Appeal, No. 7, Jan. T., 1944, from decree of C. P. Delaware Co., March T., 1934, No. 638, in the matter of the Trust Estate of B. Frank Townsend, Jr., Trust for Henry Lister Townsend. Decree affirmed.

Audit of account of trustees inter vivos.

The facts are stated in the opinion by ERVIN, J., of the court below, as follows:

The sole issue to be determined at the present time is whether or not the Commonwealth of Pennsylvania is entitled to a transfer inheritance tax. We must hold that it is not.

On September 19, 1922, B. Frank Townsend, Jr., created what is commonly referred to as a funded life insurance trust. On that day, by an irrevocable deed or agreement of trust, he granted and conveyed unto the Media Title and Trust Company certain securities, having at that time a value of $22,861.98, to be held in trust, the income to be used for the payment of the premiums upon a certain policy of life insurance in the sum of $10,000.00, dated August 28, 1922, issued by Union Central Life Insurance Company on the life of the settlor, and the balance of said income, if any, to be added to the principal of the trust until the settlor's death, but if at any time during the lifetime of the settlor, unless he should personally supply the deficiency, the said income should not be sufficient to pay the premiums, then the trustee was empowered and directed to sell sufficient of said securities for the purpose of paying said premiums; that upon the death of the settlor the proceeds of the insurance policy were to be added to the trust and the income from the then existing corpus paid unto Henry L. Townsend for and during his natural life under a spendthrift clause arrangement; that upon the death of the said Henry L. Townsend the income therefrom was to be divided share and share alike, among Mary E. Townsend, Lucille F. Townsend, Frances C. Townsend, Philip W. Townsend and William D. Townsend, five other children of the settlor, until the death of the survivor of them; upon the death of the survivor of the above named children, the trustee was directed to convert the trust estate to cash and divide the same according to the intestate laws of the State of Pennsylvania as if the settlor had at that time died intestate. The said deed of trust further provided that the trustee was to hold the securities in its discretion and that the same were to be changed, sold or converted only during the lifetime of the settlor after due consultation with him and any change to be made was to be subject to his approval.

It is further provided that the settlor thereby waived, relinquished and set over all his interest in said securities and in the said insurance policy for the purposes of said trust, without any power of revocation or cancellation on his part.

The estate of the settlor was named as the beneficiary of the said insurance policy and the premium for the first year was paid by the said settlor. The settlor reserved the right to change the beneficiary of the policy and, on September 9, 1922, he changed the beneficiary to "Media Title and Trust Company, of Media, Pennsylvania, its successors or assigns, Trustee for Henry L. Townsend, son of the insured, this son having been born June 26, 1905."

On July 24, 1936, the court appointed the Wayne Title and Trust Company and G. Martin Brill Watts as Substituted Trustees under the said deed of trust and, on September 3, 1936, the beneficiary of said policy was changed to the said substituted trustees.

The settlor died on February 12, 1942, the original life tenant, Henry L. Townsend, having predeceased him by about two weeks.

The present account was filed by the substituted trustees and was confirmed nisi on October 2, 1942. The petition for distribution accompanying the account states: "E. The fund now before the Court is not subject to the payment of inheritance tax to the State of Pennsylvania."

On October 5, 1942, the following exception was filed by the Commonwealth of Pennsylvania: "And now, to wit: this 3rd day of October, A.D. 1942, comes the Commonwealth of Pennsylvania, by R. Paul Lessy, Esquire, Attorney for the Department of Justice of the Commonwealth of Pennsylvania, and excepts to the provisions of the Petition for Distribution in order that it may be determined whether there is any inheritance tax due upon the said Trust estate."

On December 24, 1942, at the request of the attorney for the accountant, who stated that the decision of the issues raised by the exceptions may be deferred pending an appeal to the Supreme Court, the account as corrected was confirmed absolutely "and the fund now in the hands of the accountant is awarded to the Wayne Title and Trust Company and William D. Townsend, as substituted trustees, for further administration, subject, however, to the payment of any inheritance tax which may be found owing to the Commonwealth of Pennsylvania."

The account showed principal in the sum of $35,568.38, which apparently included (1) the original value of the securities of $22,861.98, (2) the overplus of income of $2,806.40, and (3) the proceeds of the life insurance policy of $10,000.00.

The Commonwealth contends that each of these funds is subject to the inheritance tax. The accountant contends that none of them are. The transfer inheritance tax act in force at the time the trust was created was the Act of June 20, 1919, P. L. 521. This act was held to be constitutional except insofar, if at all, as it endeavors to tax gifts which took full effect in possession and enjoyment prior to the death of the grantor: Spangler's Estate, 281 Pa. 118.

It was also held in that case that where the language in that act was similar to the language used in earlier collateral inheritance tax acts the authorities construing such language were pertinent. Section 1(c) of the Act of 1919, as last amended by the Act of July 14, 1936, P. L. 44, provides, inter alia, as follows: "A tax shall be and is hereby imposed upon the transfer of any property, real or personal, or of any interest therein or income therefrom, in trust or otherwise, to persons or corporations in the following cases: * * * (c) When the transfer is of property made by a resident * * * by deed, grant, bargain, sale or gift, made in contemplation of the death of the grantor, vendor, or donor, or intended to take effect in possession or enjoyment at or after such death."

This language is similar to that used in the first collateral inheritance tax act of April 7, 1826, P. L. 227. The leading case under that act was Reish v. Commonwealth, 106 Pa. 521. There it was said: "The policy of the law will not permit the owner of an estate to defeat the plain provisions of the collateral inheritance law, by any device which secures to him, for life, the income, profits, and enjoyment thereof; it must be by such a conveyance as parts with the possession, the title, and the enjoyment in the grantor's life time."

This principle of law is still in force today. All of the cases considering this question were concerned merely with the application of that rule to the facts involved. In the present case there can be no doubt but that the settlor parted with possession and title during his lifetime. The question involved is whether or not he parted with the enjoyment thereof during his lifetime.

It does not appear to be open for argument that the settlor did not retain any right to enjoyment in the overplus of the annual income beyond the amount necessary to pay for the premiums on the life insurance policy. Such income was to be added to the corpus of the trust, which in no event was to be available to him. None of the Pennsylvania cases construing the various inheritance tax acts have dealt with this particular situation, but it was considered by the Supreme Court of Illinois in People v. Northern Trust Co., 330 Ill. 238, 161 N.E. 525. In that case the grantor provided that during her lifetime the entire net income from the trust estate should be accumulated and added to the principal, and at her death said principal was to be paid to certain children or their issue. The court there held that the postponement of the enjoyment did not bring the transfers within the statute and subject them to tax for the reason that the interests, though not in the actual enjoyment of the beneficiaries, were vested in them at the date of the execution of the trust.

In the present case the interest of the beneficiaries was also vested, even though it was vested in the class rather than in certain named individuals. It was held in Overbrook Heights B. L. v. Wilson, 333 Pa. 449, that the fact that the interest of a person in a decedent's estate may be decreased or enlarged by the addition to or the death of some of the members of the class of which he is a member does not make his estate a contingent one, and that where a gift or distribution appears to be postponed for the convenience of the fund or property, or where the gift is postponed only to let in some other interest, the vesting will not be deferred until the period in question.

Therefore, we held that the overplus of income and the portion of the principal from which it was derived is clearly not subject to the inheritance tax.

The Commonwealth strenuously argues, however, that the portion of the principal from which the income was derived with which to pay insurance premiums is subject to the tax because the use of such income from the trust fund relieved him personally from meeting his obligation to pay such premiums and, therefore, he had not parted with the enjoyment of that portion of the fund during his lifetime. The Commonwealth admits that this question was squarely raised and decided contrary to its present contention in Logan's Estate, 99 Pa. Super. 432. However, it desires to have this question reconsidered in the light of an opinion of the Supreme Court of the United States in the case of Burnet v. Wells, 289 U.S. 670, 53 S.Ct. 761, 77 L.Ed. 1439, which was decided subsequent to the decision in Logan's Estate. There are three reasons why we are unable to approve the Commonwealth's contention. In the first place, a lower court has no right to ignore the latest decision of the Superior Court of this Commonwealth on an issue which has been squarely decided. Until that decision should be over-ruled by the Superior Court itself or over-ruled by the Supreme Court, it is still the law of this Commonwealth, regardless of the decisions of any other court in the country, including the Federal courts.

In the second place, the issue involved in the Burnet case was entirely different from the one before us. In that case the Revenue Acts of 1924 and 1926 specifically provided that "Where any part of the income of a trust is or may be applied to the payment of premiums upon policies on the life of the grantor * * * such part of the income of the trust shall be included in computing the net income of the grantor."

The sole question involved, therefore, was whether such acts were constitutional, it being argued that they were in violation of the due process clause of the Constitution. The majority opinion, written by the late Mr. Justice CARDOZO, held that the acts were constitutional. It pointed out that this clause was inserted in order to prevent evasion of income taxes by means of trusts, and specifically discussed the various relationships existing between the insured, the insurer and the beneficiaries of life insurance trusts, and discusses the peace of mind and happiness of a dutiful parent who has provided for his children by means of life insurance. The opinion states: "It will be a vain effort at persuasion to argue to the average man that a trust created by a father to pay premiums on life policies for the use of sons and daughters, is not a benefit to the one who will have to pay the premiums if the policies are not to lapse."

A strong dissenting opinion of four members of the court was written by Mr. Justice SUTHERLAND, which argued that there should be something more tangible than a purpose to perform a social duty, or the recognition of a moral claim as distinguished from a legal obligation in order to justify the contention that the settlor retained the enjoyment of the trust.

Finally, we feel that the decision in Logan's Estate, supra, is in line with the previous decisions of the Supreme Court in construing inheritance tax acts. In a long line of cases commencing with Reish v. Commonwealth, supra, to Ramsey Estates, 342 Pa. 103; it has been held that where a transfer is made under a trust agreement which provides that the income shall be payable to the donor during his life, the real transfer and enjoyment of the property does not occur until his death and is therefore taxable. On the other hand, it has been held that the Act of 1919, as amended, does not apply to transfers in which the settlor has divested himself absolutely of all title, possession and enjoyment of the property, not at his death, but at the time of the execution of the instrument creating the trust. Thus, in Dolan's Estate, 279 Pa. 583, where the beneficiaries received the income from the trust from the date of the transfer, it was held not to be taxable, notwithstanding the fact that the settlor had reserved the right of revocation, when in fact she died without having exercised that right, the court holding that the grantees took the estate with the possibility of its being divested and that the right to revoke unexercised was a dead thing. In the present case the settlor had no right to receive any of the principal or income during his lifetime. On the other hand, the beneficiaries were not entitled to receive any of the income during his lifetime. It is, therefore, an intermediate case but, as we have pointed out above, the beneficiaries' rights became vested at the time of the transfer and it was only the right of possession which was postponed until his death. The fact that the settlor reserved the right to approve investments of the trust did not amount to a retention of sufficient control to render the fund taxable: Dolan's Estate, supra.

Therefore, we hold that the portion of the principal from which the income was derived with which to pay insurance premiums is not subject to the payment of inheritance tax.

A different issue is involved in considering the question as to whether the proceeds of the life insurance policy are taxable. Section 1 (a) of the Act of 1919, as amended by the Act of March 28, 1929, P. L. 118, provides: "(d) * * * The proceeds of policies of life insurance, payable otherwise than to the estate of the insured, and whether paid directly by the insurer to beneficiaries designated in the policies, or to a trustee designated therein, and held, managed, and distributed by such trustee to or for the benefit of such persons or classes of persons under such plan and in such estates as may have been prescribed by the insured under agreement with such trustee, shall not be included in imposing any tax under this section."

The Commonwealth contends that this fund does not come within the foregoing exception because the actual beneficiaries of the fund were not named in the lifetime of the settlor, citing Myers's Estate, 309 Pa. 581. However, there is a decided distinction between the facts of that case and those of the present trust. In Myers's Estate the deed of trust provided that the trustees should pay the income and the principal of the fund in accordance with provisions set forth in the settlor's will. Therefore, it was clear that the ultimate beneficiaries could be changed or the amounts given to each of them altered by the testator by the simple means of making a new will or adding a codicil to his existing will. Thus it was clear that the testator would have complete control of the trust until the day of his death. In the present case, however, the testator has designated a class of persons which, while the exact membership thereof cannot be determined at the present time, will ultimately be determined by operation of law and not by any further action of the settlor. It was held in McGovran's Estate, 190 Pa. 375, that a bequest of the residue of an estate to executors to be distributed "under the intestate laws" is a gift to a class.

Therefore, we hold that the proceeds of the life insurance policy are not subject to inheritance tax. It follows that the exceptions of the Commonwealth of Pennsylvania must be dismissed.

Commonwealth appealed.