Storer v. Commissioner

ESTATE OF JOHN H. STORER, DECEASED, STATE STREET TRUST COMPANY, JOHN H. STORER, JR., ROBERT TREAT PAINE STORER, THEODORE L. STORER, AND HENRY S. HALL, JR., EXRS., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Storer v. Commissioner

Docket No. 98356.

United States Board of Tax Appeals

41 B.T.A. 1156; 1940 BTA LEXIS 1096;

May 15, 1940, Promulgated

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ESTATE TAX - GROSS ESTATE. - Held that the decedent reserved a power to amend a trust which he had created and, therefore, the corpus of the trust was properly included in his gross estate under section 302(d) of the Revenue Act of 1926, and, further, that this is so even though the power to amend was allowed to continue in the surviving trustees.

Abbot P. Mills, Esq., and Alexander R. Smith, Esq., for the petitioners.

J. T. Haslam, Esq., for the respondent.

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MURDOCK

The Commissioner determined a deficiency in estate tax of $71,789.14. The parties have settled a number of the issues by agreement and the only issue for decision is whether the value of the corpus of a trust which the decedent created on September 10, 1918, should be included in his gross estate.

FINDINGS OF FACT.

The decedent died on December 25, 1935. His wife, Edith P. Storer, died on May 9, 1924. The decedent was survived by six children and seven grandchildren. His youngest child was born in 1899.

The decedent executed a deed of trust on September 10, 1918, in which he named himself and the State Street Trust Co. of Boston as trustees. The instrument provided that the net income of the trust should be paid first to the decedent during his life, then to his wife during her life, and finally in equal shares to their six children for their lives. Provision was also made for the issue of any child who might die during the term of the trust. The trust was to terminate upon the death of the last surviving child of the decedent, at which time the corpus was to be paid to the issue of the children by right of representation. The deed gave the trustees the power to manage and keep the fund invested. Paragraph sixth provided that any trustee could resign by giving written notice to the other trustee and the beneficiaries, and "all vacancies shall be filled by an appointment in writing signed by a majority in interest of such beneficiaries."

The eighth paragraph of the deed was as follows:

EIGHTH: This declaration of trust may be amended at any time during the lifetime of the said John H. Storer by a written instrument signed by him and by the said Edith P. Storer, if she be living at the time of such request, or if she be then deceased by the said John H. Storer alone and filed with the trustees. After the decease of said John H. and Edith P. Storer the State Street Trust Co. or its successor and any duly appointed co-trustee if there by [sic] any, may amend this declaration of trust in a similar manner.

The decedent and his wife amended the original deed on January 31, 1922, expressly relying upon authority granted in paragraph eighth, by adding at the end of paragraph sixth: "All vacancies shall be filled within six months."

The decedent, acting alone, on November 25, 1927, amended the original deed by adding a new paragraph providing that his son Robert should be a trustee with himself and the State Street Trust Co.

The decedent resigned as trustee on October 15, 1930, and the beneficiaries appointed the decedent's son John trustee to fill the vacancy.

Paragraph second of the original deed provided as follows:

SECOND: The trustees or trustee for the time being may at any time in their or its discretion pay over the income to which any of the above named children or their issue may be entitled as above provided, either directly to such beneficiary or for the support of his or her family, and in case at any time such beneficiary hereunder should be a minor child then the income of such minor child may be paid to either of his or her parents, or to his or her guardian or may be applied directly by the trustees or trustee for the time being for the support, maintenance or education of such minor child in the discretion of the trustees or trustee. The balance of the income, if any not so used, may be either held by the trustees or trustee to accumulate for such minor child, or may be paid over to his or her legally appointed guardian.

The decedent executed an amendment on November 14, 1932, which was in part as follows:

I, JOHN H. STORER, a widower, pursuant to and by virtue of the authority vested in me by the Eighth Clause of a certain indenture of trust dated September 10, 1918, for the benefit of said John H. Storer during his lifetime, and signed by the said JOHN H. STORER and the STATE STREET TRUST COMPANY, do hereby amend said indenture of trust by striking out the paragraph marked "SECOND" therein and inserting in place thereof the following paragraph:

"SECOND: Each of the foregoing provisions for income to which any of the above mentioned children or their issue may be entitled as herein provided are intended for their personal support and to provide for the support of their immediate families and may be paid by my trustees into his or her hands or upon his or her separate receipts or orders therefor in writing, signed by him or her at or immediately before the payment thereon and not by way of anticipation, and in case of bankruptcy or insolvency or attempted pledge, assignment, mortgage or anticipations or if for any reason the trustees should in their discretion deem it wise, then and in such case the trustees may at any time withhold from any such beneficiary any part or the whole of the income hereinbefore provided for such beneficiary, and instead of paying such income to him or her, they may in their discretion pay or place the same or such part thereof as they may think wise to the support of such beneficiary or for the support of his wife, if any, or her husband, if any, or to or for the support, education and maintenance of any issue of such beneficiary, and may accumulate the surplus, but may in their discretion pay out such accumulations in any future year or years as income, and no pledge, assignment or mortgage by any beneficiary of any income or principal shall in any case be valid nor shall he or she have the right to anticipate the same in any manner, nor shall any income or principal be liable for his or her debts by any process; and in case at any time such beneficiary hereunder should be a minor child, then the income of such minor child may be paid to either of his or her parents or to his or her guardian or may be applied directly by the trustee or trustees for the time being for the support, maintenance or education of such minor child in the discretion of the trustee. The balance of the income, if any, not so used may be either held by the trustees or trustee to accumulate for such minor child or may be paid over to his or her legally appointed guardian."

The record does not show that there were any other amendments of the original deed of trust up to the date of the hearing.

The value of the corpus of the trust at the time of the decedent's death was $304,727.22, of which property having a value of $50,485.47 at the date of death was transferred to the trust by the decedent on or before April 30, 1919. The balance of the corpus of the trust was contributed by the decedent during the years 1925 to 1930, inclusive.

The decedent was a lawyer and was familiar with trust deeds, although he had not practiced law for a number of years before his death.

The decedent's son Robert requested the decedent, shortly before November 14, 1932, to make a change in paragraph second of the original trust deed so that it would be a spendthrift trust. He explained that a partnership of which he had been a member had recently dissolved, and if its assets were insufficient to pay its liabilities an attempt might be made by creditors to reach his interest in the trust and he wanted the provisions of the second paragraph changed to prevent that possibility. The decedent said he thought he had the power to amend only as to details and this proposed change went beyond his powers. He also had doubt of the advisability of making the change. He said he thought he could not change the trust to give one child a greater or lesser interest than his other children. He consulted his lawyers, who told him that he had the power to make the amendment. They said that the proposed change merely amplified the second paragraph and gave protection to the beneficiaries without materially changing the trust. The decedent agreed to make the change, provided his other five children agreed to it. The children gave their assent.

OPINION.

MURDOCK: Section 302(d) of the Revenue Act of 1926, as amended, provides that the gross estate of a decedent shall include the value of property transferred in trust by the decedent "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 Commissioner takes the position that the decedent expressly reserved to himself the power to change the enjoyment of the trust by amendment. The petitioners contend that the power to amend reserved by the decedent was not a power to change the enjoyment of the trust but was merely a power to amend as to "the mechanics or details." They cite , which in turn cited , to the effect that the act would not apply to powers affecting the mere mechanics of a trust.

The limitation upon the decedent's power to amend is shown, according to the petitioners, first by the context of paragraph eighth of the declaration of trust, wherein it is provided that after the death of the donor and his wife the State Street Trust Co. or its successor and any duly appointed cotrustee may amend the trust "in a similar manner." The argument is that the same power which the decedent reserved for himself might become exercisable by the Trust Co. alone and it is highly improbable that a settlor would give an inanimate trustee the power to amend the provisions of the trust so as to change the rights of the beneficiaries. The petitioners also argue that the intent of the settlor to so limit his power to amend is shown by his desire to provide equally for his children and by the construction which he and the Trust Co. placed upon paragraph eighth.

An assistant trust officer of the State Street Trust Co. testified that he was consulted in 1934 in regard to an income tax controversy involving the year 1931. He told Robert Storer that the Trust Co. interpreted the deed as permitting only minor changes for better administration and as not permitting revocation or material changes in the beneficial interests. There is testimony of statements by the decedent that he desired to provide equally for his children and believed he could not disturb the equal shares fixed by the original deed but was permitted to amend only as to details. Nevertheless, he made a substantial change in the second paragraph, which seems to have changed the enjoyment of the trust property. Cf. . Since the first sentece of paragraph eighth provides in so many words that the declaration of trust may be amended at any time after the death of the wife by the settlor acting alone, it would require clear and convincing evidence to show that the settlor did not intend to give and did not actually give himself full power to amend. Our best judgment, after consideration of all of the evidence, is that the enjoyment of the trust was subject at the date of the death of the decedent to a change through the exercise of a power by the decedent alone to amend within the meaning of section 302(d). Cf. ; ; certiorari denied, .

The petitioners make two alternative contentions in case it is held that the power to amend could affect the enjoyment of the trust property. The first is that "the power to amend was also exercisable by the surviving trustee and, therefore, upon the decedent's death no assurance passed from the dead to the living and there was no taxable event." This argument is specious. The decedent had a power to alter up to the time of his death and that power ceased at his death. That circumstance is sufficient to support the tax. Cf. ;. The power in the surviving trustees did not prevent the decedent's power over the trust property from terminating at his death. He could have exercised his power of amendment by striking out the last sentence of paragraph eighth had he so desired. This circumstance distinguishes the case of .

The petitioners' other alternative contention is based upon the proposition that section 302(d), which first appeared in the Revenue Act of 1924, should not be applied to property transferred to the trust prior to its enactment, over which the decedent retained no power in himself acting alone. They point out that originally he had to have the consent of his wife, who had an adverse interest. An adequate answer to this argument is that he could have surrendered the power and escaped tax on the trust property, but instead he chose to retain the power which he was free to exercise acting alone after the death of his wife in 1924. ; certiorari denied, ; . Thus, no retroactive effect results here from the application of section 302(d).

Decision will be entered under Rule 50.