Court Opinion

ID: 4483836
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:19.792309+00
Date Added: 2024-06-11T14:53:44.840459
License: Public Domain

Fay, J., dissenting: I respectfully dissent from the majority’s conclusion that the proceeds of the insurance policy on decedent’s life are not includable in his gross estate under section 2041. In my opinion, the decedent herein died possessing a general testamentary power of appointment over such proceeds. As a general rule, section 2041(a) requires the inclusion in the gross estate of the value of any property subject to a general power of appointment. In this regard, a “general power of appointment” is defined as a power under which the donee can appoint the property subject to the power to himself, his estate, or the creditors of either. Sec. 2041(b). The statutory rule of inclusion operates whether the power in question is an inter vivos or a testamentary general power. Under the facts of the present case, I believe the decedent had such a general testamentary power with respect to the insurance proceeds. At the outset, I note that it is common knowledge that revocable living trusts of the type created by the decedent herein are heavily laden with testamentary attributes and are oftentimes used as substitutes for a will. For instance, in a typical situation, the settlor of a revocable trust will reserve unto himself a life estate in the trust and upon his death the corpus will thereafter be distributed in accordance with the terms of the trust. As in the case of a will, the terms of a revocable trust are changeable until the moment of the settlor's death. Moreover, many of the dispositive provisions in a revocable trust, like those of a will, take effect at the settlor’s death. Indeed, certainly most, if not all, dispositive provisions contained in a will could be provided for in a revocable trust. Specifically, a settlor of a trust, as a testator of a will, could direct through the terms of the instrument that upon his death the corpus is payable to his estate, his creditors, or the creditors of his estate. This latter power is as much a general testamentary power as is one exercisable by a will. In the instant case, the decedent’s unqualified power to modify his trust’s terms was, as the majority correctly concludes, a general power with respect to any property placed in the trust by one other than the decedent. Further, because this power to modify was unqualified, it was necessarily exercisable in an inter vivos and a testamentary fashion.1  In reaching its conclusion with respect to section 2041, the majority reasons that there was no “property” to which the decedent's power attached. From reading the opinion, I am unable to ascertain whether this conclusion is premised on the fact that Mrs. Margrave had the power during the decedent’s lifetime to revoke his power of appointment by changing the beneficiary; or whether it is based upon the fact that the actual proceeds were not in existence during the decedent’s lifetime; or a combination of these two facts. In any event, to the extent that either of these factors could be considered relevant in deciding this case (and I question whether they are),2 they would be important only in ascertaining whether the decedent died possessing an inter vivos general power over the proceeds. In other words, because both of these factors, upon which the majority bases its decision, disappeared at the moment of the decedent’s death, they have no significance in determining whether he died possessed of a general testamentary power over such property. Briefly stated, a general testamentary power is a power under which the decedent has broad control over the devolution of property subject to the power after his death. I believe the decedent herein had such a power. To begin with, upon the decedent’s death the policy proceeds were irrevocably part of the trust corpus and thereafter subject to the trust’s terms. Until his death, the decedent had the power to modify the terms of the trust directing that the corpus be payable after his death to whomever he chose. Simply put, the decedent’s power was no greater and no less than would have existed had the proceeds been payable to his estate and thereafter to whomever he appointed by will. In view of the realities of the situation, the conclusion that the decedent had a general testamentary power over the insurance proceeds is inescapable. In its discussion of this point, the majority states: Nor do we think that decedent’s death breathed life into his power of appointment. To be sure, that event terminated Mrs. Margrave’s rights in the policy and the proceeds became payable to the trustee to be disposed of pursuant to the trust’s terms. That event also terminated decedent’s power to modify or revoke the trust. The fact is, however, that the right to the proceeds did not become vested in the trustee until death had actually occurred. Until that moment, Mrs. Margrave could have changed the beneficiary designation and destroyed decedent’s control of the proceeds via the trust and, therefore, the capacity of the trustee to receive the proceeds. Unfortunately, from reading this it is difficult to discern exactly what constitutes the basis of the majority’s conclusion. Certainly it cannot be the fact that the decedent’s power to modify, or revoke the trust terminated at his death. As I noted above, a decedent’s power to modify or revoke his will terminates at his death. Surely the majority is not suggesting that this fact has any bearing on the question of whether a testator died possessed of a general testamentary power. Likewise, the fact that the decedent’s power was revocable by Mrs. Margrave up until his death does not mean that it did not exist. Had Mrs. Margrave changed the beneficiary before the decedent’s death nothing would have been includable in his estate under section 2041. However, that is not what actually occurred. The hard facts are that Mrs. Margrave did not revoke the power and consequently such power became irrevocable upon the decedent’s death. What Mrs. Margrave might have done with the power is simply of no relevance. Keeter v. United States, 461 F.2d 714, 720 (5th Cir. 1972). Finally, in distinguishing Johnstone v. Commissioner, 76 F.2d 55 (9th Cir. 1935), affg. 29 B.T.A. 957 (1934), the majority again makes the misstatement that there was no “property” in existence at the time of the decedent’s death. As I have previously noted, the right to receive insurance proceeds is as much an item of “property” as the right to receive payment on a note. The contingent nature of this right during the decedent’s lifetime is relevant only, if at all (see n. 2 supra), in determining whether the decedent had an inter vivos general power. In any event, at the moment of death this right became fixed and irrevocable and passed in accordance with the decedent’s general testamentary power embodied in the terms of his trust. In enacting section 2041, Congress believed that a broad power to control the disposition of property was tantamount to its ownership for estate tax purposes. In the instant case, the decedent had such a power over the proceeds of the insurance. Dawson, Simpson, Irwin, and Wilbur, JJ., agree with this dissenting opinion.  The term “power of appointment” is broadly defined to include “all powers which are in substance and effect powers of appointment.” Sec. 20.2041-l(bXl), Estate Tax Regs.   Mrs. Margrave’s power to change the beneficiary of the policy made decedent’s general power revocable during his lifetime. However, the fact that a general power is revocable during a decedent’s lifetime by the donor of the power does not affect includability under sec. 2041 so long as such power becomes irrevocable at death. Keeter v. United States, 461 F.2d 714, 720 (5th Cir. 1972); Johnstone v. Commissioner, 29 B.T.A. 957 (1934), affd. 76 F.2d 55 (9th Cir. 1935). In addition, the right to receive insurance proceeds, which right the decedent could appoint under the terms of his trust, is no less an item of property than a note, an account receivable, or a parcel of real estate. Properly viewed, by virtue of Mrs. Margrave’s power to change the beneficiary, the decedent during his lifetime had a revocable general power of appointment over certain property, viz., the right to receive the insurance proceeds. This power of appointment became irrevocable upon his death. In my opinion, these facts, make the present case indistinguishable from Keeter v. United States, supra, and Johnstone v. Commissioner, supra.