169 / When can death proceeds of community property life insurance payable to someone other than the surviving spouse be includable in the surviving spouse’s gross estate?

If the insured elects to have death proceeds held under an interest or installment option for the insured’s surviving spouse with proceeds remaining at the surviving spouse’s death payable to another, a portion of such remaining proceeds may be includable in the surviving spouse’s gross estate under IRC Section 2036 as a transfer by the surviving spouse of his or her community property interest with life income retained. Such a transfer will be imputed to the surviving spouse if under state law the insured’s death makes the transfer absolute ( Q 216). The amount includable is the value of the surviving spouse’s community half of the remaining proceeds going to the beneficiary of the remainder interest, less the value (at the insured’s death) of the surviving spouse’s income interest in the insured’s community half of the proceeds.¹ In states where the noninsured spouse has a vested interest in the proceeds of community property life insurance (e.g., California and Washington), a gift of the surviving spouse’s community property interest should not be imputed to the surviving spouse unless the surviving spouse has consented to or has acquiesced in the insured’s disposition of the proceeds.² But see Estate of Bothun v. Commissioner,³ decided under California law, where an IRC Section 2036 transfer was imputed to the surviving spouse-primary beneficiary when, because the surviving spouse failed to survive a 15-day delayed payment clause, proceeds were paid to the contingent beneficiary. The opinion contained no suggestion of any evidence that the noninsured spouse had consented to the delayed payment clause.

The IRS has ruled that where community property life insurance is payable to a named beneficiary other than the noninsured spouse, if deaths of the insured and the insured’s spouse occur simultaneously when both possess the power to change the beneficiary in conjunction with the other, one-half of the proceeds is includable in each spouse’s estate without regard to whether local law provides a presumption as to survivorship.⁴

1.     U.S. v. Gordon, 406 F.2d 332 (5th Cir. 1969).