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The People v. Schallerer

OPINION FILED SEPTEMBER 20, 1957

THE PEOPLE OF THE STATE OF ILLINOIS, APPELLANT,

v.

MATILDA H. SCHALLERER, EXRX., ET AL., APPELLEES.



APPEAL from the County Court of Cook County; the Hon. OTTO KERNER, Judge, presiding.

MR. JUSTICE HERSHEY DELIVERED THE OPINION OF THE COURT:

Rehearing denied November 19, 1957.

Three cases from the county court of Cook County have been consolidated for argument and opinion. Each involves the following question arising under the Illinois Inheritance Tax Act: where a person purchases an annuity contract providing for a fixed annual stipend for a definite period of time or for as long as he should live, with a provision that if he die before receiving the stipulated amount (i.e., purchase price plus interest) then the difference between that sum and the annuities received is to be paid to named beneficiaries other than his estate, upon the death of such person does such payment of the balance, or a portion thereof remaining, measure an Illinois inheritance tax?

The county court answered the question in the negative, and the State appeals. Revenue being involved, this court has jurisdiction on direct appeal.

There are 20 refund annuity contracts involved in this litigation, all in substantially the same form. The decedent in each instance purchased the contract from an insurance company, which agreed to make stipulated payments to the purchaser during his lifetime, and upon his death to pay any balance remaining to designated beneficiaries. Under some of the policies the stipulated payments would cease prior to death if the purchase price plus interest was returned, whereas in others the company was obligated to continue those payments for the lifetime of the purchaser regardless of how long the latter lived. In each, however, any amount remaining upon the death of the purchaser was to be paid to beneficiaries designated by him, and the purchaser retained the right to withdraw the cash surrender value at any time or to change the beneficiaries.

Originally enacted in 1895, the Illinois Inheritance Tax Act has remained substantially unchanged since 1909. The pertinent provision here is section 1, which provides, inter alia, as follows: "A tax shall be and is hereby imposed upon the transfer of any property * * * in the following cases: * * * 3. When the transfer is of property made by a resident * * * by deed, grant, bargain, sale or gift, * * * intended to take effect in possession or enjoyment at or after such death * * *." Ill. Rev. Stat. 1951, chap. 120, par. 375.

The crux of the matter is whether the creation of these refund annuities and the subsequent payments to the named beneficiaries constitute "transfer of any property" "intended to take effect in possession or enjoyment" at or after death. An analysis of the transactions and legal relationships created thereby is determinative of the issue.

In each of the annuities here in question the premium or purchase price was paid, contributed, or deposited by the decedent. Each annuity contract provided for payments of annuities to the decedent purchaser with a provision that if the original investment or the original investment plus accruals was not returned to the decedent during his lifetime, the sum retained by the company should be payable in annuities or a lump sum to the named beneficiaries or their estates. In each of the annuity contracts the purchasing decedent retained one or more of the following powers: to modify or revoke the provisions of the contract, to withdraw in whole or part the funds retained by the company, or to revoke or change the designation of beneficiaries.

A refund annuity, such as we have in the instant situation, is a contract whereby the annuitant protects himself, during his life, by making an investment to assure annual payments to himself during his life. If he dies prematurely, his beneficiaries receive the undistributed portion of the investment. (In re Atkins' Estate, 129 N.J. Eq. 186, 18 A.2d 45; Garos v. State Tax Com. 99 N.H. 319.) The monies refunded to the beneficiaries in each of these refund annuity situations are only that undistributed portion of the decedent's original investment or deposit plus accruals, monies belonging to decedent during his lifetime and not acquired by virtue of the occurrence of a stated risk.

This court has determined that a transfer intended to take effect in possession or enjoyment at or after death is a disposition in which the donor retains the economic interest or enjoyment of the property during his life. (People v. Moses, 363 Ill. 423.) Upon the designation of beneficiaries in these refund annuity contracts a transfer occurred. (In re Bayer's Estate, 154 Pa. 230, 26 A.2d 202; In re Atkins' Estate, 129 N.J. Eq. 186, 18 A.2d 45.) The transfer did not then vest in possession or enjoyment. Only upon the death of the decedent purchaser of or investor in the refund annuity, did the interest of the beneficiary ripen into possession or enjoyment. It was a transfer or passing of a contingent interest in the annuity investment in which the decedent retained control of or an interest in the property transferred in one or more respects. It is therefore clear that in the refund annuities which are here in question we find (1) a transfer of property, (2) by grant or gift, (3) intended to take effect in possession or enjoyment at or after the death of the grantor or donor. Thus these refund annuities clearly fit within the specified limits and requirements of section 1 of the Illinois Inheritance Tax Act and are taxable transfers. Numerous of our sister States, having essentially similar statutes, have arrived at the same conclusion. In re Atkins' Estate, 129 N.J. Eq. 186, 18 A.2d 45; Gregg v. Commissioner, 315 Mass. 704, 54 N.E.2d 169; Garos v. State Tax Com. 99 N.H. 319; In re Bayer's Estate, 154 Pa. 230, 26 A.2d 202.

Contrary to the repeated assertions of appellees, this is a case of first impression in Illinois, notwithstanding People v. United Christian Missionary Society, reported at 341 Ill. 251, which they contend determines this issue. That case, however, did not involve a refund annuity contract. There an immediate executed gift of $27,000 was made to the Society, subject only to the provision that upon cessation of the annuity $1000 thereof should be set apart for a certain fund. The Society agreed to pay an annuity of $1620 to the donor for life and then to her two cousins jointly for life, should they survive her, or to the surviving one of them: "This annuity, however, was not to be paid out of this donation or the interest thereon. It was a separate and distinct obligation of the Society and became effective as of the date of the gift and not upon the death of the donor. * * * The rights of the two cousins to the annuity were also fixed during the lifetime of the donor, notwithstanding the fact that their actual possession and enjoyment of the annuity must await the donor's death." (People v. United Christian Missionary Society, 341 Ill. 251.) We there further held, citing People v. McCormick, 327 Ill. 547, that if the right of possession or enjoyment passes at the time of the execution of the instrument the transfer is not taxable notwithstanding the actual possession and enjoyment must await the donor's death. The donor retained no control over the fund donated, she retained no power to revoke or cancel all or any part of the gift or transfer, she retained no power to modify or change beneficiaries, and such transfer was therefore not taxable. That annuity was not a refund annuity such as is now in issue. Hence the United Christian Missionary case has no application to our immediate situation, and is not determinative of the issues here.

One of the decedents, Erick Gunnard Lindquist, owned a certain refund annuity issued October 20, 1947, by the Great Western Life Assurance Company, for a single premium of $50,000. By its terms, beginning October 20, 1955, he was to receive $350 per month, but if he died prior to first payment (which he did) the company would pay the greater of the single premium or the cash surrender value to the beneficiary named. On August 10, 1949, the said decedent entered into an antenuptial agreement with Doris I. Hanson, now his widow, wherein she waived and relinquished all her right, title, claim, or interest in or to the real and personal estate of this decedent except her right to receive payments from the aforesaid annuity in which decedent named her as beneficiary to receive refund annuities therefrom after his death.

Appellee in No. 34366 insists that the proceeds of the Great Western Life Assurance Company refund annuity contract payable to the beneficiary, Doris Lindquist, so named in performance of the antenuptial contract, is not a taxable transfer under the Illinois Inheritance Tax Act. The appellant insists, however, that the proceeds from said contract are taxable for the reason that the payments under said contract are made in fulfillment of an antenuptial agreement, the consideration for which was a release by the beneficiary of her marital rights, including dower.

Dower rights are taxable under the act and hence anything received in substitution therefor is taxable. (Billings v. People, 189 Ill. 472; People v. Estate of Field, 248 Ill. 147.) In our opinion, the mere fact that marital rights, including dower, are released by an antenuptial contract, — or the existence of the antenuptial contract itself — is not determinative of the issues here. The refund annuity contract, received by the beneficiary, is similar in character to those heretofore discussed. The refund annuity contract as amended to name Doris Lindquist as beneficiary, in consideration for the release of her marital rights and in performance of the antenuptial contract, transferred only a contingent interest to receive the payments due thereunder at the death of the donor and did not transfer a vested ...


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