People v. Estate of Schilling ( 1976 )

Mr. JUSTICE GEORGE J. MORAN

delivered the opinion of the court:

The State appeals from a judgment of the circuit court of St. Clair County overruling its objection to an inheritance tax return filed by the administrator of the estate of Herbert Schilling.

The issue on appeal is whether the benefits paid to a widow by a union pension plan upon the death of her husband are subject to Illinois inheritance tax.

Herbert Schilling, a plumber, was a member of the Plumbers’ and Pipefitters’ Union, Local 101. He died on March 29,1974, when a house on which he was working collapsed. He was 54 years of age, and a resident of Illinois, when he died.

The probate division of the circuit court of St. Clair County appointed the Belleville National Savings Bank administrator of Schilling’s estate. The bank, as administrator, filed an inheritance tax return in the circuit court evaluating the property passing from Herbert Schilling to his widow, Ruth Schilling, at *20,435.61. The bank did not include in this amount *16,392.69 paid from the union pension fund to the widow. The bank calculated that a tax of *8.71 was due on the widow’s inheritance.

Under section 11 of the Inheritance Tax Act (Ill. Rev. Stat. 1975, ch. 120, par. 385), the State objected to the bank’s failure to list the payment from the pension fund as part of the widow’s inheritance, claiming that the amount Ruth Schilling had received from her husband was *36,828.30, on which a tax of *336.57, rather than *8.71, was due. At the hearing in the circuit court, the State introduced into evidence a copy of the pension plan and trust agreement of the Plumbers’ and Pipefitters’ Union, Local 101.

The provisions of the pension plan and trust agreement were as follows. The union’s pension fund was to consist solely of employer contributions. Plumbing contractors were to contribute 75<P to the fund for each regular, paid hour that the union’s members worked for them, and double that amount for each overtime hour. The contractors were to pay their contributions to the trustee of the pension fund.

The trustee was authorized to invest the employer contributions in whatever properties and securities it thought were “sound and suitable,” so long as at least 20% of the contribution were invested in United States government bonds. The inheritance tax return filed by the bank indicated that the money paid to Ruth Schilling from the pension fund came from a group annuity contract the trustee had purchased for the union’s members.

An individual’s interest in the pension fund was determined by his age and the length of his employment as a union member. At age 65, a member could retire and receive a pension for the rest of his life which equaled the number of hours worked by him for which his employers had contributed to the pension fund multiplied by a fixed percent per month. A pension board, consisting of three union men and three men representing employers, which administered the pension plan, could change the pension payments at any time upon the advice of an actuary.

If a pensioner died before the sum of all his pension payments equaled his nonforfeitable interest in the pension fund, the difference between that sum and his nonforfeitable interest was to be paid to his beneficiaries. The pension plan defined a union member’s nonforfeitable interest as the total contributions made to the fund by his employer for his hours of labor, if either of two conditions were met; that is, the interest became nonforfeitable when the union member worked 5,000 hours within five years during which contributions were payable to the fund by his employers, or when the union member reached age 65.

If a union member died before reaching age 65, his nonforfeitable interest in the pension fund was to be distributed to his beneficiaries. If a member quit his job or left the union before reaching age 65, he could not demand immediate payment of his nonforfeitable interest; instead, the pension board had the discretion to delay payment if it thought such delay would benefit the member.

The pension plan required each union member to designate his beneficiaries in writing, and to file this writing with the trustee and with the pension board. A member could change his beneficiaries by giving written notice to the trustee and pension board. Herbert Schilling designated his wife as the beneficiary under the pension plan.

The pension plan specifically stated that it did not create any contractual obligations between an employer and a union member, and did not impair any contractual obligations between the union and the employers. The plan also provided that the interest of a member and his beneficiaries in the pension fund could not be assigned by them or seized by their creditors.

The attorney for the estate stipulated at the hearing on the People’s objection that Herbert Schilling had worked 5,000 hours in five years during which his employers had contributed to the pension fund, so that his interest in the pension fund had become nonforfeitable even though he was less than 65 years of age when he died. The *16,392.69 paid to Ruth Schilling represented Herbert Schilling’s nonforfeitable interest in the pension fund. After the hearing, the circuit court overruled the State’s objection.

The State argues on appeal that the payment from the pension fund to the widow was a transfer of property from a decedent which was subject to the inheritance tax.

Section 1 of the Inheritance Tax Act (Ill. Rev. Stat. 1975, ch. 120, par. 375) states, in part:

“A tax is imposed upon the transfer of any property ° ° to

persons * * * not hereinafter exempted, in the following cases:

# # e

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,

A widow is entided to a *20,000 exemption from the inheritance tax on property she receives from her deceased husband. (111. Rev. Stat. 1975, ch. 120, par. 375.) Property worth more than *20,000 passed to Ruth Schilling from her husband, even if the amount paid to her by the pension plan is not regarded as having passed from her husband. Thus, no portion of the money paid from the pension fund to Ruth Schilling was exempt from the inheritance tax because of her relationship to the decedent. In other words, with respect to the payment by the pension plan, Ruth Schilling was “not hereinafter exempted” within the meaning of section 1 of the Inheritance Tax Act.

The widow’s right to receive this payment from the pension fund was not established until her husband’s death because her husband, while alive, could have named a different beneficiary at any time. Her interest in the pension fund, therefore became effective “in possession or enjoyment at or after such death” of her husband. Herbert Schilling’s designating her the beneficiary of his nonforfeitable interest showed that he intended this result. The widow’s interest was thus one “intended to take effect in possession or enjoyment at or after such death” within the meaning of section 1 of the Act.

The payment by the pension plan to the widow, consequently was taxable if it were a “transfer * * c of property ° ° ° by deed, grant, bargain, sale or gift from the decedent.” To support their assertion that the payment was such a transfer, the State relies upon People v. Schallerer, 12 Ill. 2d 240, 145 N.E.2d 585.

The Schallerer case involved a number of similar refund annuity contracts. Each annuity was purchased with money paid by the person who initially received the annuity income. Under each annuity, the difference between the purchaser’s investment, plus interest thereon, and the total income returned to the purchaser before he died was to be paid to beneficiaries the purchaser had selected. Each annuity gave the purchaser at least one of these powers: the power to change beneficiaries, to modify terms of the contract, and to withdraw part or all of the purchaser’s investment from the company which sold the annuity. All the purchasers died, and payments were made from the annuities to the purchasers’ beneficiaries.

In Schallerer, the Illinois Supreme Court determined that the designation of beneficiaries by each purchaser was a transfer of a contingent property interest in the annuity investment from the purchaser to his beneficiaries, which he intended should take effect in possession and enjoyment after his death. The court decided, for this reason, that the payments from the annuities to the beneficiaries were subject to the inheritance tax.

The State argues that the trustee’s investing a part of the pension fund in a group annuity contract, which supplied the payment to Herbert Schilling’s designated beneficiary, made the present case almost identical to Schallerer. Despite the State’s assertion, a significant difference exists between Schallerer and this case.

All the annuities in Schallerer had been purchased by decedents, during their lives, with their own assets. A principal reason for the decision in Schallerer was that the premiums or purchase prices of the annuities had been paid by the decedents. (See 12 Ill. 2d 240, 243,145 N.E.2d 585, 586.) In this case, however, Herbert Schilling contributed nothing to his union’s pension fund. The pension fund consisted solely of employer contributions. Although the employer contributions credited to Herbert Schilling were measured by the number of hours that he worked, this did not alter the nature of the contributions as being from his employers rather than from him. Even the Attorney General of Illinois, in his manual interpreting the Inheritance Tax Act, recognizes a distinction between employer and employee contributions to a pension fund. The manual states that

“Pension plans which are payable to a named beneficiary (not for the benefit of the estate) are taxable in two different ways; (1) If the decedent died before reaching retirement age, the inheritance tax will be applied against that portion of the total fund held for his benefit represented by the decedent’s contribution to the total contribution (employer and employee contributions) to the fund “ ° ” .” Attorney General of Illinois, Illinois Inheritance Tax Manual 22 (1970).

The payments by the decedents in Schallerer, together with the income that was returned to them from the payments, showed that they retained the enjoyment of the annuity investments during their lives. Thus the distributions from the annuities to the decedents’ beneficiaries were properly subjected to the inheritance tax. (See People v. Moses, 363 Ill. 423, 427, 2 N.E.2d 724, 726.) Because Herbert Schilling made no contributions to his union’s pension fund, however, we believe that his enjoyment of any part of the fund during his life could be established only by showing that he could demand immediate payment of that part of the fund to himself.

According to the pension plan, a union member acquired the right to demand payments from the pension fund when he reached age 65. Until he reached that age, he might request payments from the pension fund, but the pension board, in its discretion, could delay such payments. Herbert Schilling died when he was 54 years of age. He never acquired the right to demand immediate payments from the fund. Thus he never had the enjoyment of any part of the fund.

As a consequence, the payment of *16,392.69 to the widow from the pension fund was not a transfer of property from the decedent, and was not taxable under section 1 of the Inheritance Tax Act. (See People v. Moses; Valley Fidelity Bank & Trust Co. v. Benson (1969), 223Tenn. 503, 448 S.W.2d 394; People v. Egbert (1968), 164 Colo. 467, 436 P.2d 116.) This result agrees with an administrative interpretation of section 1 of the Act which is apparently of long standing and wide public acceptance, and which must be recognized as having great weight. Attorney General of Illinois, Illinois Inheritance Tax Manual 22 (1970); McNely v. Board of Education, 9 Ill. 2d 143, 150, 137 N.E.2d 63, 68.

The order of the circuit court of St. Clair County overruling the State’s objection to the inheritance tax return filed by the administrator of the estate of Herbert Schilling is affirmed.

Judgment affirmed.

KARNS, P. J., concurs.