## Facts

- A father procured a life-insurance policy on his adult son’s life, kept the policy in his exclusive custody, and paid all premiums.
- The policy’s contractual rights—including the power to change beneficiaries and other ownership incidents—remained legally with the son (the insured).
- After the mother’s death, the father directed the son to sign a beneficiary-change form naming the father as sole primary beneficiary, with other family members as contingent beneficiaries.
- The family believed the father “owned” the policy in practice and that beneficiary changes would occur only if the father wanted them.
- The son died, and the insurer paid the policy proceeds to the father as named beneficiary.
- The executors filed a federal estate tax return excluding the proceeds from the son’s gross estate; the United States assessed a deficiency, the executors paid, and sued for a refund.
- The district court ruled for the executors; the United States appealed.

## Issues

1. Whether life-insurance proceeds paid to the beneficiary must be included in the decedent-insured’s gross estate when the decedent retained legal incidents of ownership (including the power to change beneficiaries) at death.
2. Whether a family understanding and practical control by another person can negate inclusion where the decedent retained formal legal powers under the policy.

## Decision

- The First Circuit reversed the district court and ruled for the United States.
- The court held the proceeds were includible in the son’s gross estate because he retained legal incidents of ownership at death, particularly the power to change the beneficiary.
- The court rejected reliance on premium payments, physical custody of the policy, and family understanding as grounds to avoid inclusion.

## Legal Principles

- For federal estate tax purposes, life-insurance proceeds on the decedent’s life are included in the gross estate if, at death, the decedent possessed any legal “incidents of ownership,” including the power to change beneficiaries.
- The inclusion inquiry turns on legally enforceable powers under the policy and applicable property law, not on informal arrangements or de facto control by others.
- State-law characterizations of equitable ownership do not defeat federal inclusion when the decedent retained legal power to affect enjoyment of the proceeds.
- A retained, unexercised power at death can trigger inclusion; the statute targets arrangements that would otherwise permit avoidance through private understandings while leaving legal powers in the decedent.

## Conclusion

The court held that because the insured retained the contractual power to change beneficiaries and other incidents of ownership at death, the life-insurance proceeds paid to his father were includible in the insured’s gross estate, notwithstanding that the father paid premiums, held the policy, and was treated within the family as the practical owner.


United States v. Rhode Island Hosp. Tr. Co., 355 F.2d 7 (1st Cir. 1966)