Department of Taxation v. Fifth-Third Union Trust Co.

Hildebrant, P. J. This appeal on questions of law is from a final order of the Probate Court, holding that payment by the trustee of the proceeds of the profit sharing and pension trust of The Early & Daniel Company, credited to the account of the decedent, made to his widow and designated beneficiary, constituted a taxable succession under Section 5332 3 (b), General Code, as a transfer intended to take effect in possession or enjoyment at or after death. The pertinent part of Section 5332, General Code, reads: *124 “A tax is hereby levied upon the succession to any property passing * * * to or for the use of a person * * * in the following cases: ( * * * “3. When the succession is to property from a resident * * * by deed, grant, sale, assignment or gift, made without a valuable consideration substantially equivalent in money or money’s worth to the full value of such property: (* * * “(b) Intended to take effect in possession or enjoyment at or after such death.” The broad, general purpose of the trust is expressed in the modification agreement of May 28, 1947, as being to provide certain financial protection to employees after age* 65, their dependents and the objects of their bounty. Division II provides for yearly contribution to the fund, solely by the company, and for participating compensation by each of the employee participants by individual accounts in the aggregate fund. Paragraph 5 provides: “5. Company to have no interest in trust funds. Upon payment to the trustee by the company of any sums to be paid by the company hereunder, all rights or claims of the company of any nature or description thereto shall terminate, and the company shall have no rights, claims or demands whatsoever upon said trust fund or any cash or property contributed thereto except the right to a proper application thereof to and for the sole and exclusive benefit of the participating employees by the trustee under the provisions hereof.” Division III, in providing for modification, provides: “ * * * and provided further, that the vested' rights *125 of any participating employee shall not be affected thereby.” Division V specifically requires the trustee to keep a separate account of the respective shares of each participant allocated to him. Division VI, paragraph 5, provides for distribution on death and designation of beneficiaries as follows: “Each participating employee shall have the right to designate, on forms furnished for that purpose by the advisory committee or the trustee and filed with the trustee, a beneficiary or .beneficiaries to receive any amounts due to him hereunder in the event of his death. Such beneficiary designations, in order to be binding and operative, must be accepted or acknowledged in writing by the trustee, and they shall in no event include any general creditor of the employee. “Subject to the foregoing limitation, the designated beneficiary or beneficiaries may be changed at will, in the same manner and under the same procedure as the initial beneficiary designation is made. In the event of the death of any participating employee, the trustee shall pay to his named beneficiary, upon proper proof of death, his share of the trust assets, including any policies or contracts on his life as shown by the balance in his individual account. Should the participating employee fail to designate a beneficiary, or should the beneficiary predecease the employee, the aforementionéd payments are to be made to the executor or administrator of the estate of the deceased employe.” It has been suggested that since profit sharing and pension trusts are a comparatively new development, the question of the application of the inheritance tax laws thereto is new and novel in character with a dearth of authority in Ohio and elsewhere thereon. Conceding such trusts to be a recent development, we *126 call attention to the fact that the inheritance tax laws have been applied to numerous transfers intended to take effect in possession or enjoyment at or after death, passing otherwise than by will or the statutes of descent and distribution. Appellant’s contention is based upon a conception that decedent had no ownership in the fund at or prior to his death, so that the designation by him of a beneficiary did not amount to a “succession” within the meaning of the statute. Appellant claims thjs lack of ownership is shown by Division VI, paragraph 7 of the trust agreement, which is as follows: “Benefits Inalienable. No participating employee shall have any right in any manner to sell, assign, alienate, anticipate, encumber or pledge, either by voluntary or involuntary act of such employees or by operation of law, his beneficial interest in the trust prior to actual payment or delivery thereof to him. Likewise, such benefits shall not be subject to attachment, execution or garnishment under legal process prior to such actual payment or delivery.” This court views the above quoted provisions simply as a spendthrift provision designed to protect the purpose of the trust and not inconsistent with ownership by the participant, called the beneficiary in the language of the trust, and effective merely to postpone participants’ right to assume all the incidents of ownership which would accrue at age 65, including possession and control of the accumulated proceeds or an absolute right thereto, subject to the payment terms of the trust agreement. Appellee cited below and in this court the case of Dorsey Estate, 366 Pa., 557, 79 A. (2d), 259, affirming the case as reported in 69 Pa. D. & C., 327, wherein it is stated in the syllabus: *127 “Where it appeared that a pension fund was composed of contributions from the wages of employees and contributions from the profits of the employer and that an employee’s share of the entire fund belonged to him during his lifetime and could be withdrawn by him under specific conditions, or disposed of by him at his death, it was held that the portion of the deceased employee’s share of the fund which represented the employer’s contributions was subject to transfer inheritance tax under the Act of June 20, 1919, P. L. 521, as amended. ” Appellant would distinguish Dorsey’s Estate from the case at bar on the ground that the Pennsylvania decedent had the right during his lifetime to withdraw the funds and property credited to him. However, both Pennsylvania Courts in both the syllabus and opinion in each report refer not alone to the right of withdrawal, but, in the alternative, to the right to dispose of the fund at death, as the basis for the decision. It is stated in the Pennsylvania Supreme Court report, at page 559: “It is the contention of appellant that in designating her as beneficiary decedent was merely exercising a power of appointment over that portion of the share of the fund credited to him which represented contributions by the company. Such a contention would be valid only if the company’s contributions continued to be owned by the company and not by decedent, because obviously a power of appointment can exist only with reference to another’s property and not one’s own.” The contention is made here that decedent had no ownership in or right to alienate the amount credited to him in the fund, and did not, by designating a beneficiary, bring about a succession to property by “deed, grant, sale, assignment or gift.” *128 We point out that here the company had specifically relinquished all ownership in the fund. The trustee held bare legal title for the purpose of the trust and it seems to the court that the participating employees holding the only beneficial interest in the fund have to be the owners thereof at all times, as surely they will be on the happening of the stipulated events, inevitable with the running of time, which destroy the stipulation on postponement of exercise of dominion over and all the incidents of ownership in accordance with the terms of the trust. Under the facts here, designation of a beneficiary by the participating employee to receive his interest in the fund maturing on his death is ambulatory in character. The participant may change the designation, or revoke it entirely, and, on death, without a designated beneficiary, by the terms of the trust, the participant’s share becomes a part of his estate, subject to disposition by will or the laws of descent and distribution. We, therefore, consider that the participating employees have at all times had a vested interest in the accumulating fund, postponed only as to enjoyment and use by the terms of the trust, and that on death, the postponed rights of a participant become fixed, the prior designation of beneficiary loses its ambulatory character, and it becomes effective to require transfer and payment by the trustee of participant’s accumulated interest in the fund to the designated beneficiary who succeeds thereto. In 38 Ohio Jurisprudence, 1244, Section 428, with reference to the nature of the Ohio Inheritance Tax, it is stated: “The inheritance or succession tax, formerly known as the collateral inheritance tax, is not a tax upon the estate or upon the right to transmit, but is one upon the succession or right and privilege to receive; in *129 other words, the Ohio inheritance tax is a succession tax on the beneficial interest of each heir, legatee, devisee, or other beneficiary of a decedent’s estate.” In Tax Commission, ex rel. Price, Atty. Genl., v. Lamprecht, Admr., 107 Ohio St., 535, 140 N. E., 333, 31 A. L. R., 985, it is stated in the syllabus: “The Ohio state inheritance tax is a succession tax on the beneficial interest of each heir, legatee, devisee, or other beneficiary of a decedent’s estate, and in determining the value of the succession of any such beneficiary the amount of the federal estate tax should first be deducted, like other debts and expenses of administration.” Definitions contained in Section 5331, General Code, are: “1. The words ‘estate’ and ‘property’ include everything capable of ownership, or any interest therein or income therefrom, whether tangible or intangible, and, except as to real estate, whether within or without this state, which passes to any one person, institution or corporation, from any one person whether by a single succession or not. “2. ‘Succession’ means the passing of property in possession or enjoyment, present or future.” Under the broad definitions and all-inclusive lan-' guage of the inheritance tax statutes as construed by the Supreme Court, it seems clear that appellant should be classed as any other beneficiary of decedent’s estate within the intent of the Legislature in enacting the statutes here under consideration, and that payment to her of a participant’s interest in the fund as designated beneficiary is a taxable succession. The judgment is affirmed. Judgment affirmed. Hildebrant, P. J., and Matthews, J., concur in the syllabus, opinion and judgment.