A third group frequently exists where part of the insurance is payable to the estate and part payable to designated beneficiaries. Group III on page 38 is an illustration.

Several important conclusions may be drawn from the foregoing.

1. The full amount of insurance receivable by the administrator or executor must be reported in the gross estate, although the $100,000 general exemption may be applied against it.

2. The $40,000 specific exemption applies only to insurance for designated beneficiaries.

3. The exemption of $40,000 relates to the sum total of insurance for all designated beneficiaries and is prorated over the amounts receivable by each in the proportion that such amount bears to the total of the insurance to designated beneficiaries. Thus in Case 3, Group III, beneficiaries A, B, and C for $50,000, $25,000, and $25,000 respectively are taxed on 6/10 of their amounts or $30,000, $15,000, and $15,000. The net taxable estate in this case amounted to $195,000. The taxable insurance is $60,000. Therefore the proceeds payable to beneficiaries A, B, and C give rise to taxes amounting to 30/195, 15/195 and 15/195 of the total Federal estate tax.

Apportionment of Tax

The collection of the tax from the beneficiary depends on the provisions made by the decedent for the payment of taxes. If the will provides for the payment of all taxes from the residuary estate or if specific funds are earmarked for such purpose, then the tax will not

be taken out of the amount indicated for the beneficiary. However, if the decedent has made no specific provision for such taxes then the executor is authorized to compel the beneficiaries to bear their proportion. This places the executor in a rather unusual position: that of being held responsible for the payment of taxes with respect to property which has never come into his possession. However, if the other assets of the estate are insufficient to satisfy the tax caused by a very large insurance estate, it would seem that the executor would have performed his legal duties when he instituted proper suit against the beneficiaries. If the outcome of the suit was unfavorable there is no good reason for holding the executor. This is always a possibility even though the act says there is a lien against such proceeds received by a beneficiary, because it excepts property sold to a bona fide purchaser for a full and adequate consideration. Clearly the situation is one that calls for due consideration and shows the advisability of making specific provision for taxes.

Legality of Taxing Insurance to Specifically Named Beneficiaries

In the case of Lewellyn vs. Frick, 268 U. S. 238, the United States Supreme Court was called upon to decide the validity of such a tax, but unfortunately they did not hand down a general decision which covers all cases. Henry C. Frick died testate on December 2, 1919, his will providing that all inheritance taxes be paid out of the capital of his residuary estate. At the time of his death there were outstanding eleven

policies aggregating $474,629.52. Four of these were payable to his wife and seven to his daughter. The provisions of Title IV of the Revenue Act of 1918, effective February 25, 1919, were applicable to this estate.

According to the graduated schedule in this law the amount of tax attributable to the insurance was calculated by the collector as $108,657.38. The estate took exception to the collector's interpretation of the law and the United States District Court for the Western District of Pennsylvania on June 5, 1924, decided that the policies did not pass by will, descent, or distribution, and that no transfer of them was made in contemplation of death within the meaning of the act and therefore the tax should not be imposed. The estate tax is an excise based on the power to transmit or the transmission from the dead to the living. The right of the beneficiaries did not spring from the death of the testator but under the contracts of insurance, the date of death being merely the time when the insurers were obligated to pay; therefore the tax is a tax on property which is a direct tax and should be levied by apportionment in accordance with the constitution. When the case was appealed to the United States Supreme Court, they affirmed the decision of the District Court but limited its application to policies issued prior to February 24, 1919, the effective date of the act under which the Frick estate was taxed.

Additional litigation will be necessary to determine the meaning of subsequent legislation but undoubtedly this case will be used as a precedent.

It is interesting to note that several state inheri