## Facts

- Lafayette Montgomery created two irrevocable trusts for the benefit of his grandchildren.
- Montgomery purchased a combined life-annuity and life-insurance package from National Life Insurance Company.
- The annuity portion was issued for a single premium of about $2.2 million and paid Montgomery about $272,000 per year for life.
- The package also included life-insurance policies on Montgomery’s life with combined death benefits of about $2 million.
- Montgomery assigned the life-insurance policies to the two irrevocable trusts, allocating about $1 million of coverage to each trust.
- The trusts paid total annual premiums of about $265,000 on the life-insurance portion.
- After Montgomery’s death, the Commissioner determined the life-insurance proceeds payable to the trusts were includible in Montgomery’s gross estate under I.R.C. § 2039 and asserted an estate-tax deficiency.
- The estate petitioned the United States Tax Court for redetermination, relying on § 2039’s parenthetical reference excluding certain “life insurance” amounts from that section.

## Issues

1. Whether proceeds payable at death under life-insurance policies issued as part of a combined annuity–insurance package are includible in the decedent’s gross estate under I.R.C. § 2039.
2. Whether § 2039’s parenthetical reference to “amounts payable under life insurance” prevents inclusion when the insurance is tied to, and issued in connection with, an annuity purchased by the decedent.
3. Whether the annuity and insurance components should be treated as separate contracts for § 2039 purposes, or treated as one integrated arrangement producing lifetime payments to the decedent and a post-death payment to beneficiaries.

## Decision

- The Tax Court sustained the Commissioner’s determination that the proceeds payable to the trusts were includible in Montgomery’s gross estate under § 2039.
- The court treated the annuity and the death-benefit feature as part of a single package arrangement for which Montgomery supplied the consideration.
- The court rejected the estate’s argument that § 2039’s parenthetical reference to “life insurance” automatically removed the proceeds from § 2039 where the insurance functioned as the survivorship payment connected to the annuity purchase.
- The decision was affirmed on appeal. See *Trust Co. of Georgia v. Commissioner (In re Estate of Montgomery)*, 458 F.2d 616 (5th Cir. 1972).

## Legal Principles

- For purposes of I.R.C. § 2039, courts may treat an annuity contract and related post-death payment rights as one arrangement when they are acquired together and are part of the same bargain funded by the decedent.
- Section 2039 can apply to amounts payable to beneficiaries by reason of surviving the decedent when those amounts arise from the same consideration that purchased an annuity payable to the decedent for life.
- The “life insurance” parenthetical in § 2039 does not necessarily bar inclusion when the death benefit is part of an annuity-centered package and operates, in substance, as the survivorship payment connected to the annuity transaction.
- Assigning the insurance policies to irrevocable trusts does not, by itself, prevent estate inclusion if § 2039 applies to the survivorship benefit produced by the decedent’s purchase of the package.

## Conclusion

The Tax Court held that the $2 million of proceeds paid to Montgomery’s grandchildren’s trusts under the combined annuity–insurance package were includible in Montgomery’s gross estate under I.R.C. § 2039 because the arrangement was treated as an integrated transaction funded by Montgomery that provided him lifetime annuity payments and provided beneficiaries a payment at death, and § 2039’s life-insurance parenthetical did not exclude those proceeds on these facts.


Estate of Montgomery v. Commissioner, 56 T.C. 489 (1971)