Rundle v. Welch, Civ. A. No. 2288.
| Decision Date | 15 April 1960 |
| Docket Number | Civ. A. No. 2288. |
| Citation | 184 F. Supp. 777 |
| Parties | George H. RUNDLE, as Executor of the Estate of Grace S. Rundle, deceased, Plaintiff, v. Russell A. WELCH, District Director of Internal Revenue, Cincinnati District and United States of America, Defendant. |
| Court | U.S. District Court — Southern District of Ohio |
McCulloch, Felger & Fite, Piqua, Ohio, for plaintiff.
Hugh K. Martin, U. S. Atty., Donald H. Hawkins, Asst. U. S. Atty., Dayton, Ohio, for defendant.
The question for decision here is whether the proceeds of four insurance policies were properly includible in the estate of Grace S. Rundle on her death on October 15, 1952. The executor seeks the assistance of this court to order repayment of estate taxes collected because of the disputed inclusion.
The policies in question were originally in force as insurance on the life of Allen G. Rundle who died on February 18, 1937. In the insurance contracts, he had designated his wife, Grace S. Rundle, as primary beneficiary and two children as contingent beneficiaries. Each policy primarily provided for lump sum payment to the widow after the death of the insured. The insured reserved a continuing right to designate other options during his lifetime. With the death of the insured, the proceeds were payable to his widow as the primary beneficiary.
The dispute centers around the later effect on the estate tax liability of the widow of various options contained in her husband's life insurance contract. On March 11, 1937, the surviving widow exercised the interest option by which the death payment proceeds of the policy were left with the insurer. She dito her son and her daughter. By this act she required the insurer to make the same final disbursement which had been earlier designated by the insured. The company agreed that it would annually pay interest at 3% to the widow-beneficiary while the deposit continued. She retained the policy-granted right to withdraw the fund at any interest date. Neither right was ever released by the decedent widow.
The executor argued that the various aspects of the widow's authority added up to a general power of appointment. He urged that this power had come into existence at the date of the death of the insured in 1937, and that because the power was never exercised, it ought to be considered to be covered by the exception carved out by Internal Revenue Code of 1939, § 811(f) (1).1 From this, the taxpayer concluded that the value of the insurance policies ought not to be included in the beneficiary's estate.
The resolution of this dispute must recognize the continuous co-existence of two significant elements. First, the decedent had a contractual right to draw down the proceeds of the policies exercisable at least once annually with only a minimal obligation to comply with the formal requirements of the insurer. This factor was coupled with the additional significant fact that the decedent had continuing income rights from the policy and a concomitant right to claim, reject or divert the income at her whim.
An underlying fundamental in the general conceptual scheme of the estate tax pattern imposes an elementary overriding dichotomy. The statute searches out for estate taxation various significant legal factors to determine whether they originated with the decedent and might be therefore includible as taxable reserved powers. Lober v. United States, 1953, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed. 15; State Street Trust Co. v. United States, 1 Cir., 1959, 263 F. 2d 635; Newman v. Com'r, 9 Cir., 1955, 222 F.2d 131; Nagle v. United States, 3 Cir., 1955, 222 F.2d 663. By contra-distinction, the taxing plan may produce an opposite result if the elements arose from persons other than the decedent. Thus a bare life estate created by another is not includible in the estate of a decedent in the absence of additional powers. Estate of Sergeant Price Martin, 1955, 23 T.C. 725 (acq. 1955-2 Cum.Bull. 7); Estate of Selina J. Gray, 1950, 14 T.C. 390 (acq. 1950-2 Cum.Bull. 2); Commissioner of Internal Revenue v. Childs Estate, 3 Cir., 1944, 147 F.2d 368.
The first inquiry must be directed to determine the extent to which the optional mode of settlement was the product of the decedent's own exercise, subdivision and definition of her own vested general property rights in the proceeds of the policies. Alternatively, we must discover whether the rights which existed at the time the widow's death arose originally and directly from her husband's earlier transactions.
The interest of the decedent in the insurance policies as a potential beneficiary of the policy was created by her husband before his death; until then, it was fully contingent and subject to revocation. At his passing, the decedent as the beneficiary acquired an indefeasible vested right to the proceeds of the insurance contract. Katz v. Ohio National Bank, 1934, 127 Ohio St. 531, 191 N.E. 782; Stone v. Stephens, 1951, 155 Ohio St. 595, 99 N.E.2d 766, 25 A.L.R.2d 992. After her interest became absolute, Mrs. Rundle did nothing to strip herself of it. Streeper v. Myers, 1937, 132 Ohio St. 322, 7 N.E.2d 554. Her designation of a lump sum payment to her son and her daughter as successor beneficiaries confirmed her husband's contractual inter vivos direction that the path of devolution would be outside her probate estate. Neff v. Massachusetts Mutual Life Ins. Co., 1952, 158 Ohio St. 45, 107 N.E.2d 100; compare In re Rothenbuecher's Estate, 1945, 76 Ohio App. 425, 64 N.E.2d 680. Even this could be effectively revoked by taking down the proceeds during her lifetime. Guggenheim v. Rasquin, 1941, 312 U.S. 254, 61 S.Ct. 507, 85 L.Ed. 813.
The decedent reserved the right to receive the annual interest and to recapture the principal sum by a simple maneuver to satisfy lenient formal requirements of the insurer's contract. In effect, by rejecting the primary lump sum method prescribed by her husband's designation in the original policy, the decedent actively changed the payment plan to an alternative formula created by her positive choice. Only by direct command could she intercept the payment process and assert the secondary interest option. Furthermore, the death of the insured effectively cut off whatever earlier expectations the contingent beneficiaries might have had. Another positive act of the widow as post mortem owner was necessary to prevent the utter destruction of their contingent expectancies through the insurer's payment to the beneficiary by a conclusive cash settlement. Stanton v. Provident Life & Accident Ins. Co., 1941, 69 Ohio App. 27, 42 N.E.2d 687.
At the time of Mr. Rundle's death, Ohio statute permitted the policy proceeds to be left on deposit subject to such obligations to which the beneficiary and the company might agree in writing. Ohio Revised Code, § 3911.14, then known as Ohio General Code, § 9398-1. Legislation permitted the insurer to commingle the funds; and the company was authorized to accept various spendthrift limitations imposed by the beneficiary or the insured. In the face of these mixed factors, it might be disputed whether the obligation of the insurer was in the nature of a trust or whether the company was simply a debtor. Compare Mutual Benefit Life Ins. Co. v. Ellis, 2 Cir., 1942, 125 F.2d 127, 138 A.L.R. 1478, certiorari denied sub nomine Eisenlord v. Ellis, 316 U.S. 665, 62 S.Ct. 945, 86 L.Ed. 1741; Scott, Life Insurance Options, 56 Harvard L.Rev. 1147 (1943); Land, Life Insurance Options, 42 Columbia L.Rev. 32 (1942). The precise nature of the relationship between the insurer and the widow after the proceeds were retained is immaterial for this purpose. However the undertaking might be characterized, the thrust of the Federal estate tax reaches either retained interest with equal facility whether it be in trust or otherwise. Internal Revenue Code, § 811(d); Internal Revenue Code, § 811(c); Internal Revenue Code, § 811 (a).2
For Federal estate tax purposes, where an insured designated payment of the principal of life insurance by a single post mortem settlement but granted alternative right to reject the single payment and permitted the beneficiary an option to elect among other alternatives, the election of the secondary rights were proximately reserved by the act of the beneficiary where she rejected the lump sum mode of settlement primarily created by the insured, where the beneficiary ordered the insurer to retain the lump sum on deposit, where she elected to receive the annual interest payments, and where she chose to retain a continuing right to take down the proceeds of the policy on any annual interest date.
Since the interest of the decedent was proximately defined by her own act and not merely from the act of her deceased husband, the nature of her continuing rights ought to be examined to determine if they were taxable as reserved powers.
The general conceptural scheme of the estate tax statute makes alternatively significant either of two principal sticks from the bundle of retained property rights. One crucial element is the retention of power to receive income from property which originated with the decedent. The other basic factor is retained power to control the ultimate devolution of property by various refinements and applications of substantial legal power.3 At the minimum the decedent had available continuing contractual authority to take down the proceeds at least once annually for the fourteen years until her death. The policy explicitly gave her the right "at any time any interest payment (came) * * * due * * * (by a simple) surrender of (the policy) * * * to withdraw the amount so retained (by the insurer). * * *" This was a clear case of a retained income right. Internal Revenue Code, § 811(c) (1) (B); Marks v. Higgins, 2 Cir., 1954, 213 F.2d 884; Maria Becklenberg...
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