Where the insured in life insurance policies, shortly before his death, established a revocable trust and designated the trustees as beneficiaries of the policies in place of the former beneficiaries, the proceeds of the policies paid to the trustees at his death were not taxable under G. L. c. 65. There was no merit in a contention that by reason of the change of beneficiaries in the circumstances the proceeds passed to the trustees by gift "made in contemplation of the [insured's] death."
PETITION IN EQUITY filed in the Probate Court for the county of Middlesex on March 26, 1964.
The case was reported by McMenimen, J.
John Barr Dolan for the petitioners.
Herbert E. Tucker, Jr., Assistant Attorney General, for the Commissioner of Corporations and Taxation.
CUTTER, J. John J. DeVincent (the insured) died at a hospital on April 23, 1958. While in the hospital, he executed on February 22, 1958, a revocable trust under which his wife was to receive the trust income for her life and to have a general power to dispose of part of the principal by her will. [Note 1] Subject to the wife's interests, the trust property was to be held primarily for the benefit of his children and more remote issue. [Note 2]
The insured placed $100 subject to this trust and shortly thereafter executed the necessary insurance company forms
to change the beneficiaries of certain life insurance policies on his life, so that the trustees of the revocable trust became the beneficiaries. Prior to these changes of beneficiary, the policies had all been payable, in the event of the insured's death, to his wife, and, if she predeceased him, in equal shares to his children.
After the insured's death, the trustees collected $156,099.66 of insurance proceeds. The executors of the insured's will (also executed on February 22, 1958; see New England Trust Co. v. Commissioner of Corps. & Taxn. 315 Mass. 639 , 647) reported the foregoing facts to the Massachusetts inheritance tax authorities, but claimed that the insurance proceeds were not subject to Massachusetts death taxes (see G. L. cc. 65, 65A). The commissioner on January 29, 1964, apparently treating the changes of beneficiary as made "in contemplation of the . . . [insured's] death" within G. L. c. 65, Section 1, made a determination of the value of the trust property and, on March 3, 1964, certified to the trustees a tax of $3,047.87 on the present interest in the trust property.
The trustees then filed this petition in equity (see G. L. [Ter. Ed.] c. 65, Section 30) to determine whether a tax under c. 65 was due with respect to the life insurance proceeds. The probate judge reserved and reported the case to this court without decision upon the pleadings and a statement of agreed facts.
In Tyler v. Treasurer & Recr. Gen. 226 Mass. 306 , 310, this court in 1917 considered the taxation of life insurance policy proceeds with particular reference (see p. 307) to the provision now found in G. L. c. 65, Section 1 (as amended through St. 1955, c. 596; see later amendment by St. 1961, c. 403) imposing an inheritance tax upon property passing by gift "made or intended to take effect . . . after . . . [a decedent's] death." This court applied (p. 309) the principle that tax laws are to be strictly construed and gave weight (p. 310) to "the practical construction put upon the law by those charged with . . . [its] enforcement . . . through many years." In an opinion by Chief Justice Rugg, it was
concluded "that sums received by beneficiaries in accordance with designations made in contracts of insurance are not subject to the succession tax."
In Welch v. Commissioner of Corps. & Taxn. 309 Mass. 293 (although it was pointed out, see pp. 294-295, that no contention was then made that policies had been "transferred . . . by the insured in contemplation of death"), it was held (pp. 296-300) that the proceeds of life insurance policies payable to trustees under a trust indenture for the benefit of others were not subject to tax under G. L. c. 65 upon the death of the insured. The case placed (p. 298) some emphasis upon the circumstance that "our taxing statutes have never contained any special provisions laying an excise based on the amounts receivable from life insurance by the beneficiary designated in the policy." The court (by Ronan, J.) went on to say, "There is no power to tax in the absence of a statute expressly granting such authority." [Note 3]
In Gregg v. Commissioner of Corps. & Taxn. 315 Mass. 704 , 711, this court (again speaking by Ronan, J.) "confined" the Tyler case "to its facts" and declined to extend its doctrine to a death benefit under an annuity contract. We do not regard that case as limiting the effect of the Tyler and Welch cases as applied to insurance policies.
In the nearly half a century since the Tyler case, there has obviously been reliance on that decision. Despite the limiting language of the Gregg case, the reasoning in the Tyler case and the Welch case was broad, and substantially proceeds on the principle that the payment of insurance proceeds at the death of the insured has not been subjected
to succession tax by the Legislature. Although the facts of these cases directly raised only the question whether insurance proceeds could be taxed (under the general language of what is now c. 65, Section 1) as gifts to take effect in possession at or after the insured's death, most of what was said (especially in the Tyler case) seems appropriate to exclude a tax upon such insurance proceeds as a "gift . . . made in contemplation of the death of the . . . donor." As was pointed out in the Welch case ( 309 Mass. 293 , at pp. 299-300), the Legislature has refrained from adopting legislation to change the effect of the Tyler case. [Note 4]
It was said in the Welch case, at pp. 298-299, "that the concept of transfers within both the Federal and the State taxing statutes has been greatly broadened since the decision in the Tyler case" in 1917. We need not decide whether, as a matter of first impression, the Tyler case would have been decided differently today. That there has been a change of tax concepts does not seem to us to be sufficient reason for changing by judicial decision the long standing interpretation of what is now G. L. c. 65, Section 1. After this lapse of time, we think that, if any change is to be made in the application of G. L. c. 65 to the proceeds of life insurance policies, that change should be made by the Legislature rather than by a new interpretation of the statute by a court.
A decree is to be entered in the Probate Court (1) declaring that the proceeds of the insurance policies on the insured's life are not subject to tax under G. L. c. 65, and (2) ordering that the tax certified with respect to such proceeds be abated.
[Note 1] The trust appears to have been designed in large measure to adapt the insured's disposition of the proceeds of his life insurance policies to the "marital deduction" for Federal estate tax. See Int. Rev. Code of 1954, Section 2056.
[Note 2] The trust was subject to an overall termination provision plainly intended to prevent violation of the rule against perpetuities. See Second Bank-State St. Trust Co. v. Second Bank-State St. Trust Co. 335 Mass. 407 , 410.
[Note 3] It may be significant that the application of the Federal estate tax to the proceeds of life insurance policies is almost entirely a development which has taken place since the decision of the Tyler case in 1917. See Paul, Federal Estate and Gift Taxation, Section 10.02 et seq. See also H. R. Rep. No. 767, 65th Cong. 2d Sess. p. 32 (C. V. 1939-1, part. 2, pp. 101-102); Lewellyn v. Frick, 268 U.S. 238, 250-252; Chase Natl. Bank v. United States, 278 U.S. 327, 333-339; Bingham v. United States, 296 U.S. 211, 216. Compare Revenue Act of 1916, Section 202, 39 Stat. 777-778, with Revenue Act of 1918, Section 402 (f), 40 Stat. 1097-1098. For the present explicit form of the Federal estate tax on insurance proceeds, see Int. Rev. Code of 1954, Section 2042.
[Note 4] See Newhall, Settlement of Estates (4th ed.) Section 142, pp. 397-398, Section 475. See also Nichols, Taxation in Massachusetts (3d ed.) 684. Compare two recent text books, Barrett and Bailey, Taxation, Section 1037, and Lombard, Probate Law and Practice, Sections 1319, 2167, which discuss (perhaps because of departmental action like that leading to the present litigation) the possibility of efforts to impose a tax under c. 65 upon insurance proceeds, in circumstances similar to those here present, as a gift in contemplation of death.