIONAL BANK, EXECUTOR and TRUSTEE of THE ROBERT B. MARGRAVE REVOCABLE TRUST, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 2210-76.

United States Tax Court

Filed October 10, 1978.

Decedent's spouse applied for and owned an naming the trustee of a revocable trust created by the decedent as beneficiary. Upon decedent's death, the proceeds were paid to the trustee. Held, decedent did not possess any incident of ownership with respect to such life insurance policy. Held, further, he did not possess a power of appointment over the policy or the proceeds thereof. Jeffrey L. Stoehr, for the petitioner.

Wayne B. Henry, for the respondent.

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 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 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 beneficiary 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 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 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. 20.2042-1(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. 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 and Skifter v. Commissioner, 468 F.2d 699 (2d Cir. 1972), affg. 56 T.C. 1190 (1971).

Prior to decedent's death, the designation of 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 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 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)-(1), 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 p. 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, 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 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...