Court Opinion

ID: 4137098
Source: CourtListenerOpinion
Date Created: 2017-02-18 02:20:58.438901+00
Date Added: 2024-06-11T14:45:48.643174
License: Public Domain

Hon. Robert S. Calvert         Opinion No. S- 108
        Comptroller of Public Accounts
        Capitol Station                Re: Allowable inheritance tax
        Austin, Texas                       exemption f,or proceeds of
                                            insurance politics assigned
                                            by decedent and surviving
                                            spouse as collateral for a
        Denr Mr. Calvert:.                  loan,

!                    In connection with your request for an opinion on
        the above-captioned subject you have supplied us with the follow-
        ing facts.

;                     The decedent and his surviving wife had assigned
i   ?   certain insurance policies on decedent’s life to a bank as colla-
1       teral for a loan. The wife was the beneficiary of these policies.
        All premiums had been paid out of community funds.     The loan
        (constituting a community debt) was in the amount of $87,.500.00.
        The face amount of the po1icie.s was $110,21834.

4                   Subsequent to decedent’s death the insurance com-
        panics made full payments to the surviving spouse, as beneficiary,
        and the b&k, as assignee. jofntly.

                     In her fnberitance tax report the execrrtrix reported
        the decedent’s community one-half of the proceeds of tbe policies
        ($55,109.17) and claimed as to said proceeds the $40.000.00 ex-
        emption allowed by Article 7117, Vernon’s Civil Statutes. She al-
        so claimed one-half of tkw coaunonity debt ($43,750.00) as a de-
        duction under schedule D of the report, which itemises deductible
        debts due by the estate. Article 7125, V&S.

                     You take the position that the decedent’s one-half of
        ‘the communtty indebtedness secxred by ths policies should be de-
         ducted from the one-half of the proceeds reported by the taxpayer
         before applying the $40,000.00 exemption cud that said one-half of
        ‘the community indebtedness cannot be claimad as a deduction under
         schedule D.

                    In other words,   In computing the inheritance tax, the
              .
                   .

Hon. Robert S. Calvert.       page 2 (S-108)

taxpayer claims to be entitled to the full amount of the fnsurance
exemption and to a deduction of the entfre amount of the decedent%
one-half of the community debt under schedule D. You would de-
duct the amount of said debt from the reported insurance proceeda
befor.e applying tbe uemption, and not allow a further deduction
for said debt under schedule D.

                  The pertinent provisions     of Arhcle   7117 are the fol-
lowing:

             *All property within the jurisdiction of @Ia
      state, . . . and any interest therein, . . . including
      the proceeds of life insurance to the extent of the
      amount receivable by the executor or adminfstra-
      tor as insurance under policies taken out by the
      decedent upon his own life, and to the &tent of the
      excess over Forty Thousand Dollar~($40,000)of
      the amount receivable by all other beneficiaries as
      Ensurance under policies tahen out by the decedent
      upon his own life , . . . shall, upon passing . . . be
      subject to tax . . .*

             Absent the loan in question, the taxpayer would in-
disputably be entitled to the full amount of the $40,000, atmption.
Thus the ques,tion is whether the affect of tha assignment was to
destroy the exemption right to the utent of the amount of the ob-
ligation secured by the policies.

              In re O’Meara’s Estate, 81 k.Y.S.2d 388 (1948). dealt
with the question here premented and held that the entire proceeds
of a life insurance policy assigned as collateral for a loan ue con-
sidered in determining the insurance exemption allowed m&r the
New York statute and that the amount of a loan secured by the poli-
cy, befng a valid cIaim agafnst the true estate, is a proper dednc-
tlon. ln reaching thb conclnmion the court stated that the assign-
ment of the policy did not divest the assignor of hb general proper-
ty in the policy but merely created a lien in favor of the assignee
to the extent of the debt owed. The transaction between the dece-
dent and the bar& created a debt for which decedent was primarily
liable, which obligation upon his death became a debt of his estate,,
and therefor,e a proper ‘deduction. Under Snch cfrcumstances in
New Ydrk. the beneficiary may in certain instanc~es be subrogated
to the rights of the assignee and have a vafid claim against the es-
tate for the amount of the proceeds used to discharge the obligation.
At page 391, the court Said:

                 MThe existence of such right of a designated
          beneficiary to recover from the estate, upon pay-
          ment of the indebtedness secured by the policy, is
                                       I

Hon. Robert S. Calvert,   page 3 (S-108)

      wholly inconsistent with the apparent contention
      of the respondent that such portion of the proceeds
      of the policy in question as are subject to the as-
      signment is receivable by the executor     and not by
      the named beneficiary,     While it has been held that
      where, as here, the insured reserves the right to
      change the beneficiary, the rights of an assignee
      to whom the policy has been assigned for a valu-
      able consideration are superior to those of the
      named beneficiary, such holding is consistent with
      a recognition of all of the rights of the beneficiary,
      as against the estate. It follows, therefore, that al-
      though the decedent’s power to revoke the designa-
      tion of his wife made her intere,st as designee in-
      choate during his lifetime, such interest became
      vested upon the occurrence of his death subject on-
      ly to ths lien of the assignee.”

               The New York cases which laid the predicate for
 the decision in O’Meara’s Estate, supra, have their Texas coun-
 terpart in Ferracy v. Perry, 12 S.W.2d 651 (Tex.Civ.App. 1929,
 error ref.). The facts fn this case, so far as pertinent here, are
 as follows. Suit was instituted against Mrs. Minnie E. Perry and
 another by the trustee in bankruptcy of the estate of R. H. Moore,
 individually, and of the Terre11 Motor Company, a partnership
 composed of R. H. Moore and L. C. Perry, then deceased. The
 Terre11 Motor Company owed a bank $18317.60 and L. C. Per~ry
 individually owed the same bank $5,467.3 7. Various customers’
 notes and a deed of trust lien on certain reaRy (property of the
 Terre11 Motor Company) had been assigned to the bank to secnre
 the total indebtedness of $23,784.97. Also in 1925 and 1926, L.C.
 Perry, joined by his wife, Minnie E, Perry, assigned to the bank
 as collateral security -0 insurance policies on L. C. Perry’s
 life aggregating $25,000. Minnie E. Perry was designated as
 beneficiary of each policy. L. C. Perry died November 2, 1926.
.R. H. Moore, individually, and R. H. Moore as surviving partner
 of the Terre11 Motor Company were adjudged bankrupts on De-
 cember 29, 1926, on an involuntary petition of the creditors filed
 November 13, 1926.

             After Perry’s death on November 2, 1926, checks
totalling the amount of the policies were drawn by the insurance
company payable to the bank as assignee and to Minnie E. Perry,
beneficiary.   On December 14. 1926, Minnie E. Perry secured a
loan in the amount of $23.784.97 from another bank. This sum
Hon. Robert S, CaJvert, page 4 (S-108)

she then paid to the firut mentfoned bauh. which assigned and
transferred to her all of the notes and obligations of the Terre11
Motor Company together with all collateral then held by it in-
cluding the tiurance    policies.

              The court stated at page 634 that on Mr. Perry’s
death title to said policies and the proceeds thereof vested in Mrs.
Perry and became her separate property subject only to the rfghts
of the bank The policies, her separate property. occupied the po-
sition of a surety for the partnership obligation and the obligation
against L. C. Perry’8 estate alone. The fact that the bank claimed
the right to hold said policfes as collateral security for the total
amount of $23,784.97 did not change the fact that the policies and
the proceeds thereof were her separate property or deprive her
of the privilege of taking all necessary steps to protect that pro-
perty. At page 634 the court said:

            *The fact that it was borrowed by her is
      immaterial, and the fact that, as soon as she se-
      cured the release of the proceeds of the policies,
      she applied same as a credit on her note at the
      First National Bank f or said borrowed money, is
      also immaterial, for this money was also her sep-
      arate funds. In order to protect her maid separate
      property, she had the r ight, with her separate means,
      to pay the $23.784.97 due the State National Barth,
      and have said indebtedness, together with the colla-
      teral held by said banh to secure same, lasigned to
      her, and by so Qfng she was subrogated to all the
      rights of said bank fn respect to said tndebtedness
      and collateral securing same.”

            Ths adjudication of bankrnptcy wns mada December
29, 1926. At page 655, the court ad&

             *If all the collateral involved had been turned
      over to the trustee by the bank or by Mrs. Perry
      after it was assigned to her, and administered by
      the bankrupt courtr Mrs. Perry would hava had the
      right to intervene and requfre the putnertip      COI-
      lateral to be applfed to ‘the $I&3 17 prtnership   debt
      before any part of the fnsurance, her meparate pro-
      perty, was so applied, and, as the valne of the psrt-
      nership collateral was much less than fhe partner-
      ship debt, the estate would have profited nothing.”

            Applying the foregoing principles to the faCtI prUmt-
ed by your request we reach the following conclusions.    Upon the
Hon. Robert S. Calvert,   page 5 (S-108)

death of the decedent, the decedent’s community one-half of the
proceeds of the policies vested in his surviving wife, subject on-
ly to the rights of the bank. The one-half of the community debt
secured by the policies should not be deducted from said proceeds
before applying the $40,000.00 exemption. Said debt secured by       ’
the policies constitutes a claim against the estate and can there-
fore be claimed as a deduction under schedule D.

                             SUMMARY

             In computing inheritance taxes under submit-
      ted facts, the $40.000.00 exemption allowed by Ar-
      ,ticle 7117, V.C.S., should be deducted from the en-
      tire amount of decedent’s community one-half of the
       proceeds of life insurance policies payable to surviv-
       ing spouse but previously assigned as collateral for
      a loan. One-half of the community debt secured by
       said policies should be allowed as a deduction under
       schedule D.

                                   Yours very truly,

                               JOHN BEN SHEPPBRD
                                 Attorney General

                             BY
                                  Mce$:r??“-
                                         Assistant

MMC:mg

APPROVED

W. V. Geppert
Taxation Division

J. C. Davis,   Jr.
Reviewer

John Atchison
Reviewer

John Ben Shepperd
Attorney General