Rev. Rul. 76-490

Advice has been requested whether certain life insurance premiums paid by an employer with respect to a group term policy held by a trust created by an employee are subject to the gift tax under section 2501 of the Internal Revenue Code of 1954 as indirect transfers under section 2511 of the Code, under the circumstances described below, and if so whether the gift is a gift of a present interest that qualifies for the annual exclusion under section 2503(b).

In 1970, X Company entered into an agreement with an insurance company providing for a master group term insurance policy insuring the lives of its employees. Only an employee was entitled to be insured. By the terms of the insurance contract, premiums were to be paid monthly in advance, on the first day of each month, by X Company. On January 31, 1975, D, an employee of X Company, created an irrevocable trust and assigned thereto all right, title and interest in a group term life insurance policy on D's life issued pursuant to the master policy. Under the terms of the trust, the beneficiary or the beneficiary's estate was to receive the full proceeds of the policy immediately on D's death.

The policy assigned to the trust provided insurance coverage in an amount of 200x dollars until D reached age 65, or ceased employment with X Company, whichever occurred first. Neither D nor the trust had a contractual right to require X Company to maintain the group contract. The premiums paid by X Company with respect to D's group insurance coverage were not reported as gifts by D in 1975. D did not report such sums as gifts because of D's belief that, by reason of the assignment, X Company paid the premiums for the direct benefit of the trust beneficiary.

Section 2501 of the Code imposes a tax on the transfer of property by gift during a calendar quarter by any individual. Section 2511 provides that, subject to certain limitations, the gift tax applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible.

Section 25.2511-1(c) of the Gift Tax Regulations provides that:

* * * all transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax.

Section 25.2511-2(b) of the regulations provides, in part, as follows:

As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.

Section 25.2511-1(h)(8) of the regulations provides, in part, as follows:

If the insured purchases a life insurance policy, or pays a premium on a previously issued policy, the proceeds of which are payable to a beneficiary or beneficiaries other than his estate, and with respect to which the insured retains no reversionary interest in himself or his estate and no power to revest the economic benefits in himself or his estate or to change the beneficiaries or their proportionate benefits (or if the insured relinquishes by assignment, by designation of a new beneficiary or otherwise, every such power that was retained in a previously issued policy), the insured has made a gift of the value of the policy, or to the extent of the premium paid, even though the right of the assignee or beneficiary to receive the benefits is conditioned upon his surviving the insured. * * *

Section 2503(b) of the Code permits the exclusion of $3,000 of gifts made to any one donee during the calendar quarter (except gifts of future interests in property), less the aggregate of the amount of such gifts to such person during all preceding calendar quarters of the calendar year, in determining the total amount of gifts for the calendar quarter. The entire value of any gift of a future interest must be included in the total amount of gifts for the calendar quarter in which the gift is made.

Section 25.2503-3(a) of the regulations provides, in part, as follows:

"Future interests" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession or enjoyment at some future date or time. The term has no reference to such contractual rights as exist in a bond, note * * * or in a policy of insurance, the obligations of which are to be discharged by payments in the future. (Emphasis added.)

Section 25.2503-3(c), Example (6) of the regulations, provides:

L pays premiums on a policy of insurance on his life. All the incidents of ownership in the policy (including the right to surrender the policy) are vested in M. The payment of premiums by L constitutes a gift of a present interest in property.

The interest in the group policy that the employee assigned to the irrevocable trust had no ascertainable value at the time it was transferred since the employer could have simply failed to make further premium payments. Therefore, no taxable gift occurred.

As to the payment of the premiums by the employer, it is well established for purposes of various estate tax provisions that, in an appropriate case, a transfer by an employee can take place where, in consideration of an employee's past and future services, the employer promises to pay a survivor's benefit. Estate of Bogley v. United States, 514 F. 2d 1027 (Ct. Cl. 1975); Estate of Tully, Sr. v. United States, 528 F. 2d 1401 (Ct. Cl. 1976); Estate of Fried, 54 T.C. 805 (1970), aff'd, 445 F. 2d 979 (2d. Cir. 1971), cert denied, 404 U.S. 1016 (1972). Compare Rev. Rul. 76-304, page 269, this Bulletin. Of course, the exact timing of when the transfer takes place would depend on all the facts and circumstances. Although the case under consideration involves the gift tax, rather than the estate tax, the provisions dealing with both taxes should, if possible, be interpreted in pari materia, Sanford v. Commissioner, 308 U.S. 39 (1939), 1939-2 C.B. 340.

Each time a premium was paid by X Company additional compensation was conferred on D. By irrevocably assigning the insurance policy to the trust and continuing participation in the group term life insurance contract, D caused the economic benefit of this additional compensation to inure to the assignee as each payment was made.

Accordingly, in the instant case, each premium payment made by the employer for group term life insurance on the life of D, where D irrevocably assigned the policy to the trust, is deemed an indirect transfer by D to the assignee of the policy for purposes of section 2511 of the Code, and subject to the gift tax imposed by section 2501.

In addition, the payment of each monthly premium for the group term life insurance is not a gift of a future interest in property and, therefore, qualifies for the $3,000 annual exclusion provided by section 2503(b) of the Code.