## Facts

- In 1934, Mary Haines (age 76) purchased three single-premium life insurance policies on her life, payable to named beneficiaries.
- At the same time and from the same companies, she purchased three single-premium, nonrefundable life annuity policies, as required by the insurers.
- The annuity and insurance amounts were actuarially coordinated so that, upon premature death, annuity and insurance premiums (with interest and adjustments) would correspond to the insurance proceeds payable.
- Haines received annuity payments during her lifetime.
- Haines later paid gift tax and irrevocably assigned all rights and benefits in the life insurance policies (including dividends, changing beneficiaries, and surrender/assignment rights) to her children and to a trustee.
- Two policies were assigned to her children and one to a trust; Haines retained no beneficial or reversionary interest in the trust.
- After Haines’s death, the government sought to include the insurance proceeds in her gross estate under Internal Revenue Code of 1939 § 811(c)(1)(B), asserting a transfer with a retained life interest.

## Issues

1. Whether life insurance proceeds are includible in a decedent’s gross estate under § 811(c)(1)(B) when the decedent irrevocably assigned all rights in the policies but retained payments under separate annuity contracts purchased in connection with the policies.
2. Whether the retained annuity payments constituted “possession or enjoyment of, or the right to the income from,” the transferred insurance policies for life within § 811(c)(1)(B).

## Decision

- The Supreme Court reversed the Third Circuit and held, 6–3, that the life insurance proceeds were not includible in Haines’s gross estate under § 811(c)(1)(B).
- The Court declined to treat the annuity and insurance contracts as a single transaction for purposes of determining a retained life estate in the transferred insurance policies.
- The Court concluded that the assignments left Haines with no retained interest in the insurance policies, and that her annuity payments did not constitute income from those policies.

## Legal Principles

- A transfer is taxable under § 811(c)(1)(B) only if the decedent retained, for life (or an equivalent period), the possession or enjoyment of, or the right to income from, the transferred property.
- Irrevocable assignment of all rights and benefits in life insurance policies, with no beneficial or reversionary interest retained, does not create a retained life estate in those policies merely because proceeds are payable at death under the insurance contract.
- Annuity payments are not “income from” transferred life insurance policies when the annuity contracts are separate and the decedent’s use and enjoyment of the annuities is independent of the insurance.
- The presence of actuarial coordination or insurer-required contemporaneous purchase does not, by itself, convert separate annuity and insurance contracts into a single property interest for § 811(c)(1)(B) inclusion.

## Conclusion

The Court held that the decedent’s irrevocable assignment of all rights in the life insurance policies removed the proceeds from her gross estate because she retained no life interest in the transferred policies, and her annuity payments arose from separate annuity contracts rather than from the transferred insurance property.


Fidelity-Philadelphia Trust Co. v. Smith, 356 U.S. 274 (1958)