Kentucky Trust Co. v. Department of Revenue

• Decision Date: 15 December 1967
• Citation: 421 S.W.2d 854
• Parties: The KENTUCKY TRUST COMPANY, Executor, etc., Appellant, v. DEPARTMENT OF REVENUE, Commonwealth of Kentucky, Appellee.
• Court: United States State Supreme Court — District of Kentucky

Page 854

421 S.W.2d 854

The KENTUCKY TRUST COMPANY, Executor, etc., Appellant, v. DEPARTMENT OF REVENUE, Commonwealth of Kentucky, Appellee.

Court of Appeals of Kentucky.

Dec. 15, 1967.

William B. Peden, Jones, Ewen, MacKenzie & Peden, Louisville, for appellant.

Robert Matthews, Atty. Gen., William S. Riley, Asst. Atty. Gen., Cyril E. Shadowen, Frankfort, for appellee.

CLAY, Commissioner.

This is an appeal from a judgment affirming an order of the Kentucky Tax Commission imposing an inheritance tax on the proceeds of a life insurance policy held in trust subject to a power of appointment.

Frank Brandon, prior to his death in 1960, had entered into a life insurance trust agreement with appellant as trustee. It provided that the insurance proceeds should be divided into Trust A and Trust B. His widow was the income beneficiary of both trusts for life, with power in the trustee to encroach on the principal for her benefit, first from Trust A and then Trust B. Upon her death the corpus of Trust B should pass to her children, and the Department of Revenue concedes the insurance proceeds allocated to this trust were exempt from taxation, for reasons which will appear. However, because the widow, by the trust agreement, was given power to appoint by will the corpus of Trust A remaining at her death, ¹ the Department contends the insurance proceeds in Trust A were taxable.

KRS 140.010 imposes an inheritance tax on all property 'belonging to' inhabitants of this state 'which shall pass' by will, or by the laws regulating intestate succession, or by deed, grant, bargain, sale or gift, made in contemplation of, or to take effect on death. It is arguable that this statute does not encompass life insurance proceeds, on the ground that such proceeds neither 'belonged to' the deceased, nor did they 'pass' from the deceased to the beneficiary by the described methods of transfer. See cases cited in 73 A.L.R.2d 171. However, we need not resolve that question.

KRS 140.030(2) deals specifically with proceeds payable under life insurance policies. It first provides that such proceeds 'payable to the assured or his estate, shall be taxable * * *.' To make it clear that proceeds otherwise payable are not taxable, this statute declares:

'The proceeds of an insurance policy payable to a designated beneficiary other than the assured or his estate or a trustee of a designated beneficiary other than the assured or his estate shall be tax-free.' (Our emphasis)

In Luckett v. First National Lincoln Bank of Louisville, Ky., 409 S.W.2d 518, we examined the reasons why this language, seemingly superfluous, was incorporated in the statute.

It is not questioned that the insurance proceeds here involved were payable to a 'trustee of a designated beneficiary other than the assured or his estate * * *'. That should end the matter. This kind of property, by specific legislative direction, is not subject to the Kentucky inheritance tax.

The Commonwealth, however, will not give up so easily. It is contended that a species of property, other than insurance proceeds, passed to the widow under the trust agreement. What was this other property? Allegedly the power of appointment.

KRS 140.040(2) provides for the valuation of property which passes at the death of the donor under a power of appointment. Clerarly this relates to taxable property. Insurance proceeds are not taxable under the specific provisions of KRS 140.030(2). To segregate the power of appointment from the property to which it relates seems to us an impossible task. Such power is simply one of the incidents of a beneficial right in the proceeds.

If these insurance proceeds had been payable to the widow outright, they would not be...