Cutler v. Commissioner

Estate of Ruth Brainard Cutler, Deceased, Ralph D. Cutler, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Cutler v. Commissioner

Docket No. 16183

United States Tax Court

13 T.C. 138; 1949 U.S. Tax Ct. LEXIS 118;

July 27, 1949, Promulgated

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Decision will be entered under Rule 50.

On December 19, 1935, decedent created an irrevocable insurance trust, the corpus of which consisted of five insurance policies issued on the life of the decedent. The trust indenture provided that upon the death of the decedent the trustee was to divide the corpus of the trust into as many parts as there were children of decedent then living and deceased children represented by then living issue. Held, under this trust instrument and the Connecticut law there existed a possibility of reverter by operation of law requiring the corpus of the trust to be included in the gross estate of decedent as a transfer intended to take effect at or after the death of the decedent within the purview of section 811 (c) of the Internal Revenue Code. Estate of Spiegel v. Commissioner, 335 U.S. 701">335 U.S. 701, followed.

John C. Parsons, Esq., for the petitioner.

Paul P. Lipton, Esq., for the respondent.

Leech, Judge.

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LEECH

This proceeding involves a deficiency in estate tax in the amount of $ 41,472.08. The sole issue is whether the proceeds of five insurance policies on the life of the decedent are includible in the gross estate.

The case was submitted on a stipulation of facts, oral testimony, and documentary evidence. The facts as stipulated are so found.

FINDINGS OF FACT.

Petitioner is the executor of the estate of Ruth Brainard Cutler, who died June 6, 1945, a resident of West Hartford, Connecticut. Petitioner's estate tax return was filed with the collector of internal revenue for the district of Connecticut on June 12, 1946.

Decedent was born January 31, 1885. At her death she was survived by her husband, Ralph D. Cutler, four children, and three grandchildren. The names and the dates of birth of the four children are as follows:

Ralph D. Cutler, Jr	Aug. 16, 1913
Helen Cutler Winter	Feb. 17, 1915
Ruth Cutler Chapman	Jan. 13, 1920
William B. Cutler	Dec. 12, 1924

On December 19, 1935, decedent executed an irrevocable trust agreement with the Hartford National Bank & Trust Co., as trustee, under which decedent deposited five insurance policies issued on her life, in the face amount of $ 135,000. Three of these policies, each in the amount of $ 25,000, had been subject to the provisions of a revocable insurance trust executed on February 4, 1931, by the decedent, which designated the same bank as trustee. By an amendment executed by the decedent on December 18, 1935, these three policies were withdrawn from the revocable trust agreement of February 4, 1931. The amendment provided that thereafter the insurance trust agreement of February 4, 1931, should be applicable only to one policy issued by the Travelers Insurance Co. on December 18, 1935, on the life of the decedent, in the face amount of $ 40,000. This latter policy was transferred to the revocable trust of February 4, 1931, in substitution for the three policies in the face amount of $ 25,000 each, withdrawn by the amendment.

Both trust indentures provided that the trustee was to collect and receive the proceeds of the insurance policies upon the death of the insured or earlier of any policy. The dispositive provisions were identical. Each trust indenture provided that the trustee was to divide the property constituting the trust corpus at the death of the decedent into equal parts for her then living children and then living issue of any deceased child, one part to be paid absolutely and free of any trust to each child who had reached the age of 25, and one part to be continued in trust for each child less than 25 until paid over when such age was reached. In the event of the death of a child prior to attaining the age of 25, such part was to be divided among his or her then living issue.

The trust indenture of December 19, 1935, was declared to be irrevocable, and the decedent reserved "none of the so-called life incidents of ownership" in the policies. It contained a provision that the trustee might purchase securities or other property from the decedent's personal representative.

The insurance policies subject to the trust indenture of December 19, 1935, were listed in schedule A of the trust agreement as follows:

Company	Policy No.	Amount
Aetna Life Insurance Co	333075	$ 25,000
Do	N946783	25,000
Do	N946784	25,000
Do	N1109784	25,000
Travelers Insurance Co	1907011	35,000

In a gift tax return filed by the decedent for the calendar year 1935, transfer of the policies listed above was reported at an aggregate value of $ 45,254.07.

Decedent paid all the premiums on the insurance policies subject to the insurance trust dated December 19, 1935. The amounts of premiums paid thereon before and after January 10, 1941, were as follows:

	Amount	Amount
Policy No.	paid prior	paid after
	to 1/10/41	1/10/41
333075	$ 13,763.50	$ 766.50
N946783	8,695.00	3,760.00
N946784	8,225.00	4,700.00
N1109784	13,556.50	None
1907011	20,389.25	None

In addition to the insurance trusts, the Hartford Bank & Trust Co. was named as trustee under four separate trusts created by the decedent on April 21, 1932, for the benefit of her four children. The corpus of each trust consisted of 1,800 shares of the capital stock of the Aetna Life Insurance Co. Each gift was worth approximately $ 37,000. The principal and any accumulated income of each trust were to be distributed to the child named as beneficiary upon his or her attaining the age of 25.

During the calendar year 1941 the decedent made gifts of various securities in approximately equal amounts, totaling $ 100,437.27. In December 1944 decedent gave each of her children gifts of securities valued at amounts between $ 2,940 and $ 3,000.

The decedent executed her last will and testament on April 21, 1943. She had also executed wills on February 18, 1933, March 26, 1936, and February 17, 1941. By decedent's last will and testament, she bequeathed one-half of her estate in trust for her husband during his life, if he survived her. Her remaining estate, or her entire estate if her husband predeceased her, was to be divided equally among her children. Each son was to receive his share outright at the age of 35, and each daughter's share was to be held in trust for her during her life, with remainders to their surviving issue, if any.

Decedent died of a cerebral hemorrhage on June 6, 1945, following an illness of two days. Decedent's general physical health was good. She suffered minor dental infection in 1934 and 1935, and was undergoing the earlier phases of menopause in those years. She underwent a minor operation for an arm infection in 1936, and in 1937 had a breast tumor removed. Decedent traveled considerably after 1935. She took a cruise to the North Cape in 1935, and spent the summer in Honolulu in 1938. She also played golf, rode, swam, and was active in civic and social affairs.

Decedent's estate tax return disclosed a total gross estate of $ 1,144,193.30, charitable deductions of $ 5,000, and total allowable deductions of $ 29,074.50. The five policies comprising the corpus of the trust dated December 19, 1935, were included in the gross estate at a total value of $ 17,889, representing the portion of the proceeds attributable to premiums paid by the decedent subsequent to January 10, 1941.

The respondent determined that the entire proceeds of the five insurance policies, in the amount of $ 135,000, subject to the 1935 trust, were includible in decedent's gross estate.

On September 15, 1947, petitioner paid to the collector at Hartford, Connecticut, the amount of $ 39,043 in respect of the deficiency determined in respondent's notice of deficiency dated July 22, 1947.

OPINION.

The sole issue presented is whether the proceeds of five insurance policies on the life of decedent, constituting the corpus of a trust created December 19, 1935, are includible in decedent's gross estate. The respondent contends that the proceeds are includible under the provisions of section 811 (g) (2) (A) of the Internal Revenue Code, as amended by section 404 of the Revenue Act of 1942, and as a transfer made in contemplation of death, or intended to take effect in possession or enjoyment at or after death, within the purview of section 811 (c) of the code. Petitioner contends that the transfer was not made in contemplation of death, that decedent by the trust agreement made a complete irrevocable transfer or gift, retaining no control or incidents of ownership, and that under section 811 (g) only the portion of the proceeds represented by the premiums paid by the decedent after January 10, 1941, is includible in the gross estate.

The trust instrument of December 19, 1935, provided that upon the death of the decedent the trustee was to divide the principal of the trust into as many parts as there were children of decedent then living and deceased children represented by then living issue. Only the designated beneficiaries who survived the decedent could take and, therefore, there existed until decedent's death a possibility that the trust corpus would revert to her by operation of law.

Such a transfer is one falling squarely within the provisions of section 811 (c) as one intended to take effect in possession or enjoyment at or after decedent's death. Estate of Spiegel v. Commissioner, 335 U.S. 701">335 U.S. 701.

Petitioner makes no contention that if all the designated beneficiaries predeceased the decedent there did not exist a possibility of reverter by operation of law, but contends the possibility that the trust would fail for lack of beneficiaries is so remote as not to require the transfer to be included as intended to take effect in possession or enjoyment at or after death. The degree of remoteness, however, is immaterial. Estate of Spiegel v. Commissioner, supra.

Petitioner makes no contention that under the laws of Connecticut, where the trust was created and under the laws of which it is to be construed, the trust corpus would not have reverted to the decedent had all the beneficiaries predeceased her. Our own research, however, convinces us that under Connecticut law the trust corpus would have reverted to decedent had she outlived the designated beneficiaries. Battistone v. Banulski, 110 Conn. 267">110 Conn. 267; 147 Atl. 820; Loomis v. G. F. Heublein & Co., 91 Conn. 146">91 Conn. 146; 99 Atl. 483.

The only argument advanced by petitioner as to why the Spiegel case, supra, is not controlling is that the corpus involved in that case was income-producing property, while in the instant case the corpus consisted of insurance policies. Section 811 (c) of the code is applicable to all property without regard to its nature. As stated in the Spiegel case, supra, the question is whether "some present or contingent right or interest in the property still remains in the settlor so that full and complete title, possession or enjoyment does not absolutely pass to the beneficiaries until at or after the settlor's death."

The proceeds of the insurance policies constituting the corpus of the trust indenture of December 19, 1935, are so clearly includible in decedent's gross estate, under section 811 (c), as a transfer intended to take effect at or after death that we find it unnecessary to determine whether the trust corpus is also includible under section 811 (c) as a transfer made in contemplation of death, or under section 811 (g) (2) (A) of the code, as amended by section 404 of the Revenue Act of 1942.

Decision will be entered under Rule 50