## Facts

- Lafayette Montgomery created two irrevocable trusts for his grandchildren on May 4, 1964, each with a son and a corporate trustee as co-trustees.
- On May 5, 1964, Montgomery bought a commercial life annuity on his own life for $2.2 million; the annuity paid monthly benefits only during his life and provided no survivor benefits.
- At the same time, the trustees applied to the same insurer for two $1,000,000 life-insurance policies on Montgomery’s life, each naming one trust as beneficiary.
- The insurer structured and offered the annuity and the life-insurance policies as a single “package” plan.
- Montgomery paid the annuity purchase price and also funded each trust with cash sufficient for the trustees to pay the life-insurance premiums, which the trustees then paid to the insurer.
- Montgomery died on October 31, 1964; the annuity terminated, and the insurer paid $2,000,000 in life-insurance proceeds to the trusts.
- The estate tax return excluded the $2,000,000 proceeds from the gross estate; the IRS determined the proceeds were includible under I.R.C. § 2039.
- The Tax Court upheld the deficiency, finding the annuity and insurance were interrelated parts of one overall plan funded by Montgomery; the estate appealed.

## Issues

1. Whether life-insurance proceeds payable to trusts, issued and funded as part of a coordinated annuity–insurance “package” purchased and financed by the decedent, are includible in the gross estate under I.R.C. § 2039.

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court held the $2,000,000 life-insurance proceeds were includible in Montgomery’s gross estate under I.R.C. § 2039.
- Accepting the Tax Court’s findings that the annuity and insurance were inseparable parts of a single plan funded by the decedent, the court found no error in treating the proceeds as death-contingent payments within § 2039.

## Legal Principles

- I.R.C. § 2039 includes in the gross estate the value of a beneficiary’s death-contingent right to payments under a contract or agreement purchased by the decedent, to the extent attributable to the decedent’s contributions.
- When an annuity and life-insurance policies are structured and acquired as an integrated commercial arrangement, the transaction may be treated as a single plan for § 2039 purposes, even if the survivor benefit is paid as life-insurance proceeds.
- Formal ownership and premium payment by trusts does not prevent inclusion where the decedent is the economic source of the survivor benefit through contemporaneous funding and purchase of the related annuity.
- Appellate review may defer to supported Tax Court fact findings on integration of transactions and the source of funding when applying § 2039.

## Conclusion

The Fifth Circuit held that where a decedent funds and participates in an integrated annuity–life insurance package designed to produce survivor benefits payable at death to trust beneficiaries, the resulting life-insurance proceeds are includible in the decedent’s gross estate under I.R.C. § 2039 to the extent attributable to the decedent’s contributions.


Estate of Montgomery v. Commissioner, 458 F.2d 616 (5th Cir. 1972)