Tilney v. Kingsley

• Decision Date: 19 October 1964
• Docket Number: No. A--4,A--4
• Parties: Norcross S. TILNEY and John S. Tilney, Executors of the Last Will and Testament of Augusta Munn Tilney, Deceased, Appellants, v. William KINGSLEY, Acting Director, Division of Taxation, Department of the Treasury of the State of New Jersey, Respondent. In the Matter of the Transfer Inheritance Tax Assessment in the Estate of Augusta Munn TILNEY, Deceased.
• Court: New Jersey Supreme Court

Page 289

43 N.J. 289

204 A.2d 133

Norcross S. TILNEY and John S. Tilney, Executors of the Last Will and Testament of Augusta Munn Tilney Deceased, Appellants, v. William KINGSLEY, Acting Director, Division of Taxation Department of the Treasury of the State of New Jersey, Respondent In the Matter of the Transfer Inheritance Tax Assessment in the Estate of Augusta Munn TILNEY, Deceased.

No. A--4.

Supreme Court of New Jersey.

Argued Sept. 10, 1964.

Decided Oct. 19, 1964.

John Barker, Newark, for appellants (Robert P. Hazlehurst, Jr., Newark, for counsel, Pitney, Hardin & Kipp, Newark, attorneys).

Joseph A. Jansen, Deputy Atty. Gen., for respondent (Arthur J. Sills, Atty. Gen., attorney).

The opinion of the court was delivered by

WEINTRAUB, C.J.

The Director of the Division of Taxation determined that the proceeds of certain life insurance policies paid to named beneficiaries were transfers intended to take effect upon the death of the insured and hence were taxable under the transfer inheritance tax law. We certified the taxpayers' appeal before the Appellate Division acted upon it.

I.

In 1937 the decedent, age 52 and uninsurable at normal rates because of a 'low pulse rate,' purchased combinations of single-premium life insurance policies and single-premium, non-refundable annuity contracts. Such combinations were obtained from three insurance companies. The total life insurance coverage was $150,000, and the premiums paid for these policies and the companion annuity contracts were 110% Of the face amount of the insurance, I.e., $165,000. The annual yield to decedent from the annuity contracts totaled $4,241.02, which is somewhat less than 3% Of the total cost of the life insurance and the annuity contracts. No benefits were payable under the annuity contracts after the decedent's death.

In form the insurance policies were independent of the annuity contracts. The premiums paid for the annuity contracts were the same that would have been payable for the annuity contracts alone, and the premiums paid for the life insurance were at standard rates. But none of the companies would have sold the insurance policy to the insured at standard rates because of the state of her health unless the enhanced risk of loss were offset by an annuity contract, the benefits of which would cease upon the insured's death. Hence the companies insisted upon a tie-in between the insurance policy and the annuity contract at the moment of sale. The companies had no interest in the continuation of that tie-in because the annuity contract could not be surrendered and the company would gain if the insurance policy were. But the insured, having a diminished life expectancy, was much concerned with the continued subsistence of the life insurance. Just as the company wanted the annuity contract to offset its increased risk under the life insurance policy, so the insured would want the life insurance policy to remain to compensate for the poor bargain the non-refundable annuity contract would be if it stood alone. Thus as a practical matter the tie-in persisted. And, of course, again at the level of the economic reality, if both contracts were continued as sensibly they had to be, the life insurance benefits of $150,000 would be payable out of the $165,000 paid for both the insurance policies and the annuity contracts.

Thus the transactions involved no life insurance risk, I.e., a risk of loss because of death. A loss to the insurer under the life insurance policy because of early death would be offset by the gain to it under the annuity contract. The hedge was perfect. The only hazard to the company was that its own investments might yield less than what it had to pay under the annuity contract, a risk typical of an investment transaction rather than of life insurance. The cost of selling the contracts and the administrative expenses presumably were covered by the 10% Charge made by each carrier over the face amount of the insurance.

In 1941 decedent assigned to the beneficiaries all of her rights in the life insurance policies. She died in 1959.

II.

Our statute, N.J.S.A. 54:34--1c, makes taxable a transfer 'by deed, grant, bargain, sale or gift made in contemplation of the death of the grantor, vendor or donor, or intended to take effect in possession or enjoyment at or after such death.' We are not here concerned with the phrase 'made in contemplation of the death' of the transferor because of the time limitation in the statute. The question is whether there was a transfer 'intended to take effect in possession or enjoyment on or after such death.'

The transaction with each company, viewed as the single bargain it actually was despite the formal division between a life insurance policy and an annuity contract, falls quite literally within the statutory reach. The insured transferred $165,000 in exchange for promises to pay her a stated annual sum for life and to pay $150,000 to the beneficiaries upon her death. Her intent was that the gift to them should take effect in enjoyment on or after her death. The transaction makes no economic sense except in those terms.

Thus viewed, the legal issue is no different from that presented by a refund annuity contract under which benefits remaining unpaid at the annuitant's death are thereupon payable to others, as to which we have held there is a transfer to such others intended to take effect in possession or enjoyment upon the transferor's death. Cruthers v. Neeld, 14 N.J. 497, 103 A.2d 153 (1954); Central Hanover Bank & Trust Co. v. Martin, 129 N.J.Eq. 186, 18 A.2d 45 (Prerog.1941), aff'd 127 N.J.L. 468, 23 A.2d 284 (Sup.Ct.), aff'd 129 N.J.L. 127, 28 A.2d 174 (E. & A. 1942), affirmed with respect to unrelated issues sub nom. Central respect to unrelated issues sub nom. Central 19 U.S.94, 63 S.Ct. 945, 87 L.Ed. 1282 319 U.S. 94, 63 S.Ct. 945, 87 L.Ed. 1282 184 (1960).

Precisely in point is Bank of New York v. Kelly, 135 N.J.Eq. 418, 38 A.2d 899 (Prerog.1944). There, too, the insured, age 69, acquired simultaneously both a non-refundable annuity contract and a life insurance policy in exchange for $100,000, plus an additional 10% 'loading charge.' The insured received $1,470.63 annually under the annuity contract, and on his death the sum of $100,000 was paid to others under the life insurance policy. There, too, the company would not have sold the insurance policy without medical examination except in conjunction with the annuity policy which provided the company with the protective hedge we have already described. The court held the combination life insurance-annuity contracts resulted in a transfer of $100,000 in the form of the insurance proceeds, a transfer intended to take effect in possession and enjoyment upon the transferor's death and hence taxable under our statute.

The court there added that the insurance was not 'life' insurance within the meaning of N.J.S.A. 54:34--4f, which exempts from taxation the proceeds of life insurance policies payable to named beneficiaries. Indeed that much apparently was conceded by counsel in the light of Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 (1941), and Keller v. Commissioner, 312 U.S. 543, 61 S.Ct. 651, 85 L.Ed. 1032 (1941), which held that since the essence of life insurance is protection against the risk of death, a statute designed to favor, by exemption from taxation, the spreading of the risk of death by life insurance would not apply where, as here, the risk of death is not spread but rather is offset by an annuity contract. And we add in passing that the taxpayers in the case before us do not question that proposition.

To the same effect as Bank of New York v. Kelly is Barillet v. Kelly, 131 N.J.L. 140, 35 A.2d 457 (Sup.Ct.1944). There the annuity contract and the life insurance policy were obtained on the life of the husband, age 70, the husband buying the annuity contract and the wife buying the life insurance policy, using however funds furnished by the husband. There too the company would not have sold the life insurance contract without the annuity contract, and the premiums paid for both contracts totaled 110% Of the life insurance proceeds. Upon the insured's death, an inheritance tax was imposed upon the sum so furnished to the wife and paid by her to the company as the premium for the life insurance. ¹ The tax was upheld, the court finding the cash gift to the wife was intended to take effect in possession or enjoyment at or after the donor's death. As to the further point there urged, that the gift be deemed effective in enjoyment at once because the wife held the irrevocable right to obtain the cash surrender value, the court answered in part that 'there is no proof that such was the intention' (p. 146, 35 A.2d p. 460).

In the case before us the taxpayers stress the fact that in 1941 the insured parted with all property rights in the insurance policies and contend that thereupon the transfer to the beneficiaries took effect in possession and enjoyment. To support this thesis the taxpayers rely heavily upon Fidelity-Philadelphia Trust Co. v. Smith, 356 U.S. 274, 78 S.Ct. 730, 2 L.Ed.2d 765 (1958).

The cited case involved combination life insurance-annuity contracts indistinguishable from those before us. The precise question was whether the life insurance proceeds came within section 811(c)(1)(B) of the Internal Revenue Code of 1939 which included in the gross estate any transfer without full consideration under which the decedent 'has retained for his life * * * the possession or enjoyment of, or the right to income from, the property' transferred. The majority of the Court held that notwithstanding the indivisible nature of the total transaction in its inception, the insured did part completely with his interest in the life insurance, and since contractually the annuity was payable from the annuity contracts and not from the insurance policies, it followed that the insured had...