Vanderlip v. Comm'r of Internal Revenue (In re Estate of Vanderlip) , Docket No. 109523.
| Citation | 3 T.C. 358 |
| Decision Date | 24 February 1944 |
| Docket Number | Docket No. 109523. |
| Parties | ESTATE OF FRANK A. VANDERLIP, DECEASED, NARCISSA COX VANDERLIP, VIRGINIA VANDERLIP SCHOALES, FRANK A. VANDERLIP, JR., KELVIN COX VANDERLIP AND CITY BANK FARMERS TRUST COMPANY, AS EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Decedent prior to 1918 took out certain policies of life insurance upon his own life. In 1932 he irrevocably assigned these policies to trustees who were to collect the proceeds at his death and hold them for the benefit of his wife, children, and grandchildren. Before transferring these policies to the trustee decedent borrowed upon them their maximum loan value. After the transfer the premiums were paid by the decedent or by loans made upon the policies by the trustees or by the application of dividends to premiums. The trustees held no other assets. The transfer by decedent of the policies to the trustees was motivated solely by his desire to avoid estate taxes. Held, that the transfer of the policies in 1932 was made in contemplation of death and the proceeds of the policies are properly includable in decedent's gross estate. Edwin W. Cooney, Esq., for the petitioners.
Clay C. Holmes, Esq., for the respondent.
Respondent determined a deficiency in the estate tax liability of petitioner estate in the sum of $327,544.95. By stipulation and concession all issues have been removed from the case except the following: Whether respondent erred in including in the gross estate of decedent Frank A. Vanderlip the proceeds of certain policies of insurance issued upon the life of decedent prior to 1918 and transferred by him in 1932 to a certain trust for the purpose of avoiding estate taxes.
The parties have filed a voluminous stipulation of facts. In addition oral evidence was adduced at the hearing. The oral evidence and a large part of the stipulation have to do with issues no longer before us.
We find the facts to be as stipulated. That part of the stipulated facts which is pertinent to the issue before us may be summarized as follows:
Decedent was born on November 17, 1864, and died on June 29, 1937. He was survived by his wife, six children, and several grandchildren. His wife, his two sons, a daughter, and the City Bank Farmers Trust Co. are the executors of his estate. They filed an estate tax return with the collector of internal revenue for the fourteenth district of New York, showing a gross estate of approximately $1,000,000. There was no material change in the total amount of decedent's estate from June 1, 1932, to the date of his death.
By agreement dated June 1, 1932, the decedent irrevocably assigned, transferred, and delivered to City Bank Farmers Trust Co. et al., as trustee, policies of insurance upon his life aggregating $923,868.60, the proceeds of which were to be held in trust for the benefit of the decedent's widow and descendants. The terms of the trust instrument are incorporated herein by reference. These policies were all issued prior to the effective date of the Revenue Act of 1918. No additional policies of insurance on the decedent's life were subsequently assigned and transferred to said trustees. The policies of insurance so assigned and transferred to the trustees comprised, until the death of the decedent, the sole assets of the trust.
Before the assignment and transfer of the policies of insurance to the trustees under the trust agreement, decedent borrowed upon the security of the policies the total sum of $398,898.51, which on June 1, 1932, represented the then maximum loan value of every policy of insurance assigned and transferred to the trustees.
After the assignment and transfer of the policies of insurance to the trustees, the latter invariably applied to the payment of each annual policy premium and the annual interest on each policy loan, any and all dividends together with the maximum additional loan value created as the result of payment of each new policy premium. The decedent paid policy premiums and interest on policy loans to the extent that the total of such two items exceeded the dividends and additional loan value so credited at the instance of said trustees. The payments thus made by decedent were in the total amount of $183,026.45. The total amount of the policy loans procured by the trustees subsequent to the transfer of the policies of insurance to them and applied by them in partial payment of premiums and of interest on policy loans was $114,539.69.
Article V of the trust instrument provided in part as follows:
From and after the assignment of them of each policy of insurance at any time assigned to them as Trustees hereunder, said Trustees shall have, with respect to such policy, or any paid-up additional insurance purchased with annual dividends thereon, or any paid-up insurance, whether extended term or otherwise, received in the event of a surrender or lapse thereof, the sole right to exercise any and all of the benefits, rights, options and privileges of whatsoever kind appertaining to such policy, and may exercise the same, or refrain from exercising the same, at such times and in such manner as they may in their absolute discretion from time to time deem advisable, including but not by way of limitation, the right (1) to borrow thereon; (2) in the event of the surrender or lapse of such policy, either (a) to receive the cash surrender value thereof, (b) to direct the disposition of the annual dividends on such policy. The Trustees shall direct that the dividends on such policies as are not fully paid up, be applied in reduction of the premiums on such policies. The Trustees are hereby expressly authorized and empowered to do and perform any and all acts and to make, execute and deliver any and all written instruments which they in their sole judgment may deem advisable in order that all the benefits, rights, options and privileges under the policies of insurance held by them hereunder from time to time shall be vested in the Trustees.
Wherever possible, the Trustees shall cause provision for automatic premium loans to be endorsed on the policies by the issuing companies. If at any time the Trustees believe that any policy assigned to them hereunder is likely to lapse by reason of the non-payment of any premium thereon, they are hereby expressly authorized and empowered in their absolute discretion, to make payment of such premium out of any funds then in their hands, and they are further authorized and empowered to borrow upon any policy, or surrender the same for cash, or take any other steps which they may deem advisable in order to raise funds for the payment of any premium on any policy, but they shall be under no duty or obligation whatsoever to pay any such premium or to take any steps to raise funds for the payment thereof.
The only value of the insurance policies comprising the corpus of the trust was the difference between the loan value and the terminal reserve value.
At the decedent's death said trustees received $421,815.66 as the proceeds of the decedent's life insurance.
The decedent's transfer of said policies of insurance upon his life to said trustees pursuant to said trust agreement dated June 1, 1932, was motivated solely by the decedent's desire to avoid estate taxes thereon and was not otherwise made in contemplation of death within the meaning of the Revenue Acts of 1926 and 1932, as amended, or of the regulations thereunder.
In 1932 decedent was the owner of certain policies insuring his life and calling for the payment at his death of $923,868.60. These policies were taken out by decedent prior to 1918. The record does not disclose whether the proceeds of the policies were payable upon his death to named beneficiaries or to his estate. In 1932, and ‘motivated solely by (his) desire to avoid...
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