Docket No. 9373.
Paul G. Reilly, Esq., for the petitioners. James C. Maddox, Esq., for the respondent.
In 1922 the decedent created three irrevocable trusts, the income of which was to be paid absolutely to the named beneficiary. The trustees, consisting of the decedent and the Corn Exchange Bank, were empowered in their sole discretion if in their opinion the net income ‘be insufficient for the proper maintenance and support of said beneficiary, (to) apply to such purposes so much of the respective part of the principal from which said income is derived as they may deem proper.‘ Each trust also contained a ‘spendthrift‘ provision, giving the trustees discretionary power in the event of the occurrence of any of the specified contingencies. Held, the corpora of the respective trusts were not includible in the decedent's gross estate for estate tax purposes under either section 811(c) or section 811(d)(2) of the Internal Revenue Code. Estate of Milton J. Budlong, 7 T.C. 756; Jennings v. Smith, 161 Fed. (2d) 74, followed. Paul G. Reilly, Esq., for the petitioners. James C. Maddox, Esq., for the respondent.
This proceeding involves Federal estate tax liability in the amount of $189,687.92. The only issue submitted is whether the corpora of three trusts created by the decedent are includible in his gross estate. A stipulation of facts was filed and certain oral testimony presented. The stipulated facts are incorporated as our findings of fact. Other facts are found from the evidence.
FINDINGS OF FACT.
The decedent, Walter E. Frew, a resident of the County and State of New York, died on May 19, 1941. His last will and testament was admitted to probate. Petitioners herein are the duly qualified executors. Petitioners filed a Federal estate tax return for decedent's estate with the collector of internal revenue for the third district of New York on August 19, 1942.
On February 27, 1922, decedent created three separate irrevocable trusts for the benefit of his brother, George H. Frew, and his brother's wife, Lessie C. Frew; for his daughter, Helen Frew Peters; and for his son-in-law, Ralph Peters, Jr., respectively. In each of the trusts, the named trustees were the decedent and the Corn Exchange Bank, which has subsequently changed its name to Corn Exchange Bank Trust Co.
The material provisions of the three trusts may be summarized as follows:
(a) In the trust created for George H. and Lessie C. Frew, decedent's brother and sister-in-law, net income was payable in equal quarterly installments to them and the survivor of them, and upon the death of the survivor, the principal and accumulations were payable to beneficiaries' son, if living. If he was not living, then such income was to go to the son's children and the issue of any deceased child. If there were none such, then it was to go to the decedent's daughter, and if she was not living, then to her children and the next of kin of any deceased child. If there were none such, then it was to go to the next of kin of the decedent's daughter.
(b) The provision for invasion of the corpus reads as follows:
FOURTH: The Trustees may, in their sole discretion, if at any time or times the net income payable to any beneficiary shall, in their opinion, be insufficient for the proper maintenance and support of said beneficiary, apply to such purposes so much of the respective part of the principal from which said income is derived as they may deem proper, anything hereinabove to the contrary notwithstanding.
(c) The ‘spendthrift‘ provisions are as follows:
FIFTH: No legal or beneficial estate, right, title, interest, claim, or demand created in connection with the principal, or income of the trust hereinabove established or the property, the subject thereof, shall be subject to sale, assignment, transfer, pledge, mortgage, or anticipation, or be otherwise impaired or affected by any beneficiary or subject or liable to any court or process, judgment, or decree, at law or in equity, but any and every of the same shall belong, and be conveyable, assignable, transferable, deliverable, and payable solely, exclusively, and personally to the beneficiary entitled at the time to take the same under the terms of this instrument and whose personal receipt shall be a condition precedent to the right to claim, demand, or receive any such conveyance, assignment, transfer, delivery, or payment thereof. Every such estate, right, title, claim, and demand, and every right to any conveyance, assignment, transfer, or delivery of any part of such principal or income to any beneficiary or other person purporting to claim under, or in the right of such beneficiary, or otherwise, shall at once cease and determine upon any attempted or executed conveyance, sale, assignment, transfer, pledge, mortgage, anticipation, or other impairment of the same by act or deed of any such beneficiary or order, judgment, or decree of any court or judicial officer whatsoever.
In case any right, title, or interest of any beneficiary otherwise entitled under the terms of this instrument to any portion of the income or of the principal of the said trust fund shall cease and determine by reason of any provision of this paragraph, the Trustees may, in their sole discretion, apply, from time to time, to the support, maintenance, care, or education of the said beneficiary so much as they may deem proper of the income and/or principal, as the case may be, of the said trust fund.
(d) The tenth paragraph recites that the trust is created for the purpose of making certain financial provisions for the beneficiaries and with the purpose and intent to divest the grantor of any and all beneficial interest in, and of all possession, dominion, and control of the property, except such as he retained as cotrustee.
Second and Third Trusts.
(e) The trust for decedent's daughter, Helen Frew Peters, provided for the payment of the income in equal quarterly installments to the daughter during her life, and provided that, upon her death, the corpus and all accumulations were to be held in trust and the income paid in equal parts to her children during the life of each child, and upon the death of the child the corpus of the child's part and all accumulations were to be transferred to the next kin of such child. But if no children of the daughter should survive her, then the corpus of the property was to be paid over to the son-in-law, but, if he be dead, then to such persons as the daughter should appoint by will, and, upon failure to appoint, to the next of kin of the daughter.
(f) The trust for decedent's son-in-law, Ralph Peters, Jr., provided for the payment of the income to him for his life, and for the payment of the income to his and the decedent's daughter's children upon the son-in-law's death. Upon the death of each of such children, the corpus and any accumulations were to be paid to the next of kin of such child, but if no child should survive the son-in-law, then the corpus of the trust and all accumulations were to be paid to decedent's daughter, if living, but if not, to the persons the son-in-law should appoint by will, or, in default of such appointment, to the next of kin of the son-in-law.
(g) The fifth, sixth, and eleventh paragraphs of the trusts for Helen Frew Peters and for Ralph Peters, Jr., are the same as the fourth, fifth, and tenth paragraphs of the George H. and Lessie C. Frew trust.
No demand was made on the trustees to invade the principal, and no payment to any income beneficiary was made from the principal of the trust funds.
At the time of the creation of such trusts the decedent was 58 years of age. He was then president of the Corn Exchange Bank, which office he continued to hold until 1929. He then became chairman of the board of directors, which office he held at the time of his death. In the Federal estate tax return filed by the petitioners, the corpora of the three trusts were reported, but it was contended they were not includible in decedent's gross estate. In his deficiency notice the respondent included the full value of such trusts as of the option valuation date. The explanation given was that the corpora were includible ‘pursuant to the provisions of Sections 811(c) and 811(d) of the Internal Revenue Code.‘
The dominant motive of the decedent in creating the 1922 trusts was his desire to see the beneficiaries enjoy the property during his lifetime, and the transfers were not made in contemplation of death.
One of the reasons assigned by respondent in the deficiency notice for the inclusion of the corpora of the three trusts in decedent's gross estate is that they were made in contemplation of death within the purview of section 811(c) of the Internal Revenue Code. On the trial the respondent conceded no question of the decedent's health was involved. On brief, he advances no argument that the transfers were testamentary in character. Assuming there has been no abandonment of this issue, we think the oral testimony adduced and the instruments themselves clearly indicate the transfers were motivated by purposes associated with life rather than in anticipation of death. We have so found as a fact. Allen v. Trust Co. of Georgia, 326 U.S. 630. We, therefore, consider the respondent's further contention that the trust corpora are includible under section 811(d)(2) of the code.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, * * *(d) REVOCABLE TRANSFERS.—(2) TRANSFERS ON OR PRIOR TO JUNE 22, 1936.— To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke * * *
The only other contention of respondent is that the transfers were incomplete (1) by reason of the power vested in the trustees, in their sole discretion, if the income of the trust ‘in their opinion be insufficient for the proper maintenance and support‘ of the income beneficiary, to apply so much of the respective part of the principal as the trustees might deem proper, and (2) by reason of the ‘spendthrift‘ provision. In substance, the respondent's argument is that the provision for the invasion of the corpus vesting sole discretion in the trustees, essentially and substantially the decedent, was the equivalent of a power to alter and amend the trusts. He supports this contention by the argument that a discretionary power of the character here involved is not subject to the control of the New York courts of equity. In re Van Decar, 49 Misc. 39; 98 N.Y.S. 309; In re Hilton, 174 App.Div. 193; 160 N.Y.S. 55; In re Van Zandt's Will, 231 App.Div. 381; 247 N.Y.S. 441; In re Cowen's Estate, 148 Misc. 35; 265 N.Y.S. 40; In re Littman's Estate, 165 Misc. 285; 300 N.Y.S. 398. Petitioners, however, contend that, where the right to invade the corpus is limited and restricted by fixed external standards, the rule adopted by the New York courts is that the invasion in such case is subject to their control. In re Martin's Will, 269 N.Y. 305; 199 N.E. 491. As Surrogate Foley points out in the Littman case, supra, where the discretion is to apply so much of the income only as is needed for the support of the beneficiary, the courts are restricted in their jurisdiction to those cases where ‘bad faith, abuse of discretion, arbitrary action, fraud or diversion‘ is shown. But where, as here, the authorization to invade the principal is dependent on the needs of the income beneficiary, such courts may act without limitation. We are convinced that this is the New York rule and it is applicable here. Respondent concedes that, if this is so, the corpora of the trusts are not includible in the decedent's gross estate. We are not willing, however, to rest our decision on such concession. In any event, we think the issue here is controlled by the rationale of Estate of Milton J. Budlong, 7 T.C. 756, and cases therein cited, and Jennings v. Smith, 161 Fed.(2d) 74. In the latter case the Circuit Court of Appeals for the Second Circuit refers approvingly to the Budlong case, supra, and reaches a similar conclusion. It reversed the decision of the District Court as to the correctness of which we expressed doubt in the Budlong case. As we said in that case:
* * * In such cases as Blunt v. Kelly, 131 Fed.(2d) 632; Estate of Margaret P. Gallois, 4 T.C. 480; Estate of Ida Rosenwasser, 5 T.C. 1043; and Malcolm D. Champlin, Administrator, 6 T.C. 280, where the trust instruments provided for the invasion of the corpus for the benefit of the grantor and some clear standard, such as ‘maintenance and support,‘ ‘support, care, or benefit,‘ ‘maintenance and comfort,‘ or ‘comfort and maintenance,‘ the trust corpus has been held taxable to the estate of the deceased grantor on the theory that he had an enforceable right to the corpus if need therefore should arise. On the other hand, where the trust instrument provided for invasion for the benefit of the grantor, yet no ‘external standard‘ was established and the invasion of the corpus rested in the absolute and uncontrolled discretion of the trustee, it has been held that the trust corpus is not taxable to the estate of the deceased grantor, because during his life he had no enforceable right to any part of it. Commissioner v. Irving Trust Co., 147 Fed.(2d) 946. See Estate of John J. Toeller, 6 T.C. 832, in which the distinction between the two lines of cases is discussed at length.
The situation we have before us is just the reverse of that in the cases cited in the preceding paragraph. Here the corpus is subject to invasion, not for the benefit of the grantor, but for the benefit of persons other than the grantor, i.e., the trust beneficiaries. And it is simply a power exercisable by the grantor as trustee under the terms of the instrument. In such a situation we think the reverse reasoning should apply. That is to say, where, as here, the trust instrument provides an ‘external standard which a court may apply in compelling compliance,‘ Commissioner v. Irving Trust Co., supra, so that the beneficiary of the invasion power has an enforceable right, the grantor does not have any real control of the corpus by virtue of the power, and it accordingly should not be taxed to his estate on that account alone. * * *
Here the corpora of the trusts with which we are presently concerned were invadable only for the benefit of life tenants, not the settlor. The ‘external standard which * * * (the) court may apply in compelling compliance ‘ was ‘the proper maintenance and support‘ of those income beneficiaries.
The respondent also refers to the ‘spendthrift‘ provision as rendering the transfers incomplete. No separate argument is made, nor are we referred to any decisions, basing taxability on discretionary powers in connection with ‘spendthrift‘ provisions. The discretionary powers in the ‘spendthrift‘ provisions in the trusts in question are contingent. The voluntary act of the beneficiary alone will give rise to their exercise. Cf. Estate of Louis J. Kolb, 5 T.C. 588. The power is unconnected with the life or death of the decedent settlor. No event giving rise to the exercise of the power arose during decedent's lifetime. The trusts construed in the Budlong case, supra, contained similar ‘spendthrift‘ provisions. We find no merit in respondent's contention as respects the ‘spendthrift‘ provision. We conclude, therefore, that the corpora of the trusts in question are not includible in the decedent's gross estate under section 811(d)(2) of the Internal Revenue Code.
Reviewed by the Court.
Decision will be entered under Rule 50.