Rev. Rul. 77-130

Advice has been requested whether the value of life insurance proceeds passing to the decedent's surviving spouse, in the circumstances described below, fails to qualify for the marital deduction under section 2056(b)(1) of the Internal Revenue Code of 1954 because the spouse's interest is a terminable interest in property.

At the decedent's date of death, decedent possessed a policy of insurance on the life of the decedent and certain incidents of ownership therein that were sufficient to require the inclusion of the entire proceeds in the decedent's gross estate under section 2042(2) of the Code. The proceeds of the policy were payable as follows: (1) $600.00 per month to the decedent's surviving spouse for life with all payments ceasing at the spouse's death; and (2) $300.00 per month to C until C's twenty-first birthday or death, whichever event shall occur first, at which time the payments are to cease. The value of the proceeds payable to the surviving spouse on the date of decedent's death as determined by the insurance company was 60x dollars, and the value of the proceeds payable to C on the date of decedent's death as determined by the insurance company was 40x dollars.

Section 2056(a) of the Code provides that, for purposes of the estate tax, the value of the taxable estate, except as limited by subsections (b), (c), and (d), shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property that passes from the decedent to the surviving spouse, but only to the extent such interest is included in determining the value of the gross estate.

Section 2056(b)(1) of the Code provides that no marital deduction is allowed with respect to certain interests in property, referred to generally as "terminable interests," passing from a decedent to the surviving spouse if (A) an interest in the property passes or has passed, for less than an adequate and full consideration in money or money's worth, from the decedent to any person other than the surviving spouse or the estate of such spouse, and (B) by reason of the passing, the other person may possess or enjoy any part of the property after the termination or failure of the spouse's interest.

Section 20.2056(b)-1(b) of the Estate Tax Regulations defines "terminable interests" to include annuities and similar interests that terminate with the passage of time. The deductibility of terminable annuities is illustrated in Example (3) of section 20.2056(b)-1(g) of the regulations, which states:

H during his lifetime purchased an annuity contract providing for payments to himself for life and then to W for life if she should survive him. * * * If * * * the contract provided for no refund upon the death of the survivor of H and W, or provided that any refund was to go to the estate of the survivor, then the interest which passed from H to W is (to the extent it is included in H's gross estate) a deductible interest.

Section 20.2056(b)-1(e)(2) of the regulations provides that in determining whether an interest in the same property passed from the decedent both to the surviving spouse and to some other person, a distinction should be made between the term "property," as it is used in section 2056 of the Code, and an "interest in property." The term "property" refers to the underlying property in which various interests exist; each such interest is not, for purposes of section 2056, to be considered as property.

Section 20.2056(e)-1(a)(4) of the regulations provides that, for the purposes of the marital deduction, the proceeds of an insurance policy upon the life of a decedent are considered as having passed from the decedent to the person who, at the time of the decedent's death, was entitled to receive the proceeds.

The proceeds of one insurance policy on a decedent's life, payable in installments to beneficiaries after the decedent's death, can, in certain circumstances, be divided into separate properties in such a way that the sole inquiry is whether a division of the proceeds into two separate properties was accomplished. See Estate of Joseph E. Reilly v. Commissioner, 239 F. 2d 797 (3rd Cir. 1957), rev'g 25 T.C. 366 (1955). Compare Meyer v. United States, 364 U.S. 410 (1960), 1961-1 C.B. 779.

In the instant case, so long as the decedent-insured was alive the two potential annuity payments were part of one plan. However, with the happening of the decedent's death, two distinct rights came into being, each separate and independent of the other. The rights of the surviving spouse to an annuity of $600 per month for life were not tied in any way to the rights of C, and the rights of C to an annuity of $300 per month until age 21 or C's death prior thereto were not tied in any way to the rights of the surviving spouse. The mere fact that the two interests derived from the same insurance contract is insufficient to fuse these independent interests in such a way that C should be deemed to have received an interest in the property that passed to the decedent's surviving spouse and a part of which property C may possess or enjoy after the spouse's death.

Accordingly, since the surviving spouse's interest in the insurance proceeds is not a nondeductible terminable interest within the meaning of section 2056(b)(1) of the Code, it qualifies for the marital deduction. The amount of the deduction is 60x dollars, which is the amount of the insurance proceeds passing to the spouse that is includible in the value of the gross estate.