Rev. Rul. 71-482

Advice has been requested as to the allowance of a deduction for the amount of proceeds of insurance on a decedent's life payable under the circumstances described below.

Under the terms of a decree of divorce by a court with power under local law to decree a settlement of all marital property rights, the decedent was required to name his wife as beneficiary of certain life insurance policies on his life. He was also required to maintain and keep the policies in full force and effect with all premiums paid for so long as the divorced wife should live and remain unmarried. The decedent paid the premiums until his death. After his death, the proceeds were paid directly to his former wife by the insurance company in conformity with the terms of the insurance contracts and never became part of his probate estate in the hands of his executor. However, as the possibility existed that the policy proceeds might return to the decedent or his estate or be subject to a power of disposition by him if his former wife should either die or remarry prior to his death, the decedent held a reversionary interest that exceeded five percent of the value of the policies immediately before his death. This reversionary interest constituted an incident of ownership in the policies and, accordingly, the value of the proceeds is includible in his gross estate under section 2042(2) of the Internal Revenue Code of 1954.

In computing the value of the taxable estate, section 2053(a)(3) of the Code allows as a deduction from the value of a decedent's gross estate such amounts for claims against the estate as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered. Section 20.2053-4 of the Estate Tax Regulations provides that the amounts that may be deducted as claims against a decedent's estate are such only as represent personal obligations of the decedent existing at the time of his death, whether or not then matured, and interest thereon which had accrued at the time of death. Only claims enforceable against the decedent's estate may be deducted.

The divorce court in this case, pursuant to local law, determined property rights in the insurance proceeds. The former wife was, by the terms of the divorce decree, ensured the status of a beneficiary of the insurance proceeds and possessed all the property rights attendant upon that status. However, the decedent was not obligated to provide his former wife with funds in the amount of the face value of the insurance. His only obligation was to keep the policies in full force and effect with all premiums paid for as long as she should live and remain unmarried. The decedent in fact discharged this obligation, with the result that no obligation survived his death.

Accordingly, under the circumstances of this case, it is held that no deduction is allowable under section 2053(a)(3) of the Code for the amount of proceeds of insurance on the life of decedent paid to his divorced wife.

This is to be distinguished from the case where the divorce decree provided for the payment, upon the decedent's death, to his former wife of a specific sum of money and he provided funds therefor by the purchase of life insurance. In such a case, the payment of the required amount would be a personal obligation of the decedent and, should the insurance company be unable to meet its obligation, would be payable from his estate. Thus the payment to his former wife would be deductible from the decedent's gross estate under section 2053(a)(3) of the Code.