Leuthold's Estate, In re

• Decision Date: 02 May 1958
• Docket Number: No. 34041,34041
• Citation: 52 Wn.2d 299,324 P.2d 1103
• Court: Washington Supreme Court
• Parties: In the Matter of the ESTATE of Grace H. LEUTHOLD, Deceased, The STATE of Washington, Appellant, v. Walter M. LEUTHOLD et al., as executors, Respondents.

Page 299

52 Wn.2d 299

324 P.2d 1103

In the Matter of the ESTATE of Grace H. LEUTHOLD, Deceased,

The STATE of Washington, Appellant, v. Walter M. LEUTHOLD et al., as executors, Respondents.

No. 34041.

Supreme Court of Washington, En Banc.

May 2, 1958.

Rehearing Denied July 3, 1958.

Don Eastvold, G Keith Grim, Henry W. Wager, John J. O'Connell, Atty. Gen., Olympia, for appellant.

Graves, Kizer, Greenough & Gaiser, Spokane, for respondent.

John N. Sylvester (of Lycette, Diamond & Sylvester), Seattle, amicus curiae.

DONWORTH, Justice.

Grace H. Leuthold died testate December 22, 1952. Her husband and her son were appointed, and qualified, as executors of her estate. The state attempted to impose an inheritance tax upon one half of the cash surrender value of six life insurance policies upon the life of her surviving spouse. The beneficiaries designated in the several policies at the time of Mrs. Leuthold's death were either the son, daughter, or the surviving spouse's estate. All premiums on the policies, which became due prior to her death, were paid out of community funds. The state asserted that her death was a taxable event which passed her half of the community interest in the cash surrender value of the policies to her hegatees.

The trial court (being bound by our decision in In re Knight's Estate, infra) was constrained to hold against the state's right to collect the tax in question, and the state appeals.

Appellant contends the court erred in following the rule laid down in In re Knight's Estate, 1948, 31 Wash.2d 813, 199 P.2d 89, 94, which it asks us to overrule. In that case, we said:

'The policies which are involved in this case were all payable upon the death of an insured who was the surviving spouse, and nothing whatever became payable on the death of the beneficiary, the deceased wife. In other words, even if the cash surrender value of a life insurance policy be considered to be property, still it is not property which passes by will or by the statute of inheritance. Whatever may be realized by anyone on the cash surrender value of such policies is acquired solely by virtue of the contract between the insurer and the insured. * * *

'The cash surrender value of the policies here involved is neither property which passed by will or by the statute of inheritance, under Rem.Supp. 1945, § 11201, nor 'insurance payable upon the death of any person,' as provided in Rem.Rev.Stat. (Sup.), § 11211b. It therefore is not subject to an inheritance tax.'

There can be no doubt that these life insurance policies were community personal property at the time of Mrs. Leuthold's death. All of the incidents of ownership attached to the policies belonged to her and her husband equally. This conclusion is supported by our decision in Occidental Life Ins. Co. v. Powers, 1937, 192 Wash. 475, 74 P.2d 27, 31, 114 A.L.R. 531, where we said:

'* * * In this state, insurance or the proceeds of insurance are not mere expectancies or choses in action, but are property, and if the premiums are paid by the assets of the community, they constitute community property.'

In In re Towey's Estate, 1945, 22 Wash.2d 212, 155 P.2d 273, 276, the husband had, without his wife's consent, changed the beneficiary in each of four policies on his life so that, instead of being payable to her, they were payable to his estate. After he died, the wife attacked the validity of these changes. The trial court awarded the wife the entire proceeds of the policies, but this court, sitting en banc, reversed the judgment, saying:

'In Occidental Life Ins. Co. v. Powers, supra (which is distinguishable from the case at bar), we held that a life insurance policy payable to the wife, insuring the husband's life, and the premiums were paid with community funds was community personal property in which the wife had a vested interest equal to that of her husband; therefore, despite the right given to him by the policy to change the beneficiary without consent of the beneficiary, the husband could not designate, without his wife's consent, the insured's mother and private secretary as new beneficiaries. That is consistent with our prior holdings, while the husband is manager, with power to sell and dispose of community personal property, 'it does not follow that he can give it away.' (Italics ours.) Marston v. Rue, 92 Wash. 129, 159 P. 111, 112.

'For the sake of clarity, we are repetitive. The subject-matter (proceeds of four life insurance policies) of this controversy is community property, which, of course, was owned equally by John Thomas Towey and his wife (respondent), as all community property, both real and personal, is owned by both spouses equally. That is, respondent had a vested property right in all of the community property (proceeds of insurance policies and all other assets of the marital community) equal to that of her husband. When the husband died the assets (insurance proceeds and all other community property) of the marital community should have been applied to payment of debts of the marital community. One-half of the community property remaining after payment of debts of the community should have been distributed to respondent widow. The other one-half of the community property remaining after payment of debts of the community was subject to testamentary disposition of decedent Towey Rem.Rev.Stat., § 1342, and that one-half should have been distributed pursuant to the terms of his last will and testament executed January 17, 1943.'

This court recently declined to overrule the Powers case in Aetna Life Ins. Co. v. Brock, 41 Wash.2d 369, 249 P.2d 383, because the eight judges were equally divided on the question.

In Northwestern Life Ins. Co. v. Perrigo, 1955, 47 Wash.2d 291, 287 P.2d 334, 335, we considered it to be settled law that a life insurance policy is property, saying:

'We have, also, consistently held that insurance is property, and if paid for by community funds, is community property.'

Other decisions to the same effect are: In re Coffey's Estate, 1938, 195 Wash. 379, 81 P.2d 283; Lang v. Commissioner of Internal Revenue, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331.

Among the incidents of ownership connected with the six policies involved in the present case was the right to receive the cash value upon surrender of the policies. These policies were all level-premium, straight life policies, the cash value of which increased each year as specified therein.

This type of policy is both an indemnity and an investment, and is described in Maclean's work on life insurance as follows:

'The level-premium plan, in fact, introduces an entirely new element into the scheme of operation: the invested fund formed by the excess payments. This fund is called the reserve, which is rather an unfortunate term since it is really not a reserve in the ordinary commercial sense implying surplus but is a fund which the company must maintain if it is to be able to pay all death claims and without which it would be insolvent. Moreover, the existence of this reserve causes a radical change in the true amount and cost of insurance. Comparing a level-premium plan with a yearly-renewable-term policy of the same face amount, we note that under the former, when a policy-holder dies, the accumulated reserve on his policy will, of course, be available as part of the 'face amount' payable. Consequently, as the reserve increases, the insurance, or amount at risk (face amount less reserve), decreases. Thus the increasing death rate is offset by a decreasing effective amount of insurance, and the cost is kept down to a practicable figure. * * *'

'Investment in the Level-premium Plan. It is very important to note that under the level-premium plan a policy of $1,000 does not give actual insurance of $1,000, (i. e., the company is never 'on the risk' for that amount) but only of $1,000 less the policyholder's own accumulated excess payments. It is thus evident, as already pointed out, that the plan is not pure insurance but rather a combination of a decreasing insurance with an increasing investment, the two amounts being computed mathematically in such a way that in any year their sum is equal to the 'face amount' payable under the policy. Failure to grasp this simple fact has led to a great deal of misunderstanding of the level-premium plan. * * *' Joseph B. Maclean, Life Insurance (New York, 1957), pages 11 and 13.

As indicated in the above quotation from Maclean's treatise, life insurance companies set up an account for each policyholder in the same manner as a savings bank establishes an account for each depositor. As premiums are received, the insured's account is credited annually with the proper increase in its cash value. If an insured owns a $1,000 policy which has been in force for several years and has a cash value of $600, and then dies, the insurer pays the beneficiary the sum of $1,000. But, contrary to popular misconception, the insurer does not pay the whole $1,000 entirely out of its own funds. It pays the $600 which was owned by the insured at the time of his death (thus wiping out his cash value), plus $400 from net premiums paid in by other insured persons.

The situation in the present case is no different than if Mr. Leuthold had taken community funds and opened a savings account with a bank in his own name. Assume, further, that at the time of his wife's death the balance in the savings account was approximately the same amount as the total cash surrender values involved in this case. Of course, it would not be contended that the wife's community one-half interest in the bank account would not be taxable on her death whether the husband had or had not exercised his right of withdrawal of the deposit at that time.

It makes no difference whether the community account under the control of the husband is with a bank or a life insurance company. In either case, the rights of the respective contracting parties are...