In re McGrath's Estate

• Decision Date: 15 September 1937
• Docket Number: 26333.
• Court: Washington Supreme Court
• Parties: In re McGRATH'S ESTATE. v. McGRATH. STATE, by PEMBERTON, Sup'r of Inheritance Tax and Escheat Division,

71 P.2d 395

191 Wash. 496

In re McGRATH'S ESTATE.

STATE, by PEMBERTON, Sup'r of Inheritance Tax and Escheat Division, v. McGRATH.

No. 26333.

Supreme Court of Washington

September 15, 1937

Department 2.

Appeal from Superior Court, King County; Roger J. Meakim, Judge.

Proceeding in the matter of the estate of William A. McGrath, deceased wherein the State of Washington, by William H. Pemberton Supervisor of the Inheritance Tax and Escheat Division thereof, filed his findings fixing the tax due, to which Agnes A. McGrath, as executrix of the estate of William A McGrath, deceased, and another, filed exceptions. From an adverse decree, the Supervisor of Inheritance Tax and Escheat Division appeals.

Affirmed.

William H. Pemberton and Charles Snyder, both of Olympia, for appellant.

Colvin & Rhodes, of Seattle, for respondent.

ROBINSON Justice.

William A. McGrath, president of the McGrath Candy Company, a corporation, died on May 21, 1935. At the time of his death, there were outstanding eight insurance policies on his life. Policy No. 1 for $10,000 and policy No. 2 for $5,000 were issued by the Northwestern Mutual Life Insurance Company, and policy No. 3 for $10,000 by the Union Central Life Insurance Company. The beneficiary in these three policies was McGrath Candy Company. The other five policies were payable to Mrs. McGrath. The aggregate proceeds of all the policies amounted to $47,235.39. All of the policies were taken out prior to the passage of chapter 180, Laws 1935 (page 706), which became effective about two months Before McGrath's death. Section 115 of that act (page 784) reads, in part, as follows:

'Insurance payable upon the death of any person shall be deemed a part of the estate for the purpose of computing the inheritance tax and shall be taxable to the person, partnership or corporation entitled thereto. Such insurance shall be taxable irrespective of the fact that the premiums of the policy have been paid by some person, partnership or corporation other than the insured, or paid out of the income accruing from principal provided by the assured for such payment, whether such principal was donated in trust or otherwise: Provided, however, That there is exempt from the total amount of insurance, regardless of the number of policies, the sum of forty thousand dollars and no more: Provided, however, That in the case of insurance upon the life of a decedent officer or employee of a corporation, payable to the corporation, or upon the life of a decedent, employee of or partner in a business enterprise, payable to one or more of the partners, where all the premiums upon such policy have been paid exclusively by such beneficiary, upon the death of the decedent the amount only of the proceeds of the policy in excess of the cash surrender value immediately preceding the death of the decedent shall be deemed a part of the estate for the purpose of computing the inheritance tax, and taxed as provided in class A, section 106 of this title.

'Where more than one beneficiary is entitled to the benefit of the provisions of this section exempting forty thousand dollars of the proceeds of insurance policies, payable upon death, the benefit of such exemption shall be apportioned among such beneficiaries ratably and proportionately: Provided, That where there is fraternal benefit society insurance payable upon the death of the decedent and other insurance payable upon the death of the decedent, the forty thousand dollars exemption shall first be taken from the fraternal benefit society insurance and if the same does not equal forty thousand dollars, then the balance of the forty thousand shall be prorated among other policies.

'The inheritance tax upon the proceeds of any insurance policy shall be a lien upon the proceeds of such policy in the hands or possession of the estate of the deceased insured or in the hands or possession of any other beneficiary under such policy to whom such proceeds may have been paid; Provided, That when proceeds of insurance payable upon death, or receivable by a beneficiary other than the executor or representative, the executor or representative shall recover from such beneficiary the tax due upon such proceeds of such policy or policies. The supervisor shall have power to release such lien with respect to all or any part of such proceeds if he be satisfied that the collection of the tax will not thereby be jeopardized.'

By subsequent provisions, the tax due upon the proceeds of any policy is made a lien upon the proceeds thereof, and, when proceeds of a policy are paid to any beneficiary other than the executor or representative, they are given the right to recover from such beneficiary the tax payable with respect to such proceeds.

During the administration of the estate, the supervisor of the inheritance tax and escheat division of the state tax commission filed his findings fixing the tax due. To these findings, the executrix and McGrath Candy Company filed exceptions raising a number of issues of law. After a hearing, the trial court entered a final decree of distribution embodying therein an order settling the inheritance tax in the amount of $11.36, instead of $334.62 as fixed by the supervisor. The appeal is from that portion of the decree.

The record is such that the decree must be affirmed if the trial court was correct in holding (1) that, under a proper construction of the statute, the $40,000 exemption is applicable to the aggregate total amount of insurance on the life of the decedent; and (2) that the proceeds of the two Northwestern Mutual policies, payable to McGrath Candy Company, are not lawfully taxable, under the provisions of section 115, chapter 180, Laws 1935 (page 784).

It was, and is, the contention of the supervisor that the $40,000 provided in the statute, with respect to insurance, is applicable only to those policies payable to the widow of the decedent. It is contended that section 115 divides insurance into two classes: First, insurance upon a decedent's life where the premiums were paid by him and the proceeds are payable to his estate or other beneficiaries designated by him; and, second, insurance payable to a corporation or partnership on the life of a decedent officer or employee, whether or not the premiums are paid by such beneficiary. The $40,000 exemption, says the supervisor, can be taken only out of insurance of the first class.

We do not agree with that construction of the statute. After providing that insurance shall be deemed a part of the estate for inheritance tax purposes and shall be taxable to the person, partnership, or corporation entitled thereto, irrespective of the fact that the premiums have been paid by some person, partnership, or corporation other than the insured, the statute says: 'Provided, however, That there is exempt from the total amount of insurance, regardless of the number of policies, the sum of forty thousand dollars and no more.'

It will be noted that the exemption is allowed 'from the total amount of insurance,' and not merely from a part of it. It is also provided later in the section that, where more than one beneficiary is entitled to the benefit of the provision exempting $40,000, the benefit of the exemption shall be applied ratably and proportionately. The exemption being, in terms, 'from the total amount of insurance, regardless of the number of policies,' it seems clear to us that the trial court correctly held that all taxable policies are entitled to ratably participate in the benefits of the exemption, regardless of the identity of the beneficiaries.

We come now to the second and more important question. We have seen that the statute provides that, in case of insurance upon the life of a decedent officer or employee of a corporation, payable to the corporation, where all the premiums upon the policy have been paid exclusively by such beneficiary upon the death of the decedent, the amount of the proceeds of the policy in excess of the cash surrender value immediately preceding his death shall be deemed a part of the estate for the purpose of computing the inheritance tax. There were three policies upon the life of McGrath answering that description, one issued by the Union Central Life Insurance Company, and two by the Northwestern Mutual. The Union Central policy was taken out by McGrath himself. Although the beneficiary named was McGrath Candy Company, McGrath expressly reserved the right to change the beneficiary at any time during the continuance of the policy. The policy also contained the following provision: 'The insured may exercise every right and receive every benefit reserved to the insured or the owner of the policy, including the right of assignment, and may agree with the company to any change in or amendment of the policy without the consent of any beneficiary.'

The two Northwestern Mutual policies, payable to McGrath Candy Company, were taken out upon the applications of the McGrath Candy Company. The McGrath Candy Company paid all the premiums thereon. McGrath, of course, had no right to change the beneficiary in these policies or do anything with relation to them. The $10,000 policy contained this indorsement: 'It is agreed that this policy shall apply to and be under the control and disposition of the beneficiary corporation without the consent of the insured.'

In the $5,000 policy, the same provision was contained in the application, which was, by reference, made a part of the policy. The trial court held that the proceeds of the Union Central policy, in excess of its cash surrender value immediately preceding the death of the decedent, were lawfully taxable, but that the proceeds of the two Northwestern Mutual policies were not. We are in complete accord with...