DocketNumber： Docket No. 105033.
Judges： Smith, Arundell, Kern, Only, Agree, Disney
Filed Date： 10/1/1942
Status： Precedential
Modified Date： 11/2/2024
1942 BTA LEXIS 646">*646 1. Decedent in 1923 established a trust for the benefit of his children, reserving the power to alter, amend, or revoke the trust. In 1924 he relinquished this power to his wife, but provided that if he should survive his wife he would regain the power. Decedent's wife modified the trust and revoked it in part several times prior to decedent's death and was still alive at the date of his death.
2. Decedent transferred securities in trust and provided that the income up to $1,500 a year should be paid to his sister for her life, the excess income to be paid to decedent. Decedent reserved the power to designate the remaindermen of the trust and to designate a beneficiary other than his sister. He possessed this power at the date of his death.
47 B.T.A. 784">*784 The Commissioner determined a deficiency in estate tax in the sum of $447,707.55. The primary issue is whether the possibility that decedent might, upon the happening of certain contingencies, obtain the power to alter, amend, or revoke a trust of which he was the grantor requires the trust corpus to be included in decedent's estate under section 302(c) of the Revenue Act of 1926, as amended, or under section 302(d) of the Revenue Act of 1926, as amended. The second issue is whether or not the value of a life interest in a trust is includible in decedent's gross estate by virtue of decedent's reserved power to designate others than himself as recipients of the life interest.
Most of the facts were stipulated. Only those of the stipulated facts material to the issues will be set forth in our findings.
FINDINGS OF FACT.
Petitioners are the executors of the last will and testament of Edward Lathrop Ballard, hereinafter referred to as the "decedent," who died on December 31, 1937. The estate tax return was filed with the collector of internal revenue at Hartford, Connecticut.
On April 26, 1923, decedent created a trust, 1942 BTA LEXIS 646">*648 hereinafter known as the children's trust, and conveyed to himself and his wife, Elizabeth B. Ballard, as trustees under that trust, 600 shares of common stock 47 B.T.A. 784">*785 of the Merchants Fire Assurance Corporation of New York having a par value of $100 a share. Decedent was the founder of the Merchants Fire Assurance Corporation of New York and was at all times from the creation of the children's trust to the date of his death the principal officer and a large stockholder of that corporation.
The children's trust instrument provided that the net income of the trust should, in the discretion of the trustees, be applied to the support, maintenance, and education of the testator's three children then living, Horatio, Elizabeth, and Anna, all of whom at that time were under 21 years of age. The trust was to terminate upon the death of the survivor of decedent and his wife and the principal was then to be distributed to decedent's three children and their issue.
The trust instrument as executed April 26, 1923, contained the following paragraph:
SECOND: The Grantor reserves full power to alter, amend and revoke in whole or in part the trust created by this instrument at such1942 BTA LEXIS 646">*649 times and in such manner as he in his uncontrolled discretion shall see fit, anything herein contained to the contrary notwithstanding, such powers to be exercised by an instrument in writing executed and acknowledged by the Grantor in the form of a deed to be recorded in the State of New York and filed with the Trustees. In the event of a revocation of the trust, all cash, securities and other property of the trust fund shall thereupon be paid and delivered by the Trustees to the Grantor and the title to such property shall vest in the Grantor absolutely, and the Trustees shall execute such instruments of assignment and other papers as may be necessary to effect such vesting of title. No one shall have any right, interest or estate under this indenture except subject to the powers hereinabove reserved by the Grantor.
The Grantor also reserves the right to remove any Trustee hereby appointed, and in the event of a vacancy occurring in the office of trustee by such removal, or otherwise, the Grantor shall have the power to appoint any other person, individual or corporate, as successor trustee, and to remove such successor trustee and again appoint and remove, as often as he may1942 BTA LEXIS 646">*650 see fit, such removal or appointment by the Grantor to be made by an instrument in writing executed and acknowledged in the form of a deed to be recorded in the State of New York, and such successor trustee, upon written acceptance of the trust, shall thereupon be vested with all of the property of the trust estate without any further conveyance or transfer of title.
Under date of January 31, 1924, decedent amended the children's trust so that the trust would continue to exist during the lives of decedent's daughters, Elizabeth and Anna, and upon the death of both Elizabeth and Anna would terminate and the corpus would be distributed among the surviving child, if any, and the issue of the three children. The amendment of January 31, 1924, further provided:
2. I hereby revoke paragraph "FOURTH" of said trust agreement, dated April 26th, 1923, and substitute in place thereof the following:
47 B.T.A. 784">*786 I hereby give and grant unto my said wife, Elizabeth B. Ballard full power and authority to withdraw from time to time and as often as she may see fit all or any part of the securities in the trust fund and to substitute other securities in place thereof, of whatever character1942 BTA LEXIS 646">*651 and value she may select, and whether such substitution increases or decreases the value of the principal of the trust, and any securities so substituted shall be held upon the same trusts as herein provided in the case of the securities transferred to the trustees upon the execution of this instrument, and such securities as may be withdrawn by her shall become her own separate and private property free from any trust whatsoever.
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5. I hereby revoke paragraph "EIGHTH" of said trust agreement, dated April 26th, 1923, and substitute in place thereof the following:
I do hereby give and grant unto my wife, Elizabeth B. Ballard full power and authority to alter, amend and revoke in whole or in part the trust created by said trust agreement of April 26th, 1923 at such times and in such manner as she in her sole and uncontrolled discretion shall see fit, anything herein contained to the contrary notwithstanding, such powers to be exercised by her by an instrument in writing executed and acknowledged in the form of a deed to be recorded in the State of New York and filed with the trustees. In the event of the revocation of this trust in whole or in part, all cash, securities1942 BTA LEXIS 646">*652 and other property of the trust fund thus revoked shall thereupon be paid and delivered by the trustees to said Elizabeth B. Ballard, and the title to such property shall vest in her and be her sole and own property, free and clear from all trusts and conditions whatsoever and the trustees shall execute such instruments of assignment and other papers as may be necessary to effect such vesting of title. No one shall have any right, interest or estate under this indenture, except subject to the powers herein granted to said Elizabeth B. Ballard. Said Elizabeth B. Ballard shall have the right at any time to remove any trustee, except the grantor hereof so long as he remains a trustee and to appoint any other person, individual or corporation as successor trustee, and to remove such successor trustee and again appoint, and remove as often as she may see fit other trustees to fill their vacancies, such removal or appointment by said Elizabeth B. Ballard to be made by an instrument in writing, executed and acknowledged in the form of a deed to be recorded in the State of New York and such successor trustee upon written acceptance of the trust shall thereupon be vested with all of the property1942 BTA LEXIS 646">*653 of the trust estate without any further conveyance or transfer of title. * * *
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7. I hereby revoke paragraph "SECOND" of said trust agreement dated April 26th, 1923, and do hereby cancel and surrender my right from this time on to revoke, amend or modify said trust agreement of April 26th, 1923 as modified by this agreement during the lifetime of my wife, Elizabeth B. Ballard, reserving, however, to myself from and after the death of my wife, Elizabeth B. Ballard all the rights and privileges reserved to me under the terms of said paragraph "SECOND" of said trust agreement, and do hereby republish and redeclare the rights reserved for me under said paragraph "SECOND" of said trust agreement as if said paragraph were introduced by the words "from and after the death of the wife of the grantor, Elizabeth B. Ballard," the grantor reserves to himself the rights mentioned therein, it being my intention to make this trust from this time on and during the lifetime of my wife, Elizabeth B. Ballard irrevocable by me and to surrender absolutely all my rights in regard to the principal of said trust and to the management and disposition thereof to my wife during her lifetime, leaving1942 BTA LEXIS 646">*654 the management and disposition of said trust both as to principal and income to my wife, Elizabeth B. Ballard and the trustees under the terms 47 B.T.A. 784">*787 of said trust agreement of April 26th, 1923 as modified by this agreement during the lifetime of my said wife, Elizabeth B. Ballard.
Between January 31, 1924, and May 24, 1935, certain instruments were executed with respect to the children's trust effecting substitution and withdrawal of securities. One of these instruments, by which shares of stock were withdrawn from the trust and other shares substituted therein, was erroneously executed under date of December 8, 1925, by decedent instead of decedent's wife. On December 1, 1931, decedent's wife executed an instrument ratifying the withdrawal of securities by decedent on December 8, 1925, and stated that such withdrawal and substitution by decedent was erroneous.
On May 24, 1935, decedent's wife further amended the children's trust so that the provisions of the trust required the payment of the net income to decedent's two daughters, they having attained the age of 21 years and decedent's son having died.
On June 1, 1936, decedent's wife executed a further amendment1942 BTA LEXIS 646">*655 to the children's trust. This amendment provided for the division of the principal of the trust into two parts, one part to be held by the trustees for the benefit of Elizabeth and the other to be held by them for the benefit of Anna. This amendment further provided that each of the daughters might make testamentary disposition of her respective share of the trust corpus, or, failing such disposition, the corpus was to be paid over to her issue; failing issue, the corpus was to be paid to the other daughter, or, if the other daughter should not be living, to her issue.
Decedent's wife was wealthy in her own right and had been taught from youth how to handle money. She took care of her own personal financial affairs, but discussed with decedent matters concerning the children's trust and relied on his judgment often because of his experience in financial matters. Decedent's wife was completely informed as to everything which was done with regard to the children's trust.
On December 31, 1937, the principal of the children's trust consisted of 27,357 shares of common stock of the Merchants Fire Assurance Corporation of New York with a par value of $5 a share. These shares had1942 BTA LEXIS 646">*656 a fair market value on December 31, 1937, aggregating the sum of $1,025,887.50.
On January 12, 1923, decedent conveyed certain securities to Edward R. Otheman and Austen B. Crehore in trust, directing that the income to the extent of $1,500 a year be paid to decedent's sister, Anna B. Crehore, during her life. The instrument creating the trust, hereinafter referred to as the Crehore trust, provided that the trust income 47 B.T.A. 784">*788 in excess of $1,500 a year should be paid to decedent. Such excess, after decedent's death, was to be paid to his wife and upon her death to decedent's issue.
Decedent reserved the right to redesignate the beneficiary who should receive the $1,500. Upon decedent's death his wife was to possess this right to designate another beneficiary. The designation of a beneficiary for the life interest of the Crehore trust by decedent or his wife might not include either decedent or his estate.
Upon the death of decedent's sister the principal of the Crehore trust was to be paid over to such persons other than decedent or his estate as decedent might designate by deed. In the event that decedent failed to make disposition of the principal1942 BTA LEXIS 646">*657 of the trust the principal was to go to decedent's wife, or, if she should not be living, to decedent's issue.
On June 15, 1927, decedent transferred additional securities to the Crehore trust and increased the annual amount which Anna B. Crehore would receive to $3,000. On March 21, 1929, the amount receivable by decedent's sister was raised to $5,000 a year.
On December 23, 1935, decedent executed an instrument designating the persons who should receive the remainder interest in the trust estate after the death of decedent's sister. From time to time decedent made other amendments to the Crehore trust which are not material in this proceeding.
At the date of decedent's death the value of the principal of the Crehore trust was $97,995. Anna B. Crehore was still living at the date of decedent's death. The present value on December 31, 1937, of a life estate of a woman of the age of Anna B. Crehore in the principal sum of $97,995 was $23,308.11. The annual net income of the Crehore trust was not in excess of $5,000.
OPINION.
ARUNDELL: The first question presented is whether or not the corpus of the children's trust is includible in decedent's gross estate under the1942 BTA LEXIS 646">*658 provisions of section 302(c) of the Revenue Act of 1926, as amended, 47 B.T.A. 784">*789 Petitioners contend that decedent retained no interest in the children's trust after the amendment of January 31, 1924, by which decedent relinquished his power to amend, modify or revoke the trust and gave such power to his wife. They maintain that the possibility that decedent might again have attained the relinquished power by surviving his wife without her having revoked the trust, can not be treated as an interest in the trust corpus taxable to decedent's estate. Respondent argues that decedent reserved a reversionary interest in the trust so that the trust corpus is includible in decedent's gross estate as a transfer to take effect in possession or enjoyment at or after death within the doctrine of
1942 BTA LEXIS 646">*660 We are of the opinion that the possibility of decedent again obtaining the power to amend or revoke the children's trust does not bring the trust corpus into decedent's gross estate. Respondent concedes that there is no question of a transfer in contemplation of death. Thus, if section 302(c), as amended, is applicable, it must be on the ground that decedent made a transfer intended to take effect in possession or enjoyment at or after his death. Respondent rests his argument relating to section 302(c) on the contention that decedent's retained contingent power is within the ambit of
In the
We find nothing in the present case that decedent gave contingently upon his death or that was transmitted by it. The widow, certainly, took nothing by that event. Her interests in and control over the trust fund were not affected in any way either by the grantor's continued life or by his death. She did not, as in the
1942 BTA LEXIS 646">*663 Nor can we say, from the standpoint of the children, that there was any transmission from the dead to the living. Their interests, since decedent's renunciation in 1924 of his power to alter, amend, or revoke, had been held at the sufferance of their mother. The same situation prevailed after decedent's death. The transfer to them was in effect made contingently upon her death, not his. By the grantor's death the children received no "valuable assurance" resulting from a termination of control exercisable by the grantor. See
The Circuit Court of Appeals for the Third Circuit, in 1942 BTA LEXIS 646">*664
This case has another all-important feature distinguishing it from the decided cases involving "possibility of reverter." Here decedent gave his wife every important power over the trust property. She exercised these powers by modifying the trust, revoking it in part, substituting securities, and finally by dividing the trust into two parts, one for the benefit of each of the surviving children. The presence of these powers in decedent's wife, plus their actual exercise by her, makes decedent's "string" on the trust property a practical nullity. Consequently, it becomes apparent that when decedent relinquished, in 1924, his present power to revoke the trust1942 BTA LEXIS 646">*665 he did not retain an interest in the trust which would subject the trust property to tax under section 302(c), as amended. See
Respondent makes a further argument with regard to the children's trust. He claims that the trust principal is includible in decedent's estate under section 302(d) of the Revenue Act of 1926, as amended. That section applies only where the decedent had at the date of death the power either alone or in conjunction with another person to alter, amend, or revoke a previous transfer of property. Decedent had no such power at the date of his death. At no time after January 31, 1924, did decedent have a present power to alter, amend, or revoke the children's trust. Nor does the fact that decedent, at the date of his death, had a contingent power to alter, amend, or revoke cause the inclusion of the trust property in his gross estate under section 302(d).
Respondent has vigorously argued that for all practical purposes decedent had the power to amend or revoke the trust by virtue of his position as husband and head of family. He contends that decedent at all times possessed the power to alter or revoke the trust in conjunction 47 B.T.A. 784">*792 with his wife because of the marital relationship, which the evidence shows was always harmonious. We reject this contention because there is no indication that decedent had such control over his wife's actions as to permit the finding that he could, by joint action with her, amend or revoke the trust. The evidence shows that decedent's wife talked matters over with him and respected his judgment on financial matters. That does not mean, however, that the familial relation gave decedent the power to amend or revoke the trust. As a matter of fact, the testimony of decedent's widow presented at the hearing indicates that she gave considerable thought to the problems of the children's trust. She had been taught to handle money and took care of her own financial affairs. Thus, we do not feel that 1942 BTA LEXIS 646">*667
The second issue is whether or not decedent's retained power to redesignate the life beneficiary of the Crehore trust causes the inclusion of that life interest in decedent's gross estate under section 302(c) of the Revenue Act of 1926, as amended, or section 302(d) of the Revenue Act of 1926, as amended.
There is no question that at the date of his death decedent had the power to deprive the life beneficiary1942 BTA LEXIS 646">*668 of the Crehore trust of her interest and to designate someone other than himself or his estate as the life beneficiary. This retained power comes within the specific words of section 302(c), as amended. Petitioners, however, contend that the value of the life interest can not constitutionally be included in decedent's gross estate because the trust was established and the life interest created prior to the passage of the Joint Resolution of March 3, 1931, which was held to be applicable only to transfers after March 3, 1931, by the Supreme Court in
We can see no constitutional objection to the application of section 302(d), as amended, to the life interest in the Crehore trust. Decedent at any time after the creation of the trust could have relinquished his power to redesignate the life beneficiary. The fact that the trust was established prior to the enactment of the 1924 Revenue Act, in which section 302(d) first appeared, does not make the application of that section to the instant case a violation of the
Petitioners contend that since the power to redesignate the life beneficiary of the Crehore trust remained in decedent's wife after his death, nothing passed from the dead1942 BTA LEXIS 646">*670 to the living at his death. For purposes of section 302(d), this transfer in trust was not complete until decedent's death eliminated the string which he had retained on the trust. The fact that the power to designate continued in decedent's widow is not material and the value of the life estate must be included in decedent's gross estate.
Other questions raised by the pleadings were disposed of by the stipulation of the parties, to which effect will be given upon recomputation.
Reviewed by the Board.
KERN concurs only in the result.
DISNEY, dissenting: I can not agree with the majority opinion on the first issue. In the
47 B.T.A. 784">*794
The children could not receive the estate until both father and mother were dead, without exercising the power to revoke. Therefore the deaths of both transmitted rights to the children, the husband's transmission being merely subject to the contingency that the wife did not herself revoke. I dissent.
SMITH and OPPER agree with this dissent.
1. SEC. 302. 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, except real property situated outside the United States -
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(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. [As amended by section 803(a) of the Revenue Act of 1932 and section 404 of the Revenue Act of 1934.] ↩
2. (d) (1) To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona-fide sale for an adequate and full consideration in money or money's worth), 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 (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent's death. [As amended by sections 401 and 404 of the Revenue Act of 1934 and section 805(a) of the Revenue Act of 1936.] ↩