Estate of Rankin

408 A.2d 1358, 487 Pa. 70, 1979 Pa. LEXIS 749

• Court: Supreme Court of Pennsylvania
• Decided: December 21, 1979
• Docket: No. 276
• Status: Published

Opinions

OPINION OF THE COURT

ROBERTS, Justice.

The Legislature specifically exempts from estate taxation payments made under various insurance and retirement plans. Section 316 of the Inheritance and Estate Tax Act,¹ like the § 303 exemption for insurance proceeds,² exempts from estate tax virtually all retirement plan benefits that are payable “to distributees designated by decedent or designated in accordance with the terms of the plan.” The § 316 exemption is unavailable, however, when, prior to death, a decedent had the “right to possess (including proprietary rights at termination of employment), enjoy, assign or anticipate the payments” made under the plan. At issue here is whether decedent, Wayne E. Rankin, had a “right to possess, enjoy, assign or anticipate” the benefits of his retirement plan when such benefits were available only on termination of employment or retirement. We hold that the proceeds of decedent’s retirement plan fall within § 316 and are not subject to inclusion in decedent’s taxable estate. Accordingly, we vacate the decree of the orphans’ court and remand with directions to exclude from the decedent’s taxable estate the amount of his accumulated contributions paid to beneficiaries designated in accordance with the plan.

Decedent died on October 10,1975, at age 59. For approximately 34 years before his death, he was employed by TWA, most recently as a vice-president. Six months prior to his death, decedent, due to illness, ceased active service. During those six months decedent received disability benefits under a separate TWÁ disability plan.

Decedent had contributed to the TWA Retirement Plan, but received no benefits before his death. Benefits under the Retirement Plan could be obtained only after retirement or termination of employment. Decedent neither retired nor terminated his employment before his death. Following his death the benefits under the plan were paid to his wife, the designated beneficiary.

By way of a supplemental appraisement the Commonwealth included in the decedent’s estate the amount of his accumulated contributions paid into the plan. On appeal, the orphans’ court, at audit, agreed with the Commonwealth and dismissed the appeal. An equally divided court, en banc, affirmed. Appeal to this Court followed.

Section 316 sets out the exemption from estate taxation.

“Payments under pension, stock-bonus, profit-sharing and retirement annuity plans, to distributees designated by decedent or designated in accordance with the terms of the plan, other than the estate of the decedent, are exempt from inheritance tax to the extent that decedent before his death did not otherwise have the right to possess (including proprietary rights at termination of employment), enjoy, assign or anticipate the payments so made.”³

In Huston Estate, 423 Pa. 620, 624, 225 A.2d 243, 245 (1967), this Court, interpreting § 316, held that the right of a decedent merely to designate a beneficiary of retirement plan proceeds was not a “right to possess or enjoy” because the right to designate did not constitute a “substantial present economic benefit.” Most recently, in Ravdin Estate, 484 Pa. 562, 400 A.2d 591 (1978), this Court held that benefits under a “Keogh Act” retirement plan were not subject to estate tax. There, as in Huston, the decedent before his death had the right only to designate a beneficiary. This Court expressly rejected the Commonwealth’s contention that the decedent’s access to the funds upon disability, death or retirement triggered estate taxability.⁴ Decedent here possessed no “substantial present economic benefit.” Rankin, like the decedents in Huston and Ravdin, had the right only to designate the beneficiary of the funds. Hence, the funds must be excluded from decedent’s taxable estate.

The Commonwealth maintains that the decedent’s ability to obtain retirement benefits upon termination of employment constituted a “substantial present economic benefit.” The Commonwealth, however, misinterprets § 316, as the section clearly states that, for estate tax to be imposed, a decedent must have a “right to possess” the retirement funds before death. Under the terms of this plan, a “right to possess” retirement benefits before termination of employment or retirement does not exist. Because decedent was neither retired nor no longer employed, he had no “right to possess” the funds.

The Commonwealth’s contention that by terminating his employment decedent would have had a “right to possess” his retirement fund contributions also ignores the substantiality and economically adverse consequences attendant upon such a decision. Indeed, such a decision would be especially unreasonable and disadvantageous here, where decedent would have forfeited all current disability and retirement benefits.⁵ In harmony with the overall legislative purpose of excluding retirement plan benefits from taxation, we conclude that the Legislature did not intend to subject these benefits to taxation. Here, the decedent had not terminated his employment, therefore he was not entitled to the return of his contributions. If decedent had acted unreasonably and terminated his employment he thereby would have forfeited substantial current disability and retirement benefits and would have received only the return of accumulated contributions.

Accordingly, the decree of the orphans’ court must be vacated and the case remanded with instructions to exclude from the taxable estate the return of decedent’s contributions under the retirement plan.

Decree vacated and remanded for proceedings consistent with this opinion. Each party pays own costs.

MANDERINO, J., did not participate in the consideration or decision of this case. EAGEN, C. J., filed a dissenting opinion.

1 . Act of June 15, 1961, P.L. 373, 72 P.S. § 2485-316, as amended January 20, 1968, P.L. (1967), 1031, § 1.

2 . 72 P.S. § 2485-303.

3 . The proceeds of this plan did not come within the second part of the § 316 exemption. That provision exempts proceeds “to the same extent as such payments are exempt from Federal estate tax. . . ” The TWA plan proceeds, because funded by employee contributions before retirement, were not exempted from federal estate tax. See I.R.C. § 2039(c).

4 . “[Dr. Ravdin] had a right to receive the fund only upon attaining age 59*/2, and retiring, or upon his earlier disability, neither of which events were subject to his control. The fund was not in his possession, and he could not assign it or anticipate payments under it; even severance of the partnership would not accelerate any payment to Dr. Ravdin from the fund. The fact that the employee’s interest in the fund was vested and non-forfeitable and that eventually the employee could if he wished take the payments due him in a lump sum, is not significant in light of all the circumstances of this case. Clearly, these features do not constitute a right to anticipation or enjoyment within the meaning of Section 316, nor a ‘substantial present economic benefit’ under the test of Huston Estate.”

Ravdin Estate, 484 Pa. 562, 571, 400 A.2d 591, 596 (1978).

5 . It must be noted that the structure of the TWA Plan discouraged termination before retirement. Only the employee’s accumulated contributions plus interest were recoverable in the event of early termination. Upon retirement, however, the employee would receive an annuity paid by both employee and employer contributions.