Rev. Rul. 76-113

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 the decedent's spouse as beneficiary of certain life insurance policies on the decedent's life. The decedent was also required to maintain and keep the policies in full force and effect with all premiums until death. After death, the proceeds were paid directly to the decedent's former spouse by the insurance company in conformity with the terms of the insurance contracts and never became part of the probate estate in the hands of the decedent's executor. However, as the possibility existed that the policy proceeds might return to the decedent or the decedent's estate or be subject to a power of disposition by the decedent if the former spouse should either die or remarry prior to the decedent's death, the decedent held a reversionary interest that exceeded five percent of the value of the policies immediately before death. This reversionary interest was an incident of ownership in the policies and, accordingly, the value of the proceeds is includible in the decedent's 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 only those that represent personal obligations of the decedent existing at the time of 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.

Section 2053(a)(4) of the Code allows a deduction for the amount of an unpaid mortgage or other indebtedness in respect of property where the full value of the decedent's interest in the property is included in the gross estate without diminution by the amount of the mortgage or indebtedness.

The divorce court in this case, pursuant to local law, determined property rights in the insurance proceeds. The former spouse 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 personally obligated to provide the former spouse with funds in the amount of the face value of the insurance. The decedent's only obligation was to keep the policies in full force and effect with all premiums paid for as long as the former spouse should live and remain unmarried. The decedent in fact discharged this obligation with the result that no obligation survived the decedent's death.

Therefore, no deduction is allowable under section 2053(a)(3) of the Code for the amount of proceeds of insurance on the life of the decedent paid to the decedent's divorced spouse.

This is to be distinguished from the case where the divorce decree provided for the payment, upon the decedent's death, to the decedent's former spouse of a specific sum of money and the decedent 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 the decedent's estate. Thus, the payment to the decedent's former spouse would be deductible from the decedent's gross estate under section 2053(a)(3) of the Code.

In the present case, the payment of insurance proceeds to the former spouse represents the satisfaction of an indebtedness created in settlement of the decedent's marital obligations. Since the insurance proceeds are includible in the decedent's gross estate at full value (by reason of the decedent's reversionary interest in the proceeds of the policy), the obligation to pay the proceeds to the decedent's former spouse is an indebtedness against property included in the value of the gross estate for purposes of section 2053(a)(4) of the Code.

Accordingly, in the present case, since the insurance proceeds were payable pursuant to a divorce decree issued by a court having the power to decree a settlement of all marital property rights, a deduction is allowable under section 2053(a)(4) of the Code.

Rev. Rul. 71-482, 1971-2 C.B. 334, which concludes that no deduction is allowable under section 2053(a)(3) of the Code for payment of insurance proceeds to the decedent's former spouse pursuant to a divorce decree, is superseded.