Estate of Margrave v. Commissioner
618 F.2d 34 (1980)
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Rule of Law:
A decedent's power to alter or revoke a trust designated as the beneficiary of a life insurance policy does not constitute an "incident of ownership" under § 2042, nor a "general power of appointment" over property under § 2041, when the policy itself is owned by another person who retains the absolute power to change the beneficiary.
Facts:
- On June 16, 1966, Robert B. Margrave executed a will and established a revocable inter vivos trust, naming The United States National Bank of Omaha as trustee.
- Margrave retained the unqualified right to modify or revoke the trust at any time.
- On January 29, 1970, Margrave's wife, Glenda Ardelle Margrave, applied for a life insurance policy on Robert's life.
- Glenda Margrave was the sole owner of the policy and paid all premiums with her own funds.
- As owner, Glenda vested all rights and privileges, including the power to change the beneficiary, in herself.
- Glenda named the bank, as trustee of Robert B. Margrave's trust, as the primary beneficiary of the policy.
- Robert B. Margrave died on April 29, 1973.
Procedural Posture:
- After Robert B. Margrave's death, the insurance proceeds were paid to The United States National Bank of Omaha as trustee.
- The bank, as executor of the estate, filed an estate tax return that did not include the insurance proceeds in the decedent's gross estate.
- The Commissioner of Internal Revenue determined an estate tax deficiency, concluding the proceeds were includible.
- The executor petitioned the United States Tax Court for a redetermination of the deficiency.
- The Tax Court held in favor of the estate, finding the proceeds were not includible.
- The Commissioner appealed the Tax Court's decision to the United States Court of Appeals for the Eighth Circuit.
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Issue:
Are the proceeds of a life insurance policy includible in a decedent's gross estate for tax purposes when the policy was owned by the decedent's spouse, but the designated beneficiary was the decedent's revocable inter vivos trust?
Opinions:
Majority - Henley, J.
No, the proceeds of the life insurance policy are not includible in the decedent's gross estate. The decedent possessed neither an "incident of ownership" under § 2042 nor a "general power of appointment" over property under § 2041. Regarding § 2042, the decedent's power to alter the trust was merely a power over an expectancy, as it was entirely contingent upon his wife's superior power as the policy owner to change the beneficiary at any time. At the moment of his death, his power to alter the trust terminated, so he never possessed a sufficient incident of ownership. Regarding § 2041, while the decedent's power to revoke the trust constituted a "general power of appointment," this power did not attach to any existing property interest prior to his death. The trust's right to the proceeds was only an expectancy. The property interest (the proceeds) only came into existence upon the decedent's death, but at that same instant, his power of appointment terminated, meaning the power never attached to the property.
Analysis:
This decision clarifies the scope of "incidents of ownership" and "general powers of appointment" for estate tax purposes, particularly in common estate planning scenarios involving life insurance trusts. The court established that an indirect, contingent power over policy proceeds, which is subservient to the absolute power of the policy owner, does not rise to the level of control required for inclusion in the decedent's gross estate. This ruling validates estate planning techniques where one spouse owns a policy on the other and directs the proceeds to a revocable trust, thereby allowing the proceeds to pass outside the taxable estate. It prevents the IRS from collapsing the distinct legal statuses of policy owner and trust settlor to create a taxable incident of ownership for the decedent.
