## Facts

- Joseph Leder died May 31, 1983.
- A $1,000,000 life-insurance policy on Joseph’s life was issued January 28, 1981.
- The application listed Joseph’s wife, Jeanne Leder, as policy “owner”; Joseph was the insured; Jeanne was the initial sole beneficiary.
- Monthly premiums of $3,879.08 were paid by automatic withdrawals from the bank account of Joseph’s wholly owned corporation, Leader Enterprises, within three years of Joseph’s death.
- Leader Enterprises treated the premium payments as loans to Joseph; neither Joseph nor the corporation received consideration from Jeanne for the payments.
- On February 15, 1983, Jeanne (as owner) transferred the policy to herself as trustee of an inter vivos trust for Jeanne and the couple’s three children.
- After Joseph’s death, the estate did not include the policy proceeds in Joseph’s gross estate.
- The IRS asserted a deficiency, asserting inclusion of the proceeds under IRC § 2035(d).
- The parties stipulated Joseph never possessed any “incidents of ownership” in the policy within the meaning of IRC § 2042.

## Issues

1. Whether, under IRC § 2035(d)(2), the decedent’s payment of premiums on a policy owned by another constitutes a “transfer” that triggers inclusion of life-insurance proceeds in the decedent’s gross estate.
2. Whether § 2035(d)(2)’s cross-reference to IRC § 2042 limits the term “transfer” to situations where the decedent had § 2042 incidents of ownership.

## Decision

- The Tenth Circuit affirmed the Tax Court’s judgment for the estate.
- Section 2035(d)(2) did not apply because Joseph held no incidents of ownership under § 2042.
- The court rejected the IRS’s theory that premium payments alone created a “constructive transfer” sufficient to include the proceeds in the gross estate under § 2035(d)(2).

## Legal Principles

- IRC § 2042 includes life-insurance proceeds in a decedent’s gross estate only if the proceeds are payable to the estate or the decedent possessed incidents of ownership at death.
- Under IRC § 2035(d)(2), the three-year inclusion rule for transfers is limited to transfers of interests that are included in the gross estate under enumerated sections, including § 2042.
- The § 2035(d)(2) reference to § 2042 limits § 2035(d)(2) to cases in which the decedent had a § 2042 ownership-type interest; premium payments without incidents of ownership do not supply that requirement.
- A “constructive transfer” theory based solely on premium payments cannot be used to create § 2042 inclusion where stipulated facts establish the decedent lacked incidents of ownership.

## Conclusion

Because Joseph Leder never possessed incidents of ownership in the life-insurance policy under IRC § 2042, IRC § 2035(d)(2) did not require inclusion of the policy proceeds in his gross estate, even though premiums were paid within three years of death and the policy was transferred to a trust shortly before death.


Estate of Leder v. Commissioner, 893 F.2d 237 (10th Cir. 1989)