Rohnert v. Commissioner

*1320 The Commissioner determined a deficiency in estate tax in the amount of $5,200. The*728 deficiency results from respondent's refusal to allow the exemption of $40,000 provided for in section 302(g) of the Revenue Act of 1926, in computing the amount of insurance includable in the gross estate. Petitioner claims that only the excess over $40,000 of insurance receivable by the trustee of an inter vivos trust should be included in the gross estate for estate tax. The facts in the case are not in dispute.

FINDINGS OF FACT.

The decedent, Waldo Rohnert, died testate November 18, 1933. Decedent was a resident of California at the time of his death. Decedent is survived by his wife, Edna V. Rohnert, and by two adult children.

Decedent executed a will on December 5, 1927, which is the will which was duly admitted to probate. The Bank of America National Trust & Savings Association, hereinafter referred to as the Bank of America, executor, is the duly qualified and acting executor under the last will and testament of the decedent.

On December 15, 1926, the decedent executed a trust agreement, naming as trustee the Bank of America National Trust & Savings Association, hereinafter referred to as the Bank of America, trustee. The trust created in 1926 is referred*729 to hereinafter as the 1926 trust, or as the inter vivos trust. The 1926 trust was revocable during the lifetime of decedent.

During his lifetime the decedent delivered to the Bank of America, trustee, subject to the terms of the inter vivos trust, six insurance policies upon his own life in the total face amount of $165,000. These policies remained in the trust at the date of the death of decedent. Each policy reserved to the insured the right to change the beneficiary. The original beneficiary of each of the policies, before the creation of the 1926 trust, was either Edna V. Rohnert, or decedent's executors, administrators, or assigns. Upon delivery of each of the policies to the Bank of America, as trustee of the 1926 trust, the then beneficiary was changed to Bank of America, trustee under the 1926 trust agreement. At the date of decedent's death the Bank of America, trustee under the 1926 trust, was the beneficiary of each policy. The value of *1321 all the policies, at the date of decedent's death, was $166,205.79, which sum was paid to the Bank of America, trustee under the 1926 trust.

Decedent also delivered to the Bank of America, trustee, three*730 other policies of insurance upon his own life, which decedent later withdrew from the trust and surrendered to the insurance company for the cash values thereof. Decedent left the proceeds of these policies on deposit with the insurance company to be paid to him, with interest, in monthly installments. At the date of decedent's death, $32,870.68 from such proceeds remained in the hands of the insurance company.

Decedent delivered to the trustee under the 1926 trust dividendbearing stocks of various companies, in addition to the life insurance policies referred to above. At the date of decedent's death, the value of the stocks in the trust was $144,590.63.

Under the provisions of the 1926 trust agreement, the trustee was directed (1) to hold the securities and the life insurance policies comprising the trust; (2) to apply any income it received from the securities, or from other personal property, in payment of the premiums upon the life insurance policies in the full amount of the premiums specified on the face of each policy; (3) to receive and hold the proceeds of the insurance policies in trust and as part of the corpus of the trust; (4) to ascertain the amount of Federal*731 and state estate taxes as soon as possible after the trustor's death, and to pay such taxes out of the trust fund, and to take any steps or proceedings necessary to procure a final determination and settlement of all estate taxes, at the cost and expense of the trust. The trustee was not directed to pay estate taxes out of any particular property in the trust.

Under the terms of the 1926 trust agreement, the decedent reserved the right, during his lifetime, to withdraw any insurance policy from the trust, or to borrow money upon any of the policies, or to exercise any privilege granted or reserved to the insured under any of the policies, or to receive any payments, dividens, surrender values, or other proceeds, of any policy accruing during the lifetime of the insured, without the consent of the trustee.

The beneficiaries of the 1926 trust were and are Edna V. Rohnert, wife of the decedent, for life, and the son and daughter of decedent after the death of Edna V. Rohnert. Edna V. Rohnert is to receive, during her lifetime, in monthly installments, of the net income of the trust fund remaining after the payment of all estate taxes.

Decedent created the 1926 inter vivos*732 trust to provide his wife and children with an estate to be administered by a bank, as trustee, and to provide funds for the payment of Federal or state estate and inheritance taxes payable in respect of property passing upon his death.

By the terms of his last will, executed December 5, 1927, decedent bequeathed to his wife $25,000 out of his estate. He stated in his *1322 will that he had provided for the financial needs of his wife and children, in addition to the provisions of the will, through the 1926 trust created during his lifetime. He bequeathed the residue of his estate in trust, and created under his will a testamentary trust. The Bank of America National Trust & Savings Association was named trustee of the testamentary trust. The beneficiary of the testamentary trust is Edna V. Rohnert, for life. Decedent's two children are the remaindermen. Decedent, in his will, directed the executor of the will to pay expenses out of his estate, as follows:

SECOND: I direct my Executor hereinafter named to pay the expenses of my last illness and my funeral and burial expenses and all of my just debts as soon after my death as the condition of my estate will permit.

*733 The trustee of the 1926 inter vivos trust has paid from that trust, and charged against the corpus of the trust estate, taxes totaling $54,306.47, as follows: Federal, $41,060.10; state, $13,246.37.

OPINION.

HARRON: The Commissioner included in decedent's gross estate the sum of $32,870.68 representing the proceeds held by an insurance company which had been subject to payment direct to decedent. This sum is the balance of proceeds of insurance policies which decedent, during his lifetime, surrendered for their cash value. This sum was included properly in the gross estate. It appears that this determination is not contested by petitioner. These proceeds were payable to decedent during his lifetime. Upon his death, they were payable to the estate.

Section 302(g) of the Revenue Act of 1926 ¹ provides that the amount of insurance receivable by the executor of an estate shall be included in gross estate for estate tax, and that insurance receivable by all other beneficiaries shall be included in gross estate to the extent of the excess thereof over $40,000. The insurance on the life of the decedent was made payable, on the policies, to beneficiaries other than*734 the executor of the estate. However, since estate taxes were to be paid from the inter vivos trust which included all the insurance, respondent has treated all the insurance, in the total amount of $166,205.79, as subject to the payment of a claim against the estate, and, therefore, as receivable by the executor rather than by other beneficiaries. As a result of the respondent's treatment of the insurance, he has determined that the total amount of the insurance is includable in the gross estate under the terms of the first clause in section 302(g). The sole question is whether that determination is correct, *1323 or whether the insurance is of the class described in the second clause of section 302(g) so as to make the $40,000 exemption, allowed by the statute, applicable thereto, and only the excess over $40,000 includable in gross estate.

The property*735 in the inter vivos trust is of two classes; 20,527 shares of various stocks, and the proceeds of six policies of insurance upon the life of the decedent. Each of the policies was payable to the trustee of the inter vivos trust, who was to hold the net corpus of the trust for the benefit of decedent's widow and children.

Since the insurance on the face of each policy was payable to the trustee, it is only by construction of the terms of the 1926 trust agreement that it can be held that any of the insurance was receivable by the executor of decedent's general estate, under section 302(g). The trustee was obligated to pay all estate taxes from the inter vivos trust. The executor of the estate was a limited beneficiary of the trust. There is no direction to the trustee to pay estate taxes from property other than the insurance proceeds. The taxes could be paid from any funds or property in the trust. However, in the absence of readily available funds from other property in the trust, some of the insurance was clearly subject to payment of a particular charge against the estate, namely, estate taxes. It is, therefore, concluded that, under the terms of the 1926*736 trust, at least some of the insurance was subject to payment of a charge against the estate, namely, estate taxes.

The total amount of estate taxes for which the trustee of the inter vivos trust was liable, is known. That amount is approximately $54,306. That amount represents all of the charges against the estate of which it can be said that the insurance was subject to meet charges against the estate. That amount is all of the insurance which can be said to be "receivable by the executor" under the first clause of section 302(g). The balance of the insurance, approximately $111,900, is clearly such insurance as is described in the second clause of section 302(g). It is receivable by a beneficiary other than the executor. None of the remainder of the insurance is for the benefit of the estate, nor is it distributable by the executor of the estate. The executor of the general estate exercises no control over the remainder of the insurance proceeds. It is concluded that the balance of the insurance, about $111,900, is includable in gross estate to the extent of the excess over $40,000, under the provisions of the second clause of section 302(g).

It is pointed out, *737 further, that the insurance in question was taken out by the decedent to provide decedent's wife and children with an estate to be administered by a bank as trustee. It would be unreasonable to conclude that all the insurance was taken out by the decedent to provide funds to meet the estate taxes, as respondent *1324 contends, in view of the fact that the face amount of all the insurance was $165,000, and all the estate taxes amount to only $54,306.47.

Congress has seen fit to include in the gross estate of a decedent only the excess over $40,000 of the amount of insurance receivable by other beneficiaries than the executor. Congress intended to allow the exemption of $40,000 of insurance passing directly to a beneficiary over which the executor exercises no control. See Report No. 767 (p. 22) of the Committee on Ways and Means, submitted to Congress when the Revenue Bill of 1918 was under consideration, quoted in . Respondent's contention in this case disregards the express intention of Congress in enacting the second clause of section 302(g), and disregards the language of that statutory provision. *738 It is noted that, under somewhat similar facts, in , the Commissioner contended that insurance receivable by beneficiaries other than an executor was includable in gross estate only to the extent used for the payment of claims against the estate. We sustained that contention. We stated:

* * * notwithstanding the fact that the proceeds here were not payable to the bank as executor but as trustee, they were subjected by the trust agreement to the charges in question, and to that extent and on that account are properly includable in the gross estate. [Italics supplied.]

Respondent relies upon the Morton case, supra, as authority for his contention that the total proceeds of insurance should be held to be receivable by the executor of decedent's estate and, therefore, includable in the gross estate for estate tax. In the Morton case, the decedent appointed the Bartlett Trust Co. as executor under his will. Under the will, the decedent bequeathed the residue of his estate in trust to the Bartlett Trust Co., as trustee. *739 Insurance on the life of the decedent was payable to the Bartlett Trust Co., as trustee under the will. In the will, the decedent directed the trustee under the will to pay all charges against the estate from the residuary estate, and the insurance proceeds were part of and commingled with the residuary estate. Under the particular facts, it was held that all of the proceeds of insurance was subject to the payment of claims against the estate and, therefore, was insurance "receivable by the executor", so as to be includable in gross estate under the first clause of section 302(g). In , the rationale of the opinion in the Morton case is stated to be as follows:

* * * The effect of our opinion in that case was to hold that no express trust was created by decedent's making the policies of insurance payable to Bartlett Trust Co., trustee, under the will and that, because no express trust was thereby created, there was a resulting trust in favor of the estate and the estate was therefore the beneficiary of the policies and the $40,000 exemption did not apply.

*1325 It further appears in the opinion in the*740 Morton case that, under the facts, we concluded that all the insurance in question was subject to distribution as part of the estate. The trustee under the will and the executor of the estate being the same institution, the situation was the same as though the insurance was receivable by the executor of the estate.

In this case, the insurance is receivable by a trustee of an inter vivos trust for named beneficiaries. The inter vivos trust is separate from the general estate, and from a testamentary trust created under a will. Cf. . In , we held that insurance receivable by beneficiaries other than an executor of a general estate was includable in gross estate only to the extent used for the payment of claims against the estate. In so holding, we modified the rule of the Morton case, at least in so far as the respondent argues that it supports his contentions in this case. We reach the same result here as was reached in the Pacific National Bank of Seattle case. See, also, *741 .

Upon the conclusions reached above, there should be included in the gross estate for estate tax, $32,870.68, the proceeds of the cash value of policies surrendered by decedent during his life; $54,306.47, the amount advanced by the trustee of the inter vivos trust for estate taxes; $71,899.32, the extent of insurance receivable by a beneficiary other than the executor above $40,000.

Reviewed by the Board.

Decision will be entered under Rule 50.