Estate of Skifter v. Commissioner
468 F.2d 699 (1972)
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Rule of Law:
Fiduciary powers over an insurance policy on a decedent's life, which the decedent did not retain but instead acquired from an independent source long after transferring all interest in the policy, do not constitute "incidents of ownership" under § 2042(2) of the Internal Revenue Code, provided the decedent cannot exercise those powers for his own economic benefit.
Facts:
- In 1961, Hector Skifter assigned all his interest in nine insurance policies on his life to his wife, Naomi Skifter, retaining no powers or interest in them.
- Several months later, Naomi died.
- Naomi's will directed her residuary estate, which included the nine insurance policies, to be placed in a trust for the benefit of their daughter, Janet.
- Naomi's will appointed Hector Skifter as the trustee of this trust.
- As trustee, Hector Skifter was granted broad powers, including the absolute discretion to pay the entire trust principal to the income beneficiary (his daughter), but he could not exercise any power for his own economic benefit.
- In 1964, Hector Skifter died while serving as trustee of Naomi's trust.
Procedural Posture:
- The Commissioner of Internal Revenue determined a deficiency in the estate tax of Hector Skifter, including the proceeds of nine life insurance policies in his gross estate.
- The Estate of Hector Skifter petitioned the United States Tax Court to contest the deficiency.
- The Tax Court held in favor of the Estate, finding that the proceeds were not includible in the decedent's gross estate.
- The Commissioner of Internal Revenue, as appellant, appealed the Tax Court's decision to the United States Court of Appeals for the Second Circuit.
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Issue:
Do broad fiduciary powers over life insurance policies in a trust, which the decedent acquired as a trustee under his deceased wife's will years after he had irrevocably assigned the policies to her, constitute 'incidents of ownership' under § 2042(2) of the Internal Revenue Code, thus requiring the inclusion of the policy proceeds in his gross estate?
Opinions:
Majority - Lumbard, Circuit Judge
No. The decedent's fiduciary powers do not constitute 'incidents of ownership' under § 2042(2). The term 'incidents of ownership' refers to the right of the insured or his estate to the economic benefits of the policy. Here, Skifter could in no way exercise his trustee powers to benefit himself. The court reasoned that Congress intended § 2042 to provide estate tax treatment for life insurance that is parallel to the treatment of other types of property under sections like § 2038 (revocable transfers). Section 2038 has been interpreted to apply to powers retained by a decedent when transferring property, not powers that devolve upon the decedent from an independent source long after the transfer. Because Skifter did not retain the powers but acquired them through his wife's will, the situation is substantively different from a retained power that would be part of a testamentary disposition scheme. Therefore, since other property would not be included in the estate under these circumstances via § 2038, the insurance proceeds should not be included via § 2042.
Analysis:
This decision establishes a crucial distinction between fiduciary powers retained by an insured-transferor and those acquired by the insured from an independent source after the transfer is complete. By tethering the interpretation of § 2042's 'incidents of ownership' to the principles of other estate tax sections like § 2038, the court prevents life insurance from being taxed more harshly than other assets. This ruling provides a significant safe harbor in estate planning, allowing an individual who has transferred a policy to later serve as a trustee over that same policy without causing estate inclusion, provided the trusteeship arises from an independent event (like a beneficiary's will) and the powers cannot be exercised for personal economic benefit.
