Docket Nos. 53222 53223.
John C. Howard, Esq., for the petitioners. Robert B. Pierce, Esq., for the respondent.
John C. Howard, Esq., for the petitioners. Robert B. Pierce, Esq., for the respondent.
Petitioner created a trust, of which she was the sole life beneficiary, consisting of stocks, securities, and a contingent remainder interest in a trust created by the will of her grandfather. The petitioner was to receive the trust income for life or until the receipt of the remainder interest in her grandfather's estate. Thereafter, the trustees were empowered to pay petitioner so much of the income of the trust as they in their discretion deemed desirable and ample for her comfortable well-being and enjoyment. In the event the income of the trust was insufficient for that purpose, the trustees were authorized to invade the trust principal. Provision was made for gifts over of any trust property remaining at her death. Held, petitioner retained the dominion, control, and beneficial use and enjoyment of the trust income and corpus and therefore did not make a gift, taxable under section 1000, I.R.C. 1939. Alice Spaulding Paolozzi, 23 T.C. 182, and Estate of Christianna K. Gramm, 17 T.C. 1063, followed.
The respondent determined deficiencies in gift tax of the petitioners for the year 1950 in the amounts as follows:
+-----------------------------------------------+ ¦Petitioner ¦Docket No.¦Deficiency¦ +-------------------------+----------+----------¦ ¦Sarah Gilkey Vander Weele¦53222 ¦$63,277.21¦ +-------------------------+----------+----------¦ ¦Frederick Vander Weele ¦53223 ¦11,308.72 ¦ +-----------------------------------------------+
The sole issue presented for our determination is the question whether a transfer in trust by petitioner Sarah Gilkey Vander Weele of securities and a remainder interest in trust property constituted a taxable gift.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
Sarah Gilkey Vander Weele and Frederick Vander Weele, petitioners, are and during the years here involved were husband and wife and resided at Kalamazoo, Michigan.
On March 25, 1950, Sarah Gilkey Vander Weele, sometimes hereinafter referred to as petitioner, owned a one-third contingent remainder interest in a testamentary trust created by the will of her grandfather, George L. Gilkey, deceased. Petitioner's mother, Sarah Margaret Gilkey, is a life beneficiary under the aforementioned trust, and on March 25, 1950, she was 65 years of age. Upon the death of petitioner's mother, the trustees are required to divide the remainder of the trust corpus equally among the three children of Sarah Margaret Gilkey, or their issue, per stirpes.
On March 25, 1950, petitioner was 31 years of age and on that date the value of her contingent remainder in the trust created by her grandfather was $564,769.09. Petitioner owned stocks and securities valued on March 25, 1950, at $28,135.99, which had been given her over a period of years by her father and mother. The total value on March 25, 1950, of petitioner's stocks and securities and her remainder interest in the testamentary trust of her grandfather was $592,905.08.
For several months petitioners had been unable to live within their means and had been behind in the payment of their bills, some of which were long overdue. Petitioners had not had experience in handling investments or in the management of substantial amounts of money and consequently felt unprepared to manage the remainder interest valued at approximately $600,000 in the testamentary trust which Sarah Gilkey Vander Weele expected to receive.
Petitioner, acting upon the suggestion of her mother, consulted two of the trustees of her grandfather's estate, who were practicing attorneys, with respect to the creation of a trust for the purpose of providing for the satisfactory management of her property and of insuring her financial protection and security. Petitioner had known the trustees for several years and was confident that they would manage her property satisfactorily and would apply the income therefrom to her best interest.
During the course of her discussions with the trustees of her grandfather's estate concerning the creation of a trust, the petitioner expressed no desire to provide benefits for her husband or children, except in the event that a portion of the trust fund remained at her death, but spoke only of her purpose to insure that she would have sufficient income to take care of her own needs for the remainder of her life.
On March 25, 1950, petitioner executed an indenture of trust and transferred to the trustees therein designated her stock and securities and the remainder interest in the testamentary trust created by her grandfather. The designated trustees were also trustees of her grandfather's estate. The trust was expressly irrevocable.
The trust instrument requires the trustees to pay the entire net income from the stock and securities to petitioner for life or until the trustees receive her remainder interest in her grandfather's testamentary trust upon the death of her mother.
The trust further provides as follows:
(B) * * * Upon receipt by the Trustees of the property representing the Donor's interest under the Will of George L. Gilkey, deceased, the Trustees shall thereupon pay to the Donor for and during the natural life of the Donor such reasonable and substantial portion of the entire net annual income of the entire trust estate as to the Trustees in their sole judgment and discretion shall deem desirable and ample for the comfortable well-being and enjoyment of the Donor; and said payments of annual net income shall be paid to the Donor in monthly instalments as near as may be. The said Trustees may from time to time, in their sole judgment and discretion, pay to the Donor the entire net annual income of the full trust estate.
The amount of net annual income of the trust estate remaining in the hands of the Trustees, after payment of that portion of the annual net income to the Donor, shall be accumulated by the Trustees as a part of the trust estate for the benefit of the children of the Donor, and such accumulations shall terminate at the expiration of the minority of said children.
(C) In the event that the amounts so payable to the Donor do not in the sole judgment and discretion of the Trustees provide for the comfortable well-being of the Donor, the said Trustees may from time to time pay to the Donor such part or all of the principal of the entire trust estate, or any portion of the trust estate resulting from the accumulations of net income as to said Trustees in their sole judgment and discretion shall seem advisable, without regard to any obligations herein set forth, or implied, to preserve or conserve any of the trust estate for either the husband of the Donor, or any of the other beneficiaries hereinafter designated.
Upon receipt of the aforementioned remainder interest, the trustees are further required to pay petitioner $10,000 from principal and an additional $10,000 therefrom every 5 years thereafter for life. Upon petitioner's death, the trustees are required to pay $10,000 from principal to her husband and a like sum 5 years from the date of her death, and to divide the remainder of the trust into equal portions to be held in separate trusts for her children. The separate trusts for the benefit of the children are to be distributed to them upon attaining the age of 25. The trust also contains a spendthrift provision purporting to restrain and prevent the anticipation or encumbrance by petitioner of her interest in the trust estate and the income therefrom.
At the time of the creation of the trust, the petitioner was assured by the trustees that they would construe liberally the terms of the trust instrument and would pay her the entire income of the trust, both before and after the remainder interest was received by the trustees, and that if the income was insufficient to support her or to permit her to live comfortably and in the station in life to which she was accustomed, they would invade the principal of the trust and pay it to her or apply it for her benefit. Various contemplated items of expense were discussed with the trustees, and it was understood to be petitioner's desire to utilize the trust fund for such items as vacations, travel, sickness, and the unpaid mortgage payments on petitioners' dwelling.
Petitioners filed gift tax returns for 1950 with the then collector of internal revenue for the district of Michigan at Detroit. In their returns, petitioners treated the transfer of the entire trust assets as having been made one-half by each, and each petitioner reported one-half of the value of the trust created by Sarah Gilkey Vander Weele. Petitioners subsequently took the position that no taxable gift had been made by them and they consequently filed claims for refund of the gift tax reported and paid. They here claim overpayments in the amount of gift tax so paid.
In his statutory notice of deficiency, respondent has determined that petitioners made a taxable gift in the amount of $478,897.61 and that $126,259.85 of that amount should be treated as having been made by petitioner's husband, Frederick Vander Weele.
The issue presented for our decision is the question whether by means of the creation of the trust on March 25, 1950, and the transfer thereto without consideration of petitioner's stocks, bonds, and the contingent remainder in the assets of the testamentary trust created by her grandfather, petitioner made a completed gift within the meaning of section 1000 of the Internal Revenue Code of 1939.
SEC. 1000. IMPOSITION OF TAX.(a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident, or nonresident, of property by gift. * * *(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *
The respondent has taken the position that the transfer of property in trust by petitioner constituted a taxable gift of the entire trust fund unreduced by an amount equal to the actuarial value of a life estate in the property so transferred.
Petitioners contend that the foregoing transfer in trust did not constitute a completed gift so as to subject the transaction to the imposition of a gift tax. In the alternative, petitioners argue that in the event we determine that the transfer in trust completed on March 25, 1950, resulted in a taxable gift, we should find that petitioner retained a life estate and that the value of the gift should be reduced by an amount equal to the value of a life interest in the trust assets. It is contended by petitioners that Sarah Gilkey Vander Weele did not intend to make a gift of either the trust assets or the income resulting therefrom and that she retained dominion, control, and the right to the beneficial use and enjoyment of both the corpus and income of the trust.
In support of their position, petitioners rely on our decisions in Alice Spaulding Paolozzi, 23 T.C. 182, and Estate of Christianna K. Gramm, 17 T.C. 1063.
In Alice Spaulding Paolozzi, supra, the taxpayer created a trust of which she was, during her lifetime, the sole beneficiary. At the time the trust was established the taxpayer was contemplating marriage to an Italian citizen, by virtue of which she would become an Italian national. The trust was created for the purpose of enabling the settlor-taxpayer to escape the stringent restrictions to which the Italian Government was subjecting foreign securities held by Italian nationals and for the additional purpose of avoiding the possible confiscation of her property. The trustees were empowered by the terms of the trust instrument to hold, manage, invest, and reinvest the property as a trust fund until the death of the taxpayer and during her life to pay her as much of the net income as they, in their absolute discretion, should determine to be to her best interest. Provisions were made for remainders over to the issue of the settlor. The taxpayer filed a gift tax return in which she reported as a taxable gift the value of the remainder after a life estate of one her age.
The Commissioner determined that the transfer in trust was a complete gift of the entire amount of the property so transferred. We there upheld the taxpayer's contention that since her creditors could reach the maximum amount which the trustees could pay to her or apply for her benefit, she could realize the economic benefit of the income accruing to the trust during her life simply by borrowing money and then relegating the creditor to the trust income for reimbursement. We stated as follows at page 187:
In view of the clear exposition of Massachusetts law set out * * * it cannot be gainsaid that petitioner's creditors could at any time look to the trust of which she was settlor-beneficiary for settlement of their claims to the full extent of the income thereof. This being true, it follows that petitioner, as she points out, could at any time obtain the enjoyment and economic benefit of the full amount of the trust income. * * *
The facts here presented would seem to require a similar conclusion. Petitioner was entitled to receive the entire net income from the stocks and securities for life or until the vesting in the trustees of petitioner's remainder interest upon the death of her mother. Upon receipt of the remainder interest of Sarah Gilkey Vander Weele in the trust established by her grandfather, the trustees have power to pay to petitioner for life ‘such reasonable and substantial portion of the entire net annual income’ as ‘to the trustees in their sole judgment and discretion shall seem desirable and ample for the comfortable well-being and enjoyment of the Donor.’
Under the law of Michigan, by which the trust herein is governed, a trust created for the benefit of the settlor does not protect his interest from the claims of creditors, either prior or subsequent. Mich. Stat. Ann. secs. 26.921 and 27.545; Gilkey v. Gilkey, 162 Mich. 664. Petitioner's creditors therefore could have reached the income of the trust to the extent that it was distributable to her and petitioner here, as in Alice Spaulding Paolozzi, supra, could have obtained the economic benefit and enjoyment of the trust income by creating indebtedness and relegating the creditor to her interest in the trust for satisfaction. Accordingly, petitioner retained sufficient dominion and control over the income of the trust as to prevent the imposition of a gift tax on the value of the income.
With respect to the transfer of the corpus of the trust, we are of the opinion that our decision in Estate of Christianna K. Gramm, supra, is dispositive of the question whether petitioner made a completed gift of a remainder to the remaindermen. In that case, the taxpayer created a trust designating a corporate fiduciary and her two children as trustees. The assets transferred to the trust were valued at approximately $84,000. The decedent was to receive the net income for life, and provision was made for distribution upon her death. The deed of trust gave the corporate trustee the power to invade the principal, without the consent of the other trustees, for any amount which it might consider proper for the comfort, education, maintenance, or support of the settlor. The settlor could revoke or amend the trust with the written consent of her children; but if the children were incapable of giving such consent, the execution by the settlor of an instrument in writing would be sufficient for the revocation or alteration of the trust.
We there pointed out that the amount which might be required for the ‘comfort’ of the settlor was incapable of determination at the time of the creation of the trust, and we held that since there was no restriction in the trust instrument limiting the extent to which the principal might be used for the ‘comfort, education, maintenance or support’ of the settlor, there was an unlimited possibility of withdrawal of the trust fund and no completed gift resulted from the transfer.
The trust indenture here in question provides that ‘In the event that the amounts so payable to the Donor (out of income) do not in the sole judgment and discretion of the Trustees provide for the comfortable well-being of the Donor, the said Trustees may from time to time pay to the Donor such part or all of the principal of the entire trust estate * * * without regard to any obligations herein set forth, or implied, to preserve or conserve any of the trust estate for either the husband of the Donor, or any of the other beneficiaries hereinafter designated.’ In addition, provision was made for the payment to petitioner of $10,000 out of principal upon the death of her mother and the payment of a like amount every 5 years thereafter for the remainder of petitioner's life.
Thus, it is apparent from the trust instrument here involved, as in Estate of Christianna K. Gramm, supra, that the power of the trustees to invade the corpus of the trust for the benefit of the petitioner is virtually unrestricted. Moreover, at the time of the creation of the trust, the trustees understood that it was petitioner's intention that the fund should be used for such items of expense as vacations, travel, sickness, and the unpaid mortgage on petitioners' dwelling. In view of the fact that petitioner created the trust here in issue for the purpose of providing for her personal financial security and the further fact that the corpus of the trust was subject to an unlimited possibility of withdrawal, we are of the opinion that the execution of the deed of trust on March 25, 1950, and the transfer of assets pursuant thereto did not result in a taxable gift within the meaning of section 1000 of the Internal Revenue Code of 1939.
Decisions will be entered under Rule 50.