Flournoy v. Howe

Douglas E. Schmidt, Howard M. Simon and Schramm, Raddue & Seed for Objector and Respondent.

OPINION

ROTH, P.J.

The State Controller and inheritance tax referee appeal from an order fixing the inheritance tax for the above named estate.

On December 11, 1965, Katherine L. Howe (Katherine), aged 63, executed an "Annuity Agreement" with her two sons, John Marshall Howe and Norman Ross Howe, pursuant to which she transferred in late April and early May of 1966, three parcels of encumbered real property to John and Norman in consideration of their joint and several promises to pay to her, commencing May 1, 1966, the monthly sum of $735.59 "during the full term of her natural life." Katherine died on May 25, 1969.

The stipulated facts disclose (1) the net value of the properties on the transfer date was $120,000; [1] (2) the net value of the properties on May 25, 1969, the date of Katherine's death, was $135,978; (3) John and Norman had the means to make the payments described in the annuity agreement without recourse to income generated by the transferred property; (4) the net rental of the three transferred properties, before income taxes and without allowance for depreciation,…

*951 Opinion

The State Controller and inheritance tax referee appeal from an order fixing the inheritance tax for the above named estate.

On December 11, 1965, Katherine L. Howe (Katherine), aged 63, executed an “Annuity Agreement” with her two sons, John Marshall Howe and Norman Ross Howe, pursuant to which she transferred in late April and early May of 1966, three parcels of encumbered real property to John and Norman in consideration of their joint and several promises to pay to her, commencing May 1, 1966, the monthly sum of $735.59 “during the full term of her natural life.” Katherine died on May 25, 1969.

The stipulated facts disclose (1) the net value of the properties on the transfer date was $ 120,000; 1 (2) the net value of the properties on May 25, 1969, the date of Katherine’s death, was $135,978; (3) John and Norman had the means to make the payments described in the annuity agreement without recourse to income generated by the transferred property; (4) the net rental of the three transferred properties, before income taxes and without allowance for depreciation, for the years 1966 through 1969, was as follows: 1966—$9,274; 1967—$10,928; 1968—$12,684; 1969—$14,785;…

— Respondents have apparently solved the problem of transferring property from one generation to the next without paying either gift or inheritance tax..

The method involves the transfer of property from parent to child in *956 return for a promise, the attribution of an inflated value to the child’s promise, and the assertion on the death of the parent that adequate and full consideration for the property was paid at the time of its transfer. In this case we are solemnly assured that an unsecured promise by private persons to pay a lifetime annuity is worth the same amount of money ($120,000) as a similar promise by Mutual Life Insurance Company of New York. Under this argument the unsecured promise of a private individual becomes equal in value to the promise of one of the largest insurance companies in the world. Wholly ignored is the far greater probability of the insurance company’s performance of its promise, brought about by its vastly superior financial resources, its stability and safety as an enterprise, its regulation as a life insurer by the State of New York, its legal requirements for reserves, its prudential limitations on investments, and its perpetual existence.…