Abstract

The millions of dollars in proceeds which annually pass to estates and beneficiaries under life insurance policies on the life of the decedent, have long been considered a prime source for federal estate taxes. The nature of the life insurance contract, however, with its numerous ownership and dispositive options, has complicated and often frustrated effective assertion of the tax.

The continuing controversy attending the inclusion of policy proceeds in the decedent's gross estate was recently accentuated by Gorman v. United States. Although the decision only encompasses a very limited problem, its ramifications are broad, especially for the estate planner. The problem encountered by the Gorman court was basically this: what portion of the proceeds of a life insurance policy in which the decedent had no incidents of ownership at death, yet continued to pay premiums until that time, are taxable to his estate? Certainly no less important than the resolution of this question was the Gorman court's feeling that Revenue Ruling 67-463 was a flagrant overassertion of authority by the Internal Revenue Service. The controversial ruling reads:

A decedent, within three years of death and in contemplation of death, paid the premiums on a policy of insurance on his life. He had transferred the incidents of ownership in the policy to his wife more than three years prior to his death. Held, such payment was a transfer of an interest in the policy measured by the proportion the amount of premiums so paid bears to the total amount of premiums paid. Accordingly, the value of the proportionate part of the amount receivable as insurance that is attributable to those premiums paid by the decedent within three years of death is includable in his gross estate under section 2035 of the Internal Revenue Code of 1954. This conclusion is also applicable where the wife originally applied for the insurance.

Rejecting the Ruling's premise that premiums paid in contemplation of death are transmuted into proceeds on a pro rata basis, the Gorman court held that only the dollar amount of the premiums so paid by the insured non-owner are includable in his gross estate.

Before examining the Gorman rationale, an attempt will be made to place the problem in perspective by briefly surveying the development of two pertinent current Code sections; section 2042 (Proceeds of Life Insurance) and section 2035 (Transactions in Contemplation of Death). Some tangential considerations raised by the ruling and the Gorman holding also will be approached. Likewise, the community property aspect of the problem will be considered. One preliminary caveat is in order. It is not within the scope of this note to propose alternative estate plans in light of Gorman and the revenue ruling.

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