Opinion
As Modified on Denial of Rehearing Dec. 14, 1972.
Opinions on pages 96-112 omitted.
For Opinion on Hearing, see 112 Cal.Rptr. 199, 518 P.2d 1151.
[105 Cal.Rptr. 472]Myron Siedorf, Chief Inheritance Tax Atty., Walter H. Miller, Asst. Chief Inheritance Tax Atty., and Edwin Rosenthal, Asst. Inheritance Tax Atty., for appellant.
Jones & Bednar and William E. Burby, La Jolla, and Philip C. Jones, Los Angeles, for objector and respondent.
AISO, Associate Justice.
The Controller of the State of California appeals from an order fixing the inheritance tax in the estate of Susan L. Nunn, deceased, and a judgment (order) sustaining objections to the inheritance tax appraiser's report which included in said decedent's estate the whole of trust assets ($329,372) of a trust set up by a decree of distribution in the estate of George Lee Nunn, her predeceased husband. (Prob.Code, § 1240.) We have concluded that the orders appealed from should be reversed with directions to the probate court to order the recalculation of the assets includible in Susan's estate and the inheritance tax payable thereon for the reasons which we set forth below.
This was in addition to her separate property ($202,463) and property she held in joint tenancy with a third party ($108,438). This litigation involves only the trust assets.
The Facts
On April 24, 1952, George Lee Nunn and his wife, Susan L. Nunn, executed a joint and mutual will. It declared that there were no children or issue of any predeceased children and that all of their property was community property, except for certain exceptions noted--the husband's separate property amounting to only $1,700 cash. Each bequeathed to the survivor a life estate in his or her net estate with the power to invade the corpus for the life tenant's use and need' as such life tenant 'may determine.' Subject to the survivor's life interest coupled with the power to invade corpus, each made gifts of the remainders naming certain identical remaindermen. The will provided that the gift of the life estate with power to invade corpus was in lieu of any and all community property and any other interest which the survivor had in the estate of the other and that the execution of the joint will constituted express consents and waivers with regard to this arrangement. Paragraph [105 Cal.Rptr. 473] Twelfth of the will provides: 'GEORGE LEE NUNN and SUSAN LINTHICUM NUNN hereby jointly and mutually agree with each other, in consideration of our respective promises and of out reciprocal devices and bequests herein contained, that his Will shall not be revoked, changed or amended by us without the written consent of the other, and they further agree that after the demise of one of the parties hereto, the survivor shall not in any event revoke, change or amend this Will. They each further agree that the survivor will seriously endeavor to use only the income from the combined estates of husband and wife for the support, maintenance, care and comfort of said survivor, including a comfortable dwelling, good food and raiment, health and/or hospital service, travel and congenial diversions. This is not intended however to limit the right to invade the corpus given to said survivor as a part of his or her life estate, and pursuant to such right the survivor shall have the right to use all or any part of the corpus for the purposes hereinabove stated should circumstances develop which, in the discretion of said survivor, should require or justify such use of corpus.' (Italics added.)
We capsulize or extract only those portions of the will pertinent to this litigation. We omit recitation of minor specific devises and refer to the numerous persons named as remaindermen collectively as such.
The relevant portions of the will up to this point read:
The husband died on August 9, 1959, and the will, which also contained counterparts corresponding to the provisions summarized with reference to the wife, was admitted to probate. The decree of distribution distributed the husband's net estate to the Beverly Hills National Bank and Trust Company as Trustee, with the net income to be distributed periodically to the surviving spouse during her lifetime, subject to the following: 'Any net income of the Trust Estate which SUSAN L. NUNN shall not require, need or want which in her judgment she shall deem to be in excess of that necessary for her support, maintenance, care, comfort, the providing of a comfortable dwelling, good food and raiment, health or hospital services, travel and congenial diversions shall be accumulated by the Trustee and . . . reinvested in sound corporate stocks . . ..'
It stated in part that the distribution was 'in pursuance of and according to the Last Will of said deceased [George Lee Nunn], and particularly paragraphs Third, Fourth and Fifth thereof . . .' The Fourth and Fifth pertain to remainder interest. See Preceding footnote 3 for provisions of the Third paragraph.
The decree further provided: 'SUSAN L. NUNN shall have and is hereby given the right during her natural life to invade the corpus of the Trust Estate for her own use and need as she may determine.' (Italics added.)
The decree also authorized the trustee: 'If at any time in the absolute discretion of the Trustee SUSAN L. NUNN should because of disability be in need of funds for her proper care, maintenance and support, the Trustee may in its absolute discretion [105 Cal.Rptr. 474] pay or apply for the benefit of SUSAN L. NUNN in addition to the payments hereinabove provided for her such amounts from the principal of the Trust Estate up to the whole thereof as the Trustec may from time to time deem necessary or advisable for her use and benefit.' (Italics added.)
The trial court after an evidentiary hearing in the instant case found, inter alia: 'Federal estate taxes of $17,517.44 . . . and inheritance taxes covering the life estate of Susan and the remainder interests of $10,399.22 were . . . paid from George's estate.' (Counsel for both sides agreed at time of oral argument before this court that the respective interests taxed were based upon the whole of the community property, i. e., inclusive of Susan's interest therein.) 'From the date George's trust was funded until her death on April 7, 1969 Susan, the life tenant of George's trust, received only the income from it.' 'The consideration given by Susan for the life interest which she retained in the property subject to the trust was greater in value than such life interest.'
The trial court concluded that Susan received only a life estate and that the named remaindermen received vested interests from George's estate; that Susan's power to invade the corpus was only a special power of appointment within the meaning of Revenue and Taxation Code section 13692 subdivision (a); that when the joint and mutual will and the contract contained therein became binding upon Susan, it was not taxable under sections 13641 and 13644; and that none of the trust assets was taxable in Susan's estate.
All references to sections refer to the Revenue and Taxation Code unless otherwise indicated.
Section 13641 provides: 'If a transfer specified in this article was made during lifetime by a decedent, for a consideration in money or money's worth, but the transfer was not a bona fide sale for an adequate and full consideration in money or money's worth, the amount of the transfer subject to this part shall be the excess of
Controller's Contentions
The Controller argues alternatively: (1) Susan's power of appointment was a general power taxable upon her death under section 13696, or (2) even if the power to [105 Cal.Rptr. 475] invade the trust corpus was a limited special power, so much of the trust assets which is traceable to Susan's community interest is nonetheless taxable under sections 13641 and 13644.
Section 13696 provides in part relevant here: 'If at the time of his death a decedent has a general power of appointment with respect to property, the exercise of the power is subject to this part as a transfer of the property from the decedent to the person to whom the property is appointed and the decedent's failure to exercise the power is subject to this part as a transfer of the property from the decedent to the person to whom the property passes by virtue of the nonexercise of the power. . . .'
Power of Appointment is Special
The trial court found that the life tenant's power to invade the corpus was a limited special power within the meaning of section 13692 subdivision (a), namely, a power to invade the trust corpus for her own benefit limited by an ascertainable standard relating to her health, support, and maintenance. We think that this conclusion was proper and that the words, 'care and comfort of said survivor, including a comfortable dwelling, good food and raiment, . . . travel and congenial diversions' do not enlarge upon the limitation that the invasion be limited to the needs and use for her health, support, and maintenance. In this case, the same result is reached whether we look to the decree of distribution as construing the will (Estate of Callnon (1969) 70 Cal.2d 150, 156, 74 Cal.Rptr. 250, 449 P.2d 186; Estate of Cooper (1969) 274 Cal.App.2d 70, 75, 78 Cal.Rptr. 740), to the will to supply matters omitted or left ambiguous in the decree which incorporates provisions of the will (Estate of Callnon, supra, 70 Cal.2d at p. 157, 74 Cal.Rptr. 250, 449 P.2d 186; Estate of Cooper, supra), ar determine the attributes of the power by resort to appropriate federal authorities, in absence of apposite California guides, upon the theory that the decree of distribution failed to determine the taxable character or nature of the power. (Estate of Morse (1970) 9 Cal.App.3d 411, 414, 415 88 Cal.Rptr. 52.)
The fair over-all import synthesized from various provisions of the decree of distribution which set up the trust is that the life tenant's power to invade the corpus of the trust was limited to her needs for her own proper care, support, maintenance, and health. The trustee was even authorized to accumulate portions from the income which the life tenant would determine to be in excess of her needs for support, maintenance, and preservation of her health.
Referring back to the joint and mutual will, which also contained a contract, it was agreed that the survivor would seriously endeavor to limit the expenses for support, maintenance, care and comfort of the survivor, including a comfortable dwelling, good food and raiment, health and/or hospital service, travel and congenial diversions, to the income from the combined estates of husband and wife.
The federal regulation implementing 26 U.S.C. section 2041(b)(1)(A), which is the statute upon which section 13692 of our Revenue and Taxation Code was modelled, is most illuminating. It provides: 'A power to consume, invade, or appropriate income or corpus, or both, for the benefit of the decedent which is limited by an ascertainable standard relating to the health, . . . support, or maintenance of the decedent is, by reason of section 2041(b)(1)(A), not a general power of appointment. A power is limited by such a standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). As used in this subparagraph, the words 'support' and 'maintenance' are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard. Examples of powers which are limited by the requisite standard are powers exercisable for the holder's 'support,' 'support in reasonable comfort,' 'maintenance in health and reasonable comfort,' 'support in his accustomed manner of living,' 'education, including college and professional education,' 'health,' and 'medical, dental, hospital and nursing expenses and expenses of invalidism.' In determining whether a power is limited by anascertainable [105 Cal.Rptr. 476] standard, ti is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.' (Italics added.) (2 Fed.Tax.Reg. (1972) § 20.2041-1(c)(2), p. 964.) For cases construing ambiguous posers as ascertainable limited powers in comport with these regulations see: e. g., Security-Peoples Trust Co. v. United States (D.C.W.D.Pa. 1965) 238 F.Supp. 40, 53; Pittsfield Nat. Bank v. United States (D.C.Mass.1960) 181 F.Supp. 851, 853, 854; Barritt v. Tomlinson (D.C.S.D.Fla.1955) 129 F.Supp. 642, 646. Compare: United States v. De Bonchamps (9 Cir. 1960) 278 F.2d 127, 130. Lehman v. United States (5 Cir. 1971) 448 F.2d 1318 seemingly holding to the contrary stressed the fact that the words 'comfort' and 'welfare' so infected the words 'support' and 'maintenance' as to cause the power in that case to fall within the tenor of the sentence of Estate Tax Regulation, supra, which states: 'A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard.'
Returning to the questionable phrases in the instant case, the words 'care and comfort of said survivor, including a comfortable dwelling, good food and raiment, . . . travel and congenial diversions' are of like import as 'support in reasonable comfort,' 'maintenance in health and reasonable comfort,' or 'support his accustomed manner of living.' In the context of the ambient circumstances of this case, 'travel' may be subsumed under education or health, and 'congenial diversions' under health. In sum, the life tenant's power to invade the trust corpus in this case was a limited special power within the meaning of sections 13692 and 13693 because it was one with an ascertainable standard relating to health, education, support, or maintenance of the life tenant.
Portion of Trust Assets Taxable in Susan's Estate
We do not agree either with the inheritance tax appraiser's report which put the whole of the trust assets into the surviving wife's estate nor with the trial court holding that none of such trust assets are taxable in her estate. It is our view that the differential in dollar value's worth between her one-half community interest in George's estate and the dollar value of her life interest in the income from the combined residual community interest (both the husband's and wife's community shares), is taxable under sections 13641 and 13644. (Estate of Brubaker (1971) 21 Cal.App.3d 768, 98 Cal.Rptr. 762; cf. Estate of Carson (1965) 234 Cal.App.2d 516, 524, 44 Cal.Rptr. 360; see concurring opinion of Judge Hufstedler in In re Estate of Bomash (9 Cir. 1970) 432 F.2d 308, 314.) We are at a loss as to how the trial court concluded that none of the trust assets is to be included in Susan's estate in face of its finding that 'the consideration given by Susan for the life interest which she retained in the property subject to the trust was greater in value than such life interest.' This can refer only to her one-half community interest, because her separate property did not pass into the trust estate.
It is settled that in ascertaining whether there was an equivalent exchange in money or money's worth, it is the pragmatic economic result which is the controlling consideration. Except in the unusual situation of an undertaking to support an invalid child presented in Estate of Vai (1966) 65 Cal.2d 144, 154-156, 52 Cal.Rptr. 705, 417 P.2d 161, the technical concepts of contracts are not apropos. In the recent case of Estate of Bielec (1972) 8 Cal.3d 213, 220, 221-222, 104 Cal.Rptr. 516, 521, 502 P.2d 12, 17, Chief Justice Wright states: 'The concept of adequate consideration as it is used in the Revenue and Taxation Code provisions has a meaning quite distinct from that of the same term as it is used in the laws of contract. . . . To be adequate under the taxing statute consideration must be equivalent in value to the full value of that for which it is exchanged. [105 Cal.Rptr. 477] If it is less than than equal it or a portion thereof is subjected to imposition of a tax. (Rev. & Tax.Code, § 13641.) . . . Thus section 13641 compels an application of standards considerably more stringent than those associated with a determination of contractual inforceability. (Estate of Craycroft, supra, 191 Cal.App.2d 436, 444-445, 12 Cal.Rptr. 552.) We have heretofore held and now adhere to the rule that a transfer may be deemed to have been made for an adequate and full consideration only when it is sufficient to support a demand for specific performance. (Estate of Brix (1919) 181 Cal. 667, 674-675, 186 P. 135.) [Fn. omitted.]'
The fact that at the time of the husband's demise, there was paid an inheritance tax based upon an erroneous calculation using the combined value of both the husband's and wife's community interest, does not preclude the Controller from collecting the proper amount of tax payable upon Susan's death (Estate of Kingmen (1972) 26 Cal.App.3d 220, 103 Cal.Rptr. 208; In re Estate of Bomash, supra, 432 F.2d 308), especially if credit is allowed for any overpayment which occurred at the time of George's death (Estate of Kingman, supra).
The cause should be remanded to the trial court so that an amended inheritance tax report based upon the views hereinabove set forth can be prepared and a proper order affixing the proper amount of inheritance tax payable made by the trial court.
Disposition
The order fixing inheritance tax and the judgment (order) sustaining objections to the inheritance appraiser's report are reversed and the cause remanded for a redetermination of the inheritance tax in accordance with the views set forth in the foregoing opinion; each side to bear its own costs upon appeal.
KAUS, P. J., and ASHBY, J., concur.
'FIRST: We declare that we are husband and wife, and that we have no children or issue of any deceased children; and that all of our property is community property under the California law with the exception of the following assets which are the separate property of SUSAN LINTHICUM NUNN, to wit: 1182 shares of R. J. Reynolds Tobacco Co., new Class B stock, three diamond rings and one sapphire and diamond bracelet; and with the exception of $1,700.00 which is the separate property of GEORGE LEE NUNN.
'. . .
'THIRD: In the event that my wife survives me, then I, GEORGE LEE NUNN, do hereby give, devise and bequeath to my wife, SUSNA LINTHICUM NUNN, a life estate in all the rest, residue and remainder of my estate, of every kind and description, whether real, personal or mixed and wheresoever situated, during the term of her natural life, with the right on the part of my wife to invade the corpus for her own use and need as she may determine. (Italics added.)
'. . .
'SEVENTH: The life estate with power to invade the corpus, given to my wife, SUSAN LINTHICUM NUNN herein, is in lieu of all her community property rights and all other rights of inheritance from my estate and my wife, by signing this joint and mutual will, expressly consents and agrees to the distribution made to her by me herein and hereby waives all rights which she may otherwise have to community property and all other rights of inheritance from my estate except as in this Will provided.'
Section 13692 in part pertinent provides: "General power of appointment' means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate, provided that the following shall not be deemed to be general powers of appointment:
'(a) A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent.'
Section 13693 reads: "Limited power of appointment' means a power which does not qualify under the preceding section as a general power of appointment.'
'(a) The value, at the date of the transferor's death, of the property transferred, over
'(b) An amount equal to the same proportion of the value, at the time of the transferor's death, of the property transferred which the consideration received in money or money's worth for the property transferred bears to the value, at the date of transfer, of the property transferred.'
Section 13644 provides: 'A transfer conforming to Section 13641 and under which the transferor expressly or impliedly reserves for his life an income or interest in the property transferred is a transfer subject to [inheritance tax]. Such a reservation shall be conclusively presumed where the transferor retains the possession or enjoyment of the income or interest in the property until his death.'