Budlong v. Commissioner

Estate of Milton J. Budlong, Industrial Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Budlong v. Commissioner

Docket No. 7308

United States Tax Court

7 T.C. 756; 1946 U.S. Tax Ct. LEXIS 77;

September 19, 1946, Promulgated

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Decision will be entered under Rule 50.

In 1929 decedent created, by a single instrument, separate trusts for the primary benefit of his daughter and two sons, and another for the benefit of his sister. Until his death in 1941, he served as sole trustee of the four trusts. His grandchildren were remaindermen of the trusts for his children, with cross remainders to the other trusts for the children in the event of the failure of issue of a primary beneficiary, and with ultimate contingent remainders to certain designated charities. The remainder of the sister's trust was distributable at her death to the trusts for the three children. Under the terms of the trust instrument, decedent, so long as he served as sole trustee, could distribute or accumulate and add to corpus all or any part of the trust income, as he saw fit, except that the sister was entitled to a minimum annual payment of $ 2,500. After his death or resignation, his successor trustee was required to distribute all the trust income thereafter accruing to the then income beneficiaries, and exactly $ 2,500 to the decedent's sister. The trust instrument also provided that the trustee could, in his discretion, from time to time expend for the benefit of income beneficiaries such amounts of corpus as were necessary "in case of sickness or other emergency." Decedent made transfers of property to the trusts both prior and subsequent to March 3, 1931. In 1937 decedent created three additional trusts for his three children, with similar remainder provisions in which he retained, so long as he acted as sole trustee, the right to distribute or accumulate income. These trusts, however, did not provide for the invasion of corpus in case of sickness or other emergency. Decedent acted as sole trustee of these trusts until his death. None of the transfers were made in contemplation of death, and decedent did not expressly reserve a power to alter, amend, revoke, or terminate. Held, that as to the 1929 trusts for the children, the power to invade corpus in case of sickness or other emergency, even if it was one retained by decedent and not intended solely for a successor trustee, does not amount to a power to "alter, amend, or revoke" within the meaning of section 811 (d) (2) of the Internal Revenue Code; held, further, that as to both the 1929 and the 1937 trusts, decedent, through the unlimited power to distribute or accumulate the income, reserved a "right to designate the persons who shall possess or enjoy the property or the income therefrom," within the meaning of section 811 (c), requiring the inclusion in his gross estate of the value of all property transferred to the 1929 children's trusts after March 3, 1931; the value of all property transferred to the sister's trust after that date, discounted however for the value of the sister's life annuity; and the value of the entire corpora of the 1937 trusts; held, further, that no part of the value of property transferred to the 1929 trusts prior to March 3, 1931, is includible in the gross estate. Estate of Edward E. Bradley, 1 T. C. 518; affd., 140 Fed. (2d) 87.

Richard F. Canning, Esq., for the petitioner.

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

Arundell, Judge.

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ARUNDELL

This proceeding involves a deficiency in estate tax in the amount of $ 111,601.35.

The issues before us for decision involve the includibility in the decedent's gross estate under section 811(c) or (d), Internal Revenue Code, of the value of certain trusts created by him in 1929 and 1937.

Substantially all of the facts have been stipulated and as stipulated are hereby found accordingly. In addition, one witness testified on behalf of petitioner.

FINDINGS OF FACT.

The petitioner is the duly qualified executor under the will of Milton J. Budlong, hereinafter referred to as the decedent, who died a resident of Newport, Rhode Island, on July 5, 1941. The estate tax return herein was filed with the collector of internal revenue for the district of Rhode Island. In the return the executor elected to have the gross estate of the decedent valued as of the optional valuation date in accordance with section 811(j), Internal Revenue Code.

1929 Trusts.

On July 1, 1929, the decedent, by a single instrument, created five trusts, one each for the primary benefit of Frances W. Budlong, his daughter, John Budlong, his son, Milton Joseph Budlong, his son, and Mrs. George A. Woolsey, his sister. The fifth trust created by the said instrument terminated prior to the death of the decedent by reason of the death of the beneficiary and is not here material. The primary beneficiaries of the four trusts were living at the date of decedent's death. The decedent was at all times prior to his death the trustee under the four trusts.

The second article of the trust instrument reads as follows:

Said trustee shall pay over to and/or expend for the benefit of the several principal beneficiaries so long as they shall respectively live, such part (or all) of the net income of said trusts for their respective benefits as in each case said trustee in his discretion shall from time to time deem advisable, provided, that, with respect to the said Mrs. Herrington and Mrs. Woolsey, such payments shall in each case aggregate at least Twenty-five Hundred Dollars ($ 2500.00) per annum during their respective lives, with power in said trustee to expend from time to time such portion of the principal of said trusts for their respective benefits as may be necessary in addition to the net income thereof to produce said minimum annual payments. In case of the death of any of said principal beneficiaries who are children of the settlor, said trustee shall similarly in his discretion pay over to and/or expend from time to time for the benefit of the lawful issue for the time being surviving of each such deceased principal beneficiary who shall be a child of the settlor such part (or all) of the net income of such trust which would have been distributable to such deceased principal beneficiary if living and to such of said issue (if more than one) and in such proportions as said trustee shall in his discretion determine. Said trustee may in his discretion add from time to time any undistributed income to the principal of its respective trust.

After said Milton J. Budlong shall cease to act as trustee or a trustee hereunder by reason of his death or otherwise, the trustee or trustees hereunder shall, notwithstanding the foregoing pay over to each of the said Mrs. Herrington and Mrs. Woolsey during their respective lives the sum of Twenty-five Hundred Dollars ($ 2500.00) per annum from the net income of the trusts established for their respective benefit and from the principal thereof if such net income shall be at any time insufficient to produce said annual sum (accumulating the balance of said net income, if any) and shall pay over to the said Frances Budlong all of the net income of the trust established for her benefit (not including, however, any income accumulated from prior years) and shall pay over to each of said principal beneficiaries who is a son of the settlor who shall have graduated from college or shall have reached the age of twenty-five (25) (whether or not he shall have attended college) or from and after the time when he shall have graduated from college or reached the age of twenty-five (25) years (whether or not he shall have attended college) all of the net income of the trust established for his benefit (not including, however, any income accumulated from prior years), provided that if any of said principal beneficiaries shall assign, encumber or purport to assign or encumber his or her beneficial interest in the trust established for his or her benefit, or if any creditor of either of them shall attempt to reach such beneficial interest by legal process, or in case of the bankruptcy of any of them, his or her respective right to receive such net income in accordance with the foregoing shall thereupon cease and said trustee shall thereafter pay over to and/or expend for his or her benefit, as the case may be, such part (or all) of the net income of the trust for his or her respective benefit as in each case said trustee in his discretion shall from time to time deem advisable.

Said trustee shall have further power from time to time in his discretion similarly to expend from the principal of said trusts such amounts as he may deem necessary for the benefit of the respective principal beneficiaries thereof and/or, in the cases of the decease of such of them as are children of the settlor, their respective issue, in case of sickness or other emergency.

At the death of Mrs. Woolsey the remainder of the property in her trust was to be added in equal shares to the trusts for the benefit of children of the settlor.

The trusts for the primary benefit of children of the settlor were to terminate and the principal distributed per stirpes among the lawful issue surviving the principal beneficiary when the youngest issue reached the age of 30 years or upon the expiration of 21 years after the death of the last survivor of the settlor and all principal beneficiaries, whichever should occur first. The trust instrument made provision for further remainders over to the other trusts of the same date in the event of failure of issue of any principal beneficiary. In the event of complete failure of lawful issue of all primary beneficiaries prior to the distribution of all trust property, the estates then remaining were to be paid over in equal shares to designated charities. The donor had the right to appoint successor trustees. In the event of his failure to do so, it was provided that a designated trust company should become trustee. It was provided that such new trustee or trustees in each case should enjoy and perform the rights, powers, and duties conferred or incumbent upon the original trustees except that while successor trustees could hold and continue any investments received by them, they were to confine their future investments to so-called "legal investments."

The trusts were expressly irrevocable and no express power to alter, amend, revoke, or terminate was reserved. They were not made in contemplation of death.

The decedent transferred property to the trusts both prior to and subsequent to March 3, 1931. The value, at the optional valuation date, of the property transferred to the various trusts prior to that date is as follows:

Frances W. Budlong trust	$ 26,721.08
John Budlong trust	32,661.93
Milton Joseph Budlong trust	32,660.81
Mrs. George A. Woolsey trust	*86 property in the various trusts transferred thereto subsequent to March 3, 1931, was as follows: Frances W. Budlong trust $ 66,903.11 John Budlong trust 79,786.60 Milton Joseph Budlong trust 73,974.67 Mrs. George A. Woolsey trust 1937 Trusts. On June 16, 1937, the decedent by separate instruments created three trusts for the respective benefits of Frances W. Budlong, John Budlong, and Milton Joseph Budlong. The value of the corpus of each trust as of the optional valuation date was $ 13,125. The decedent was at all times prior to his death trustee under each trust. The trust for Frances Budlong provided that the trustee should pay over all of the net income to the beneficiary in monthly installments. It was provided, however, that, so long as decedent was sole trustee, the trustee should pay over to the beneficiary so much of the trust income as the trustee should deem appropriate. Any undistributed income was to be added to the corpus. Upon the death of the life tenant the trust property was to be distributed among her issue then living, per stirpes, and in default of issue living the property was to be paid over equally to the trusts of the same date for the benefit of the settlor's two sons, or the survivor of them or their issue. If there were no surviving life tenants or issue of the life tenants, provision was made for the benefit of the settlor's nephew and/or the nephew's wife and/or a designated university. The trusts for the benefit of each of the settlor's sons provided that the net income should be paid over to the respective sons, except that, so long as decedent was sole trustee, the trustee could use his discretion as to the amount of income to be distributed. The instrument further provided that if the life beneficiary, after becoming 30 years of age, was engaged in a trade or business and manifested sobriety and industry and needed additional capital, the trustee should pay over to him free of trust 25 per cent of the then principal of the fund. At any time thereafter if the trustee, in his discretion, should be satisfied that the beneficiary had demonstrated business ability, he was directed to pay over to the beneficiary free of trust 50 per cent of the principal and accumulations remaining in his hands. The remainders of the respective trust estates were to be distributed in the same manner provided for in the above trust for the benefit of the settlor's daughter. In each of these instruments it was provided that it was the wish and purpose of the settlor that the trustee should exercise the discretion given him liberally for the benefit of the children of the settlor, and that the distribution of the above percentages of principal should be made to the sons unless there should appear definite and substantial reasons for not doing so. The indenture for the benefit of the daughter provided that it was the wish and purpose of the settlor that during the lifetime of the said daughter the trust estate be so managed as to yield as large a return as possible consistent with reasonable security and prudent management, and that following the death of the daughter the policy of investment and reinvestment should emphasize the preservation and security of the principal of the fund as a primary objective. In all three trusts the donor reserved the right to appoint successor trustees, but designated a corporate trustee and an individual to act as such in the event he failed to make other appointments. Each trust was expressly irrevocable, and no express power to alter, amend, revoke, or terminate was reserved. They were not made in contemplation of death. The respondent has included the value of each of the trusts in the decedent's gross estate. Since the briefs were filed, respondent has conceded, in view of the provisions of section 81.17 of Regulations 105, as amended by T. D. 5512, approved May 1, 1946 (I. R. B. 1946, No. 10, p. 9), that the sum of $ 4,841.33, being the value of a remainder of a different and separate trust created by the decedent for the benefit of his daughter, is not includible in the gross estate. Hence that trust is not in question here. OPINION. In the 1929 trusts for decedent's three children, decedent had the discretionary power, so long as he acted as trustee, to distribute, or to accumulate and add to corpus, all or any part of the income as he saw fit. Respondent contends that this power amounted to a right to designate the persons who should possess or enjoy the property or the income therefrom, and that, since decedent, by acting as sole trustee throughout his life, retained the right until the moment of his death, section 811 (c) of the code requires the inclusion in the gross estate of the value of at least so much of the property as was transferred to the trusts after March 3, 1931. Respondent further contends that decedent also had the right to expend corpus for the benefit of income beneficiaries in case of sickness or other emergency, and that it amounted to a power to alter, amend, or revoke within the meaning of section 811 (d) (2), thus bringing into the gross estate the value of the entire corpora of the trusts. The pertinent portions of section 811 (c) and (d) (2) are set out in the margin. *91 Respondent's argument as to decedent's power to invade the corpus is predicated upon the third paragraph of article second of the trust instrument. Petitioner contends that decedent did not have that power, but that it was intended only for a successor trustee. Though there is considerable merit in petitioner's contention, we deem it unnecessary to decide the debatable question as to whether decedent had the power. Assuming for present purposes that he did, we think, nevertheless, it is not properly characterizable as a power to "alter, amend or revoke" within the meaning of section 811 (d) (2). It is obvious that the power in question gave the trustee no absolute and arbitrary control over the corpus. On the contrary, it was conditional and limited. A definite standard -- the sickness or other emergency of the respective beneficiaries -- was provided to govern its exercise. Furthermore, its exercise could in no way inure to the benefit of the decedent. We have little doubt that an income beneficiary, suffering illness or other emergency, could, in the event of any arbitrary refusal by decedent to apply principal for his need, have obtained appropriate relief by a proceeding in equity. See Barbour v. Cummings, 26 R. I. 201; 58 Atl. 660; Viall v. Rhode Island Hospital Trust Co., 45 R. I. 432; 123 Atl. 570; cf. Carrier v. Carrier, 226 N. Y. 114; 123 N.E. 135">123 N. E. 135. It is equally probable that if decedent had chosen to apply principal for an income beneficiary when no sickness or emergency existed, a remainderman would have had just cause for complaint in equity. See In re Briggs' Estate, 150 Pa. 66">150 Pa. 66; 27 Atl. (2d) 430; cf. Helvering v. McCormack, 135 Fed. (2d) 294. Clearly, the decedent did not have free rein to expend the corpus or to give it to whom he chose. In our opinion, the discretionary power to use corpus for the benefit of one not the grantor, in case of sickness or other emergency, may not be distorted into a device to alter, amend, or revoke. 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">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 therefor 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. On the other hand, where no standard is provided, where the beneficiary has no enforceable right, and the invasion of corpus rests within the absolute discretion of the grantor as trustee, it may properly be said that he has that degree of control over the corpus which would justify taxing it to his estate. Estate of Albert E. Nettleton, 4 T. C. 987, was a case falling within the latter category. It may be that Jennings v. Smith, 63 Fed. Supp. 834, upon which respondent relies, is also a case in that category. At least it appears to us that the court concluded that there was no limit upon the grantor-trustee's exercise of the power to invade. We are not prepared to say that we should have reached the same conclusion upon the facts there present. In any event, however, if that decision is not thus distinguishable, we, with all due respect, should consider it necessary to disagree with the court's reasoning. We pass, therefore, to a consideration of the unlimited power of the decedent to distribute the trust income or accumulate and add it to principal. In contending that this power does not warrant the inclusion of the trust property under section 811 (c), petitioner relies upon Estate of Edward E. Bradley, 1 T. C. 518; affd., 140 Fed. (2d) 87. We agree that that case requires the exclusion of so much of the property as was transferred to the trusts prior to March 3, 1931. This, for the reason that the amendments made to subsection (c) by the Joint Resolution of that date, one of which related to the retained right to designate the persons to possess or enjoy the property or the income therefrom, had prospective application only. Hassett v. Welch, 303 U.S. 303">303 U.S. 303. A different situation, however, is presented with respect to the transfers made after March 3, 1931. Security-First National Bank of Los Angeles, 36 B. T. A. 633; Estate of Charles Curie, 4 T.C. 1175">4 T. C. 1175. As a practical matter decedent could give all the income to the primary beneficiaries or take it away and give it to remaindermen, persons other than income beneficiaries. That was a right to shift economic benefits and enjoyment from one person to another, which is, we think, contemplated by the phrase "to designate the persons who shall possess or enjoy * * * the income" from the property. Since decedent retained this right until the moment of his death -- and it is immaterial that he retained it as trustee rather than as settlor, Welch v. Terhune, 126 Fed. (2d) 695 -- the express provisions of section 811 (c) are met, requiring that the value of transfers subsequent to March 3, 1931, be included in the gross estate. The 1929 trust for the benefit of decedent's sister is somewhat different from the trusts for the children, in that the sister had an absolute right to a minimum payment of $ 2,500 per year. Except as so limited, the decedent had the same right to distribute or accumulate income, as in the other trusts. Respondent therefore properly discounted the value of the corpus of that trust by the value of the life annuity of the primary beneficiary. As in the other trusts, however, he erred in including the value of property transferred prior to March 3, 1931. What we have already said is dispositive also of the 1937 trusts for decedent's children. In those trusts he likewise could distribute or accumulate the income as he saw fit, thereby having retained the right to designate the enjoyment. Since all transfers to these trusts were subsequent to March 3, 1931, the values of the entire corpora are includible in the gross estate under section 811 (c). As already stated, respondent has now conceded that the value of an additional and separate trust created by decedent for the benefit of his daughter is not includible in the gross estate. It is so ordered. Since the parties have stipulated that additional attorneys' fees and executor's commissions occasioned by this proceeding may be proved and deduction allowed therefor, the matter can be taken care of in the recomputation. Decision will be entered under Rule 50. Footnotes 1. The Commissioner included in the gross estate only the sum of $ 5,173.85, which represents the value of the remainder after the life estate of the beneficiary.↩ 2. The Commissioner included in the gross estate only the sum of $ 11,905.17, which represented the value of the remainder after the life estate of the beneficiary.↩ 3. 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 * * *. * * * * (c) Transfers in Contemplation of, or Taking Effect at Death. -- To the extent of any interest therein of which the decedent * * * has at any time made a transfer, by trust or otherwise, under which he has retained * * * for any period which does not in fact end before his death * * * (2) the right * * * to designate the persons who shall possess or enjoy the property or the income therefrom * * *. (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, * * *↩ Authorities (1) Hassett v. Welch , 58 S. 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