Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Dividends Are Not Incidents of Ownership

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ILM 201328030 concludes that a decedent who maintained life insurance policies solely for a former spouse and who had no rights over the policies other than to receive the dividends would not have an incident of ownership. The ILM relied on Bowers stating:

The Tax Court considered the question of whether “dividends paid on an insurance policy” is an economic benefit that would cause the value of the insurance proceeds to be includible in a decedent’s gross estate in Estate of Bowers v. Commissioner, 23 T.C. 911 (1955). In Estate of Bowers, the decedent agreed to carry life insurance on his life payable to his former wife as part of a settlement agreement in a divorce. The court held that the right to dividends, which may be applied against a current premium, is nothing more than a reduction in the amount of premiums paid rather than a right to the income of the policy. Id. at 917. See Estate of Jordahl v. Comm’r, 65 T.C. 92, 99 (1975) (stating that “it is well established that, since dividends ‘are nothing more than a reduction in the amount of premiums paid,’ the right to dividends is not an incident of ownership.”) (citations omitted). Cf. Schwager v. Comm’r, 64 T.C. 781, 792 (1975) (finding that while certain powers may be retained which will not constitute incidents of ownership, such as the right to receive policy dividends, the ability to bar the change of beneficiary to a part of the policy does constitute a substantial incident of ownership).

In this case, pursuant to the settlement agreement arising from his divorce, Decedent agreed to maintain life insurance policies for the sole benefit of Former Spouse. Although the dividends from the policies “belonged” to Decedent in a technical legal sense, the mere right to the dividends, by itself, is not an incident of ownership that would cause the value of the insurance proceeds to be included in Decedent’s gross estate under § 2042(2).

Turney P. Berry

Louisville, Kentucky

Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

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