Untitled Texas Attorney General Opinion ( 1955 )

September 3~0, 19~55
Hon. Robert S. Calvert Opinion No. S-177
Comptroller of Public Accounts
Austin, Texas Re: Imposition of inheritance
tax where survivorship
benefits accrue under pen-
Dear Mr. Calvert: s ion plan.
You have requested the opinion of this- offlce on the abov,e.
captioned matter and have submitted in connection therewith the fol-
lowing facts.
At the decedent’s death certain benefits accrued to his widow
under a *Retirement Plan”.established by his employer. The Plan 1s
administered by three trustees, designated by the employer, who admin-
ister the Plan by receiving~ all the employer’s contributions or payments
and purchasing Retirement Income and Group Income Endowment in-
sea&e. This insur.ance ~together with money from a special fund within
the trust provided the source of the benefits here in question. The em-
ployee paid no part of the cost of the premiums of the insurance, nor
did he contribute to the special fund.
The employer has no ownership rights in the payments it
makes to the trustees or in the funds held by them or in the insurance
policies purchased with said funds~. Participant employees are not
allowed to transfer, assign, withdraw or dispose of any part of the
benefits or to take action with respect to any part of the contributions
or policies. They may not borrow on any benefits nor can such,bene-
fits be reached by a creditor or lien holder. However the plan does
provide for withdrawal benefits similar to the regular cash surrender
value of insurance policies. If employment is terminated because of
the employee’s misconduct, benefits may be suspended, reduced or
cancelled.
The employer reserves the rlght to modify or terminate the
Plan and to reduce or discontinue contributions. Any such action would
not deprive the employee of his equity at that time.
Monthly retirement income in ~excess of .$20.00 a month is
written on an individual policy basis. and a~physical examination is
necessary. Each $10.00 a month retirement income provides $1 ,OOO.OO
I-Ion. Robert S. Calvert, page 2 (Opinion No. S-177)
life insurance. For example, if current retirement fundlng ls on the
basis of a monthly retirement income of $40.00, the life insurance
protection is $4,000.00. Should the applicant fail to pass the medi-
cal examination, under the Plan he would still have ,$2,000.00 face
value 1% Insurance plus a minimum benefit of the total premiums
patd for individual retirement annuity polic,les in excess of the $20.00
monthly income for the retirement plan. The Commissioner of, Inter-
nal Revenue has ruled that the cost of the life insurance benefit repre-
sents additional income to the employee.
Normal retirement date is the second day of January,
nearest age 65. Retirement is generally payable in the form of a
paid-np retirement income policy though the trustees have discretion-
ary powers and may exercise other options of payment depending
upon the amount of the benefit and other existing conditions. The trus-~
tees also have discretionary powers as to payment of survivorship
benefits on the employee’s death and consider the amount, number of
benefic.iaries. their personal sitnation and other pertinent factors in
deciding time .and manner of payments.
If the employer requests an employee to continue wor,king
after normal retirement date and the employee wishes to do so, bene-
fits will accumulate but will not be paid until retirement. Ifretirement
begins before normal retirement age due to physical ‘or mental dis-
ability, the retirement income will be the amount that can be ~procnred
at that time from the policies held by the trnstees providing the employer
consents.
If death occurs prior to retirement age, the ‘term’ life
insurance feature of the Plan provides funds for the beneficiary de-~.~
signated by the employee. After retirement age is’ reached, :most of :
the life insurance features of the Plan terminate unless the’employee
makes ‘premium payments. The exemption of the group life-insurance
proce,eds paid to the widow is not questioned.
1..
If the employee retires, in most cases he receives a monthly
retirement Income for the remainder of his llfe. If he dies ,prior to ~:
receiving 120 monthly retirement payments, his designated beneficiary
receives the difference between 120 monthly payments and the number
of payments received by the employee prior to his death‘ If no bene-
ficiary has been designated, the accrue~d benefits pass to the employee’s
estate. The employee may change ths beneficiary designation at.v$l.
In thls case the decedent had passed the age of 65 but had
not retired. The trustees had accumulated and held for the decedent
13 months of retirement benefits amounting to $1,560.00. ‘At the time
Hon. Robert S. Calvert, page 3 (Opinion No:S-177)
of his death the trustees were the owner~s ,and beneficiaries of the .:~ :~
policies above referred to. We quote the following~statement as’ to ~1,~~
the benefit payment set-up,for the’widow in this case: :
“$2,040.00 paid by the Trustees own5/10/55,~from the a e&al fund
referred to above, covering monthly payments~~due l/2 P‘54 thru
5/2/55.
*Payments beginning 6/2/55 and continuing through. 12/2/63:.
~Payor Monthly Payment Policy Proceeds
Bankers Life ~Company $ 18.33 $1,704.00
New England Mutual 80.80 7,658.61
Sup lementary Fund
7 Within Trust) 20.87 It
$12O.p0 ~.’ ‘~~
*From an existing uninvested fund not discounted
for future interest.?
Thus in common with many other pension plans., the bulk
of the benefits &ere directly financed through purchase of annuity
contracts from insurance companies. AS to the small portion of the
benefits which are attributable to the Supplementary Fund, we think
that. the same rules will apply insofar as taxability is concerned in.
that to the extent of these funds the employer is self-insured.
Article 7117, Vernon’s Civil Statutes, provides an exemption
for $40,000.00 *of the amount receivable by . . . beneficiaries as in-
,se
surance under policies taken out by the decedent upon his own life.. . .
If the survivorship benefits in this case dare the fruit of
annuity contr~acts, no exemption can be allowed because contracts of
annuity are not included In the term insurance. 3 Corpus Juris
Secundum, Annuities, 1375. 1376, SeS. 1. It is settled in Texas that
annuity contracts are not insurance contracts for the reason that an
annuity contract is essentially a form of investment and lacks the
character of “risk which is connoted in the business of writing in-
surance . w Daniel v. Life Insurance Company of Virginia, 102 S.W.2d
256, 260 (Tex. Civ. App. 1937); accord, Union Central Life Insurance
Company v. Mann, Attorney General, 138 Tex. 242. 158 S. W. Zd 477
m41) .
It has been held in various states ‘that benefits under annuity
contracts are not entitled to the insurance exemption from death taxes.
, .
Hon. Robert S. Calvert, page 4 (Opinion No. S-177)
Re Southern, 14 N. Y. S. 2d~l (App. Div. 1939); In re Bayer’s Estate,
26 A.2d 202 (Pa. Sup. 1942); In re Atkins Estate, 18 A.2d 45 (P
rogatlve Ct. of N. J., 1941) (affirmed in Central Hanover Bank &y,-’
Co. v. Martin, 23 A.2d 284 (N. J. Sup. lm affirmed in 28 A.2d 174
Ct. of Errors and Appeals of N. J. 1942) affirmed in 3 19 U.S. 94
1943).) See 150 A. L. R. 1285 for other authorities so holdlng.
Likewise, benefits from annuity contracts were not con-
sidered insurance for Federal estate tax purposes but were usually
taxed under Section 811(c) of the 1939 Code as transfers Lntended to
take effect at death. Old kolony Trust Co., 37 B, T. A. 435 (1938);
Comm. v. Wilder~s Estate, 118 F.2d 281 CC, C.A. 5th 1941, cert. den.
314 U . ,S1 ‘634). C omm. v. Clise, 122 F. Zd 998 (C.G.A. 9th 1941, cert.?
den; 3 15 U.S.‘821).
However, pension plan set-ups may differ in many respects
from ordinary annuity contracts and present different problems of tax-
abiliiy. There is authority for the proposition that although survivor-
ship benefits attributable to the employee’s contributions to a retirement
system are ln the nature of an annuity and not exempt from death taxes
as insurance, benefits attributable to’the employer’s contrlbntlon should
be treated as insurance proceeds and accorded the statutory exemption.
See cases dlscuksed in 150 A. L. R. 1292. ’
We have decided that under the better views; taken in the
cases hereinafter discussed, survivorship benefits under pen&on or
retirement systems do ;not constitute insurance and are not entitled
to the exemptton provided in Article 7117 therefor. The question
still remains, however, as to whether such benefits are taxable under
the provision of Article 7117 which subjects to tax “All property . . .
which shall pass . . . by deed, grant, sale or gift made or intended to
take effect in possession or enjoyment after the death of the grantors
or donor . . :”
In the present case, at the time of his death the decedent
had a vested right to at least 120 monthly retirement benefits. We.
regard as immat.eriaI the fact that this right had not vested at the time
he designated the beneficiary. He could have changed that designation
at any time after the interest in question vested. We think ais failure
to do so constituted an effective glft intended to take effect at his de+.
Moreover, we do not think the nature of tha interest as
vested or contingent should be the determinative factor of taxability
for inheritance tax purposes where survivorship benefits are involved.
In the first place different considerations affect taxability under an
inheritance tax statute which, in opposition to an estate tax statute,
levies the tax on the privilege of receiving rather than transferring
- .
. rc’
Hon. Roherf S. Calvert, page 5 (Opinion No. S-177)
property. Furthermore we do not view the employer’s contribntions
as a gratuity. Actually they are part of the cotiideration paid the
employee for his services and constitute additional compensation. RI
the final analysis, it is the employee’s performance of his servtces
under the terms of employment calling for the payment of the survivor-
ship benefits to the beneficiary at death as well as the designation of
that beneficiary which constitutes the effective gift to take effect at
death. For cases holding annuities payable to a widow or other bens-
ficiary of a decedent under retirement or pension systems, or em-
ployee profit sharing trusts, subject to inheritance tax, see: Borchard
gGmlel& 101 Atl. (2d) 497 (Corm. Sup. 1953); In re Bra&&t’s
.W. (2d) 164 (Mlch. Sup. 1955); Crnthers v. Neeld, 103
Arpd) 153 (N. J. Sup. 1954); In re Estate of Danieis’, 111 K %. (2d)
252 (Ohio Sup. 1953); and In re Dorsey’s Estate, 79 A tl. (2d) 2.59
(Pa. Sup. 1951).
Since we regard the employer~‘s coutributlons as additional
co~mpeusatlon to the employee, the survivorship beuefits in this case
result from the investment of co-unity funds; and only one-half of :
said benefits is subject to tax. Cf. Blackman v.. Bansen, 140 Tex. 536,
169 S.W.2d 962 (1943). This statement is based on the assamptfon ‘,.
that the decedent and the surviving spouse were married during the
entire time thgt w employer made contrihutious: Otherwise, of course,
only that portion of the benefits attributable to community income could
be split for inheritance tax purposes.
SUMMARY
Survivorship benefits accruing under a retirement plan
do not constitute ‘%s.urance~ and are not entitled to the ex-
emption provided therefor. Said benefits are subject:to
inheritance taxes, and only that portion attributable to com-
munity income can be split for inheritance tax pKrpOSeS,
APPROVED~: Yours very truly,
L. W. Gray JOHN BEN SBEPPERD
Taxation Division Attorney General
Mary K. Wall
Reviewer
J. A. Amis, Jr.
Reviewer
Davis Grant
Special Reviewer
twill D. Davis
Special Reviewer
Robert S. Trotti
First Assistant
John Ben Shepperd
Attorney General