Welch v. Comm'r of Corps. & Taxation

• Decision Date: 31 May 1941
• Citation: 34 N.E.2d 611,309 Mass. 293
• Parties: WELCH et al. v. COMMISSIONER OF CORPORATIONS AND TAXATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

309 Mass. 293

34 N.E.2d 611

WELCH et al.

v.COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Middlesex.

May 31, 1941.

Reservation and Report from Probate Court, Middlesex County; Leggat, Judge.

Petition in equity by E. Sohier Welch and others, trustees, against the Commissioner of Corporations and Taxation, for the abatement of a succession tax assessed by the commissioner. On report of the judge of probate, without decision, for the determination of the Supreme Judicial Court.

Decree to be entered ordering the abatement of the tax.

Argued before FIELD, C. J., and DONAHUE, DOLAN, COX, and RONAN, JJ.

G. M. Naylor, Jr., and J. L. Ware, both of Boston, for petitioners.

E. O. Porctor, Asst. Atty. Gen., for respondent.

RONAN, Justice.

This is a petition in equity under G.L.(Ter.Ed.) c. 65, § 27, filed in the Probate Court of Middlesex County by the petitioners, trustees under an agreement and declaration of trust, dated December 5, 1928, and amended December 21, 1934, seeking the abatement of a succession tax assessed by the respondent upon present interests in the trust property, which he contended, took effect in possession and enjoyment upon the death of the settlor, Prescott Bigelow, on October 27, 1937, The case was submitted upon the petition, answer and statement of agreed facts to the judge of probate, who reported it, without decision, in accordance with G.L.(Ter.Ed.) c. 215, § 13, for the determination of this court.

Under the agreement and declaration of trust as amended, the trustees agreed to accept and hold such policies of insurance, issued upon the life of the settlor and payable to them as trustees, as he might deliver to them, and, upon his death, to collect the proceeds and pay the income therefrom to his wife during her life and then to his children and their issue and to his stepson and his issue; and upon the death of his widow, children and stepson to pay the principal discharged of any trust to the issue of his children and also to the issue of the stepson. Bigelow had the right under the agreement of trust to alter to revoke the trust, to assign, pledge or sell the policies, to exercise any option or privilege granted by them, and, during his lifetime, to receive the surrender value of any of the policies, and all payments, dividends and benefits arising from them. The trustees collected the proceeds of the policies. They paid a succession tax on September 26, 1939, in the amount assessed by the respondent, upon the value of the present interest which he determined passed upon the death of the settlor.

There is no contention that the policies were transferred to the trustees by he insured in contemplation of death, as that phrase has been construed in taxing statutes. United States v. Wells, 283 U.S. 102, 51 S.Ct. 446, 75 L.Ed. 867;Heiner v. Donnan, 285 U.S. 312, 52 S.Ct. 358, 76 L.Ed. 772;Matter of Einstein's Estate, 114 Misc. 452, 186 N.Y.S. 931. The trustees contend that their rights and those of the beneficiaries were finally established at the time the policies were deposited with them by the settlor, and that their right to receive the proceeds and the right of the beneficiaries to share therein did not constitute property that came to them by deed, grant or gift made or intended to take effect in possession or enjoyment at or after the death of the settlor, and, consequently, was not taxable under G.L.(Ter.Ed.) c. 65. The commissioner contends that, as the settlor reserved the right to change the beneficiaries in the policies and to revoke the trust, he retained such command and control over the policies that their transfer to the trustees and to those who were to share in the proceeds did not become final and complete until the relinquishment of these rights by the settlor at his death, and that the relinquishment of such rights was the basis upon which the tax was properly imposed.

It is a general rule that, in the absence of statute, the proceeds of life insurance policies payable to the insured or to his estate become, upon their receipt after his death, a part of his estate and are properly included in the computation of an inheritance tax; but that the payment of the insurance money to a beneficiary designated in the policy is not subject to such a tax because the proceeds were acquired by the beneficiary by virtue of the contract of insurance and not from the estate of the insured. Fagan v. Bugbee, 105 N.J.L. 85, 143 A. 807; Matter of Van Dermoor's Estate, 42 Hun 326; Matter of Knoedler's Estate, 140 N.Y. 377, 35 N.E. 601;Matter of Reed's Estate, 243 N.Y. 199, 153 N.E. 47, 47 A.L.R. 522;Matter of Parsons' Estate, 117 App.Div. 321, 102 N.Y.S. 168;In re Myers's Estate, 309 Pa. 581, 164 A. 611;In re Estate of Bullen, 143 Wis. 512, 128 N.W. 109,139 Am.St.Rep. 1114.

It is settled in this Commonwealth that the proceeds of a life insurance policy do not pass to the beneficiary named therein by will or by our statute regulating intestate succession; that such a beneficiary does not receive anything by way of ‘deed’ or ‘grant’ within the meaning of our taxing statute; and that if the designation of the beneficiary could be considered as ‘a gift,’ then it was a present gift of a contractual right which, if it remained in force until the death of the insured, entitled the beneficiary to the proceeds of the policy even though the insured had reserved the right to change the beneficiary. ‘By designating a beneficiary both the ‘grant’ and the ‘gift,’ so far as either exist at all, take effect in enjoyment and possession at once. Such a relation does not by fair intendment come within the descriptive words of the statute [St.1912, c. 678, § 1, as amended by St.1913, c. 498] as ‘property * * * which shall pass * * * by * * * gift * * * made or intended to take effect in possession or enjoyment after the death of the grantor.’' Tyler v. Treasurer & Receiver General, 226 Mass. 306, 309, 115 N.E. 300, 301, L.R.A.1917D, 633. There is nothing in our own decisions that narrows or limits the force and effect of the case last cited. Since the decision of that case in 1917, the taxing authorities of the Commonwealth have not imposed any succession tax upon the proceeds of life insurance policies received by beneficiaries named in the contracts of insurance until recently, when, it would seem, that on account of the case of Fagan v. Bugbee, 105 N.J.L. 85, 143 A. 807, the commissioner has attempted to impose a tax upon receipt of the proceeds by such beneficiaries.

The fact that the beneficiaries are designated in the policies as trustees for the benefit of those named in the agreement and declaration of trust does not, in our opinion, bring the transaction within the statute. The indenture of trust and the designation of the trustees as beneficiaries and the delivery of the policies to them were all parts of a single plan. The rights of the trustees and those entitled to share in the proceeds from the policies attached at the same time and became effective when the policies were deposited with the trustees, and these rights continued so long as the relation of the trustees to the policies stood unchanged and the indenture of trust remained unaltered and unrevoked. The trustees acquired the legal interests in the contracts of insurance by virtue of being designated beneficiaries in the policies, and the equitable interests in these contracts were acquired by those entitled to share in the proceeds by virtue of the indenture of trust. Under succession statutes substantially similar to our own, it has been held that the designation of the beneficiary in trust for others does not constitute a taxable transfer of the proceeds of the policies upon the death of the insured. Matter of Voorhees' Estate, 200 App.Div. 259, 193 N.Y.S. 168;Matter of Elting, 78 Misc. 692, 140 N.Y.S. 238;Matter of Haedrich's Estate, 134 Misc. 741, 236 N.Y.S. 395; In re Killien's Estate, 178 Wash. 335, 35 P.2d 11. The statutes in each of these States have since been amended, those in New York by taxing the amount receivable by beneficiaries from life insurance in a manner similar to the Federal estate tax, Laws of 1930, c. 710, and those in Washington by exempting all insurance except where payable to the estate of the insured, Laws of 1929, c. 135. But see now Laws of 1935, c. 180, § 115; In re McGrath's Estate, 191 Wash. 496, 71 P.2d 395. Where the indenture of trust did not name the beneficiaries, it has been held that they took by the terms of the will of the insured and did not come within a statute exempting the payment of the proceeds to trustees designated in the policies. In re Myers' Estate, 309 Pa. 581, 164 A. 611.

The commissioner relies upon Fagan v. Bugbee, 105 N.J.L. 85, 143 A. 807, which held that a tax was properly imposed upon the receipt of the proceeds of policies in which the beneficiaries were designated as trustees and were required to distribute the proceeds in accordance with an indenture of trust, on the ground that those who took the equitable interests in the proceeds acquired these interests by virtue of the written trust and not by the contract of insurance. The courts of New York and Washington have expressly declined to follow this decision. Matter of Haedrich's Estate, 134 Misc. 741, 236 N.Y.S. 395;In re Killien's Estate, 178 Wash. 335, 35 P.2d 11. Compare Thomson v. McGonagle, 33 Haw. 594. The New Jersey Legislature at the session next held after the decision in Fagan v. Bugbee amended the statute by exempting from the tax payment of policies to beneficiaries who had been named therein as trustees.

The commissioner urges that the gift of the proceeds of the policies was not complete as long as the insured retained the right to change the beneficiaries and to...