Estate of Allen

• Decision Date: 28 July 1980
• Citation: 108 Cal.App.3d 614,166 Cal.Rptr. 653
• Court: California Court of Appeals Court of Appeals
• Parties: In the MATTER of the ESTATE of Orpha Clare ALLEN, Deceased. Kenneth CORY, State Controller, Petitioner and Appellant, v. Herbert F. ALLEN, etc., Objector and Respondent. Civ. 48008.

Page 653

166 Cal.Rptr. 653

108 Cal.App.3d 614

In the MATTER of the ESTATE of Orpha Clare ALLEN, Deceased.

Kenneth CORY, State Controller, Petitioner and Appellant, v. Herbert F. ALLEN, etc., Objector and Respondent.

Civ. 48008.

Court of Appeal, First District, Division 3, California.

July 28, 1980.

Hearing Denied September 24, 1980.

Lois J. Scampini, Goth, Dennis & Aaron, Redwood City, for objector and respondent.

Myron Siedorf, Chief Inheritance Tax Atty., Edwin Rosenthal, Asst. Chief Inheritance Tax Atty., John D. Schell, Inheritance Tax Atty., San Francisco, for petitioner and appellant.

Albert J. Horn, Keith P. Bartel, Carr, McClellan, Ingersoll, Thompson & Horn, Burlingame, for amicus curiae.

DEARMAN, ^* Associate Justice.

In this case, following the death of a retired airline employee's spouse, the controller sought to impose an inheritance tax on one-half of the pension that the surviving employee spouse was receiving, despite the fact that receipt of the pension preceded and was unaffected by the decedent's passing. We concur in the superior court's conclusion that such a tax would be improper by virtue of the fact that the community property interest of the non-employee spouse did not pass to her husband at her death but simply terminated at that time. In reaching this conclusion we reject the controller's two preliminary contentions and hold that the prong of the "terminable interest" rule articulated in Waite v. Waite (1972) 6 Cal.3d 461, 99 Cal.Rptr. 325, 492 P.2d 13, is still viable and that the rationale of Waite, which involved a public pension plan, is equally applicable to the private pension plan involved here.

Orpha and Herbert Allen had been married for 36 years when Orpha Allen died in 1977. By then Mr. Allen had retired from Pan American World Airways, his employer throughout the marriage, and was receiving retirement income from Pan American.

The terms of the retirement plan were simple. Mr. Allen would receive $515.46 until he died. If he predeceased his wife she would receive $344.48 until her death. The couple had chosen this plan, with its survivor annuity, over one that would have conferred higher monthly benefits while Mr. Allen lived but no benefits after his death. The plan provided that all benefits received were non-assignable, inalienable and non-transferable, and expressly declared its purpose to be:

1). To induce employees to enter and continue in employment with Pan American World Airways; and

2). To provide sufficient subsistence for retired employees and their dependents.

Orpha Allen died testate and made her husband her sole devisee and legatee. Mr. Allen petitioned the superior court to set aside and confirm the community property (Prob.Code, §§ 650; 201) so that inheritance taxes could be assessed under Revenue and Taxation Code section 13551. The latter statute, enacted in 1975 and repealed while this appeal was pending (Stats.1980, c. 634, § 3 p. ----) allowed taxation of the passage of a deceased spouse's interest in community property to his or her surviving spouse. Mr. Allen did not list his pension as a community asset. The inheritance tax referee, however, ruled that Mrs. Allen's community property interest in the pension her husband would receive for the rest of his life (he was 64) had "passed" to Mr. Allen within the meaning of section 13551 and computed its value to be $52,864.70. A total of $3,992.30 was assessed in taxes. ¹

Mr. Allen filed his objections in the superior court contending that various decisions of the California Supreme Court had established that his wife's community property interest in the pension had terminated at her death and that she had no power to devise it. He argued that he continued to receive $515.46 per month pursuant only to his prior contractual arrangement with Pan American and that no transfer had occurred within the meaning of the California Inheritance Tax Act. The superior court agreed and struck the interest in the pension from the list of taxable assets. The controller appeals.

Distinguished by what is called in this litigation the "terminable interest" rule, comprised of two California Supreme Court holdings, pension rights must be perceived as a unique species of community property. ² In Waite v. Waite (1972) 6 Cal.3d 461, 99 Cal.Rptr. 325, 492 P.2d 13, the decision bearing directly on the instant case, the trial court, upon the divorce of a judge and his wife, ordered the controller to pay directly to Mrs. Waite "or her devisee or heirs " one-half of all benefits payable to her husband under the Judge's Retirement Act. This order followed as a matter of course the usual community property rule, embodied in Probate Code section 201: "Upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof goes to the surviving spouse, subject to the provisions of sections 202 and 203 of this code." However, the Supreme Court sustained Judge Waite's objection to that part of the order regarding payment to Mrs. Waite's heirs. The court held that the state's concern lay in providing subsistence only for the judge and his dependents and not the objects of the non-employee spouse's bounty. (Id. at 473, 99 Cal.Rptr. 325, 492 P.2d 13.) Despite some ambiguity in the opinion (compare fns. 8 and 9) Waite has consistently been interpreted as having limited Mrs. Waite's community property interest in the pension to an interest that survived only as long as she did. (See, e. g., In re Marriage of Fithian (1974) 10 Cal.3d 592, 599-600, 111 Cal.Rptr. 369, 517 P.2d 449, cert. den. 419 U.S. 825, 95 S.Ct. 41, 42 L.Ed.2d 48; In re Marriage of Lionberger (1979) 97 Cal.App.3d 56, 71-72, 158 Cal.Rptr. 535; In re Marriage of Borges (1978) 83 Cal.App.3d 771, 774, 148 Cal.Rptr. 118.

The second and quite different qualification on pension rights as community property was formulated in Benson v. City of Los Angeles (1963) 60 Cal.2d 355, 33 Cal.Rptr. 257, 384 P.2d 649. In Benson the Supreme Court held that in providing for payment of pension benefits to a deceased public employee's "surviving spouse" the Legislature intended that the deceased's divorced first wife take nothing even though most of the pension was earned during the first marriage. In sum the terminable interest rule asserts that the non-employee spouse's pension interest terminates at the death of either spouse.

Relying heavily on Reppy, Community and Separate Interests in Pensions and Social Security Benefits After Marriage of Brown and ERISA (1978) 25 U.C.L.A. L.Rev. 417, 443-482, the controller argues that Benson and Waite should not be extended to private pension plans. ³ The gist of the argument is that the terminable interest rule is unfair to non-employee spouses and conflicts with the principle of spousal equality embodied in decisions such as In re Marriage of Brown (1976) 15 Cal.3d 838, 126 Cal.Rptr. 633, 544 P.2d 561. Alternatively, it is argued that if the rule's conflict with the community property statutes can be justified it is only because the cases involved public retirement plans governed by statutes the Supreme Court felt took precedence over (and impliedly amended) the community property statutes. Finally, the controller contends that the terminable interest rule was never intended to preclude imposition of an inheritance tax. In the context of this case each of these arguments must be rejected.

First, the controller has failed to identify a single unfairness attributable to Waite 's contribution to the terminable interest rule. By extension of Waite, Mrs. Allen's share in the pension could not be passed on to third persons of her choice but automatically went to her husband; likewise, under the plan at issue here the pension payments cease at Mr. Allen's death and thus he, just like his wife, owns no pension rights that can be devised to third persons. While the retirement plan pays Mr. Allen more after Mrs. Allen's death than it would have paid Mrs. Allen had she outlived her husband, the Waite holding is in no way responsible for that inequality; community property law does not yet dictate the economic terms of a pension package. (See Brown, supra, 15 Cal.3d at 849-50, 126 Cal.Rptr. 633, 544 P.2d 561; Waite, supra, 6 Cal.3d at 473 fn. 8, 99 Cal.Rptr. 325, 492 P.2d 13.) And while a fair argument exists that the egalitarian spirit of Brown, supra, and the holding of Benson, supra, are incompatible (see, e. g., In re Marriage of Peterson (1974) 41 Cal.App.3d 642, 656, 115 Cal.Rptr. 184), a similar incompatibility is not indicated with respect to Waite. ⁴ Identifying the Waite and Benson decisions as comprising a single rule is but a convenient fiction; the viability of the former in no way depends upon the viability of the latter.

Moreover, the result in Waite not only created little inequality; it was clearly powered by its own consideration of fairness. The court in Waite focused on the special purpose of the pension at issue there: "provision for the subsistence of the employee and his spouse . . . .

Once the spouse dies, of course, her need for subsistence ends, and the state's interest in her sustenance reaches a coincident completion. When this termination occurs, the state's concern narrows to the sustenance of the retired employee; its pension payments must necessarily be directed to that sole objective."

(6 Cal.3d at 473, 99 Cal.Rptr. 333, 492 P.2d 21.)

The court thus highlighted the unique place of such a pension in community property law: it is property that is meant to be shared by the spouses and only the spouses, and one whose purpose would be wholly defeated by allowing the deceased spouse to bequeath his or her share to third persons. The Supreme Court has recently stressed that the...