Insurance Policies Were Community Property

William and Audrey Burris lived in Louisiana, a community property state.  During their marriage William purchased three life insurance policies using community funds.  He was named as owner of the policies while Audrey was the designated beneficiary.  When Audrey died, the couple’s children replaced her as beneficiaries.  William died less than a year later.

Audrey’s estate included half of the cash surrender value of the three life insurance policies.  William’s estate included the total amount of the proceeds payable under the three policies ($825,089).  Later, the estate claimed that since the policies had been purchased with community funds, they were community property, and only half of that amount should be taxable. 

The IRS disagreed, stating that Louisiana jurisprudence has established a separate body of law governing life insurance policies as community property.  In Louisiana, the IRS contended, the ownership of life insurance policies is determined by the terms of the contract of insurance itself.  In this case, the contract expressly placed all incidents of ownership on William.

The Tax Court held in favor of the estate, finding that the policies were community property and that only half the proceeds should be taxable in the decedent’s estate.  The court rejected the government’s argument that Louisiana community property laws do not apply to insurance policies in certain situations.  According to the Court, “all assets acquired during marriage are presumed to be community property, in which each spouse is considered to own a present interest.”  Merely showing that title is taken in the name of only one spouse does not rebut this presumption.