IN RE: the ESTATE of Ida Anna RICHARTZ

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District Court of Appeal, First District, Division 2, California.

IN RE: the ESTATE of Ida Anna RICHARTZ, also known as Ida A. Richartz, Deceased. Robert C. KIRKWOOD, State Controller, Appellant and Petitioner, v. Margaret KELLY, Contestant and Respondent.

Civ. 15995.

Decided: February 23, 1955

James W. Hickey, Charles J. Barry and John D. O'Hara, San Francisco, for appellant. Graham & Morse and Francis L. Tetreault, San Francisco, for respondent.

The appellant Controller is appealing from an order dated May 27, 1953 entered in the Superior Court of the State of California in and for the City and County of San Francisco excluding from the properties of the decedent subject to inheritance tax the sum of $8,895.05 and fixing the total inheritance payable at the sum of $52.07 rather than the sum of $496.82. The dispute between the parties concerns a total tax of $444.75. The sum $8,895.05 is the sum, as stated by the Controller in his opening brief, which was paid to respondent, Margaret Kelly, as death benefits by the San Francisco and the State of California Retirement Systems.

An Agreed Statement on Appeal has been filed herein. This Statement on Appeal included a stipulation as to certain pertinent and material facts.

The stipulation is as follows:

(1) The portion of the San Francisco death benefit consisting of the equivalent of six months' compensation becomes payable immediately a teacher becomes a member of the system.

(2) No part of the total sum of $8,895.05 would have been payable to Mrs. Kelly if Miss Richartz' death had occurred after retirement.

(3) The San Francisco Teachers' Retirement Fund is supported one-half from tax revenues and one-half by contributions by the members. The amount of the respective contributions are adjusted from time to time as actuarial computations dictate to maintain the fund in solvent condition to meet all future liabilities as actuarially computed.

(4) Many private employers in the San Francisco area provide group life insurance for their employees. In some cases the premiums are paid by the employer; in some cases the premium cost is shared by employer and employee; in some cases the employer self-insures. In such private group life insurance programs the insurance is ‘term’ insurance and covers only during the period of employment. In the majority of such private group life insurance programs the amount of coverage is graduated by ranges to the level of the employee's earnings.

(5) In ‘term’ life insurance issued by commercial insurance companies it is not unusual, assuming identical yearly premium payments, for the amount payable on death to vary from year to year.

Respondent contends that the payment of the total death benefits of $8,895.05 to Mrs. Kelly as designated beneficiary of Miss Richartz under the State of California and the San Francisco retirement plans is exempt from inheritance taxation (1) as proceeds of a life insurance policy or policies under Sections 13721 and 13724 of the Revenue and Taxation Code and (2) as a ‘death benefit’ or other right accruing under a retirement law and exempt from taxation as provided in Section 31452 of the California Government Code.

The question as to whether the death benefits are exempt from State Inheritance Taxation under Section 31452 of the California Government Code has been determined by our Supreme Court in the In re Estate of Simpson, 43 Cal.2d 594, 275 P.2d 467. It was there held that this exemption clause only applies to property taxation and does not provide exemption from the Inheritance Tax.

In the In re Estate of Simpson the Supreme Court did not have the factual situation that is here presented by the stipulation of the parties, namely,—Were the payments in the nature of life insurance and as such exempt under Sections 13721–13724 of the Revenue and Taxation Code. Nor was this point presented to, or at issue in, the Supreme Court in the In re Estate of Simpson.

Appellant contends that the amounts payable to respondent are not in the nature of insurance; that no element of hazard or risk is involved. We can not agree. Here the named beneficiary of the teacher if said teacher died before retirement would receive a death benefit regardless of the teacher's length of service and regardless of the amount of the teacher's own contributions to the fund. Furthermore, each of the retirement systems and the funds set up thereunder are set up on an actuarial basis and it is the duty of the officials in charge of the retirement systems to keep the funds solvent. Both hazard and risk are involved based on the length of the teacher's life and service. See subdivisions (2) and (3) of Agreed Statement of Appeal.

Insurance has been defined as the substitution of a certain loss for an uncertain loss. The uncertainty here involved is the length of the teacher's life because the retirement systems here involved are based on actuarial experiences.

It is clear that the entire San Francisco death benefit of $8,048.55, as well as the state death benefit of $846.56, represent disbursements from retirement funds which must be considered in the actuarial computations made by the managers of the funds to determine the amount of contributions necessary to maintain the funds in the solvent condition.

It is our view that the inclusion in the formula for determining the amount of death benefits of an amount equivalent to the employee's contributions plus interest thereon, represents an additional life insurance risk assumed by the retirement plan and is in no sense merely an undertaking to return to the employee contributions plus interest.

In the In re Estate of Barr, 104 Cal.App.2d 506, 231 P.2d 876, the court distinguished between a Contract of Insurance and an Annuity Contract. It was there held that the risk assumed in an insurance policy is to pay on the insured's death and that the essence of such a Contract of Insurance requires that it cover a hazard and distribute or shift the risk involved.

On the other hand in an Annuity Contract there is no risk of loss assumed only an investment risk. Under such a contract on the death of the annuitant the company will pay to a beneficiary the portion of decedent's money which had not been repaid prior to death.

Applying these rules to the facts of the case at bar, it is clear that the death benefits here involved were not annuities but were insurance. There was no mere investment involved but the payment by both the teacher [decedent] and the county of contributions which vary in amount from time to time as actuarial computations dictate. Further the death benefit payable at the time of the teacher's death bears no relation to the amount of contributions paid in. Here is the hazard and shifting of and distribution of the risk referred to in the In re Estate of Barr, supra. On the death of the teacher the county was obligated to pay the equivalent of six months compensation plus contributions by the teacher to the named beneficiary and this without regard to the length of time the teacher was a member of the system. Clearly this bears none of the features of an annuity which only repays on death the amount of the contributions plus earned interest thereon.

The In re Estate of O'Donnell, 153 Misc. 480, 275 N.Y.S. 445, 447, concerned a death benefit payable to the estate of the decedent under the New York City retirement plan and if the death benefit constituted insurance it was subject to New York State Inheritance Tax since it was payable to the decedent's estate rather than to a designated beneficiary. The court held the amount of the death benefit subject to inheritance tax saying:

‘Since a benefit of the variety here received by the executor is in the nature of insurance payable to an estate, it is obvious that it would be taxable except for the charter provision quoted.’

The court then proceeded to hold that the charter provision in question (which had nothing to do with insurance) was not applicable.

In the In re Estate of Fitzsimmons, 158 Misc. 789, 287 N.Y.S. 171, 173, the question before the court was whether the total amount paid to the designated beneficiary was insurance (and exempt from inheritance taxation under a provision similar to that before this court). The court held that the total amount was a payment in the nature of an insurance payment and exempt from tax, saying: ‘That this particular system was enacted by provisions of the Greater New York Charter and not under section 229 of the Insurance Law, which authorizes pension and retirement systems, in no way detracts from its character as insurance. The moneys received by Florence R. Fitzsimmons from the Teachers' Retirement System of the City of New York are, therefore, exempt from taxation and the appeal of the State Tax Commission is denied.’

In Shaw v. Board of Administration, 109 Cal.App.2d 770, 241 P.2d 635, 637, the District Court of Appeal for the Second Appellate District in considering the rights of a previously divorced widow to death benefits under the California State Employees Retirement System held that the total death benefits payable under the retirement system were insurance, saying: ‘The provisions of the Retirement Law providing for a death benefit are in the nature of a contract of life insurance to be governed generally by the principles applicable to such contracts.’

We conclude that the proceeds in question came within the insurance exemptions provided by Section 13724 of the Revenue and Taxation Code and that the lower court's order allowing the exemption and fixing the inheritance tax is correct.

Order fixing inheritance tax affirmed.

KAUFMAN, Justice.

NOURSE, P.J., and DOOLING, J., concur.