Estate of Leona Engelman, Peggy D. Mattson v. Commissioner

121 T.C. No. 4
UNITED STATES TAX COURT
ESTATE OF LEONA ENGELMAN, DECEASED, PEGGY D. MATTSON, EXECUTOR,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4668-02. Filed July 24, 2003.
In 1990, H and D, husband and wife, established a
living trust. The terms of the trust provided for an
allocation of trust assets between two separate trusts,
Trust A and Trust B, upon the death of the first
spouse. Initially, all assets were to be placed in
Trust A except to the extent disclaimed by the
surviving spouse. Disclaimed assets were to be placed
in Trust B. The surviving spouse was also granted a
power of appointment effective at death over Trust A.
H died on Dec. 30, 1997. On Feb. 5, 1998, D
executed a document entitled “Power of Appointment”
directing disposition of the Trust A corpus. D died on
Mar. 6, 1998. Thereafter, on May 11, 1998, the special
administrator of her estate executed a “Disclaimer” of
D’s interest in Trust A assets valued at approximately
$600,000 as of H’s earlier death. Those assets were
placed in Trust B and distributed to the beneficiaries
thereof.
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Held: Trust assets worth approximately $617,317
at D’s date of death are includable in the gross estate
on account of absence of a disclaimer qualified within
the meaning of sec. 2518, I.R.C.
Held, further, no charitable deduction is
allowable with respect to distributions to the American
Cancer Society, Yale University School of Law, or the
State of Israel.
Richard V. Vermazen, for petitioner.
Christine V. Olsen, for respondent.
OPINION
WHERRY, Judge: Respondent determined a Federal estate tax
deficiency of $356,211 for the Estate of Leona Engelman (the
estate). After concessions, the issues for decision are:
(1) Whether a qualified disclaimer within the meaning of
section 2518 was made with respect to trust assets worth
approximately $617,317 at the date of death of Leona Engelman
(decedent); and
(2) whether, to the extent that the foregoing trust assets
are included in the gross estate, the estate is entitled to a
charitable deduction for certain amounts distributed.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the date of decedent’s
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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Background
This case was submitted fully stipulated pursuant to Rule
122, and the facts are so found. The stipulations of the
parties, with accompanying exhibits, are incorporated herein by
this reference. Decedent was a resident of California when she
died testate in that State on March 6, 1998. No probate
proceeding was maintained on behalf of the estate. The executor
and special administrator of decedent’s estate, Peggy D. Mattson
(Ms. Mattson), resided in California at the time the petition in
this case was filed.
Decedent and Samuel Engelman (Mr. Engelman) were husband and
wife. On January 10, 1990, in California, they executed a
declaration of trust placing their assets into the Engelman
Living Trust. The instrument named the settlors, decedent and
Mr. Engelman, as the initial trustees of the trust and set forth
provisions regarding administration and disposition of the trust
estate.
The trust declaration provided generally that, while both
settlors were alive, the trustees were to distribute income or
principal as the settlors directed. Upon the death of the first
spouse, the following provisions were to take effect:
2. DEATH OF FIRST SETTLOR. Upon the death of one
of the SETTLORS, survived by the other, the TRUSTEES
shall divide the Trust Estate into two separate trusts.
These separate trusts will be referred to as: TRUST “A”
and TRUST “B”. Although it is intended that two
separate trusts be created under the laws of California
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for federal and state income tax purposes, the TRUSTEES
may hold all of the Trust Estate as one common fund,
and are not required to make a physical division
thereof.
3. DIVISION AND ALLOCATION OF ASSETS. The Trust
Estate, and distributions received by this Trust from
the estate of the deceased SETTLOR (if any), shall be
allocated among the trusts described above as follows:
A. Except as provided in Subparagraph B and
Paragraph 4 [relating to simultaneous death], the
entire Trust Estate shall be allocated to TRUST “A.”
B. If the surviving SETTLOR, in his or her
capacity as beneficiary, effectively disclaims (under
Code Section 2518 or any successor provision then in
effect) all, or any specific portion, of his or her
interest in TRUST “A”, such disclaimed amount shall be
allocated to TRUST “B” to be held, administered and
distributed according to its provisions.
With respect to Trust A, all income was to be paid to or for
the benefit of the surviving settlor; the surviving settlor could
direct the trustees to distribute principal at any time and for
any reason; and the surviving settlor was granted a power, at his
or her death, to appoint any part of the principal and
undistributed income of Trust A. The latter power was to “be
made by last written instrument filed with the TRUSTEES,
effective at the surviving SETTLOR’s death and specifically
referring to this power of appointment.” Any portion of Trust A
not so appointed was to be added to Trust B.
As regards Trust B, net income was to be paid to the
surviving settlor at least annually, and the trustees were
authorized to distribute principal as they determined necessary
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or advisable for the settlor’s health, education, support or
maintenance (after exhaustion of Trust A). Upon the death of the
surviving settlor, the balance of Trust B (excluding household
goods and personal effects) was to be distributed pursuant to an
enumerated list of specific bequests, with the residue to the
State of Israel. Decedent and Mr. Engelman also on January 10,
1990, signed substantially identical pourover wills devising and
bequeathing their estates to the trustees of the Engelman Living
Trust.
Decedent and Mr. Engelman amended the trust instrument on
December 14, 1990, May 6, 1992, and December 28, 1994. The first
two amendments revised the list of specific beneficiaries to
receive assets from Trust B, and the third amendment provided
further information regarding successor trustees. According to
the second amendment, specific bequests from Trust B were to be
made as follows: To Helen Adams, $50,000; to Carol L. Engelman,
$30,000; to Jerrold W. Engelman, $10,000; to Alan Engelman,
$10,000; to the American Cancer Society, $5,000; and to the Yale
University School of Law, $5,000.
On December 30, 1997, Mr. Engelman died, survived by
decedent. At that time, the total value of assets in the
Engelman Living Trust was approximately $1,546,487. Subse-
quently, on February 5, 1998, decedent executed a document
entitled “POWER OF APPOINTMENT”. The preamble recited: “The
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undersigned at present is the holder of a power of appointment
over the principal of Trust A or the Survivor’s Trust, which came
into existence as the result of the passing of her husband,
pursuant to that certain revocable Declaration of Trust executed
by SAMUEL ENGELMAN and LEONA ENGELMAN on January 10, 1990.”
Thereafter, the instrument directed that the Trust A corpus
remain in trust for the benefit of Helen Adams and then upon her
death be distributed 10 percent each to the American Cancer
Society, the University of California at San Diego, the City of
Hope, and Sharon Commings, with the residue to Jeffrey McCoy.
The power of appointment was delivered to the trustees of the
Engelman Living Trust.
Decedent died on March 6, 1998. On May 11, 1998, Ms.
Mattson, in her capacity as special administrator of decedent’s
estate, executed a document entitled “DISCLAIMER OF INTEREST IN
TRUST PROPERTY”. Language therein stated that Ms. Mattson, on
behalf of decedent, “absolutely disclaims and renounces” all
interest in assets listed on an attached schedule. The
referenced schedule set forth Trust A assets valued at
approximately $600,000 as of Mr. Engelman’s date of death. The
document further specified that “such disclaimed assets shall
constitute Trust ‘B’ as per the express provisions” of the
Engelman Living Trust.
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Ms. Mattson, as successor trustee of the Engelman Living
Trust, then distributed from Trust A to Trust B property worth
approximately $617,317, representing the appreciated value of the
disclaimed assets on the date of the distribution. After this
allocation, property valued at approximately $930,557 as of
decedent’s date of death remained in Trust A. On July 2, 1998,
checks written on the account of “Engelman Living Trust B” were
issued to the following beneficiaries: To the Estate of Helen
Adams, $50,000; to Carol L. Engelman, $30,000; to Jerrold W.
Engelman, $10,000; to Alan Engelman, $10,000; to Yale University,
$5,000; and to the American Cancer Society, $5,000. In August of
1998, a transmittal letter referencing “the balance of the B
Trust portion of the Engelman Trust” and a check in the amount of
$432,901.41 were sent to the State of Israel.
Thereafter, in December of 1998, a Form 706, United States
Estate (and Generation-Skipping Transfer) Tax Return, was filed
on behalf of decedent’s estate. The reported value of the gross
estate, $936,476 as of the alternate valuation date, excluded the
disclaimed assets. The return claimed a charitable deduction of
$285,777, comprising $95,259 each to the American Cancer Society,
the University of California at San Diego, and the City of Hope.
The Form 706 also reported, with respect to individual
noncharitable beneficiaries, that Sharon Commings received
$95,529 and Jeffrey McCoy received $535,565 from the estate.
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During relevant times, Ms. Mattson also served as the
appointed conservator for the person and estate of Helen Adams.
In this capacity, on September 17, 1999, Ms. Mattson executed a
document entitled “DISCLAIMER OF INTEREST IN TRUST PROPERTY”.
The writing purported to disclaim “an income interest only in the
residue of Trust “A” of the * * * ENGELMAN LIVING TRUST * * *
created by a Power of Appointment executed by LEONA ENGELMAN on
February 5, 1998”. The estate concedes that this attempted
disclaimer was untimely and “is moot”.
Discussion
I. Inclusion of Trust Assets in the Gross Estate
A. General Rules
As a general rule, the Internal Revenue Code imposes a
Federal tax “on the transfer of the taxable estate of every
decedent who is a citizen or resident of the United States.”
Sec. 2001(a). The taxable estate, in turn, is defined as “the
value of the gross estate”, less applicable deductions. Sec.
2051. Section 2031(a) specifies that the gross estate comprises
“all property, real or personal, tangible or intangible, wherever
situated”, to the extent provided in sections 2033 through 2045.
Section 2033 broadly states that “The value of the gross
estate shall include the value of all property to the extent of
the interest therein of the decedent at the time of his death.”
Sections 2034 through 2045 then explicitly mandate inclusion of
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several more narrowly defined classes of assets. Among these
specific sections are section 2036, which includes transfers
where the decedent retained the possession of, the enjoyment of,
or the right to designate persons who shall possess or enjoy
transferred property or income therefrom; section 2038, which
includes revocable transfers; and section 2041, which includes
property over which the decedent held a general power of
appointment.
However, inclusion of certain assets in the gross estate may
be avoided through operation of the disclaimer provisions of the
Internal Revenue Code. For purposes of the estate tax, section
2046 incorporates by reference section 2518, which reads in part:
SECTION 2518. DISCLAIMERS.
(a) General Rule.--For purposes of this subtitle,
if a person makes a qualified disclaimer with respect
to any interest in property, this subtitle shall apply
with respect to such interest as if the interest had
never been transferred to such person.
(b) Qualified Disclaimer Defined.--For purposes of
subsection (a), the term “qualified disclaimer” means
an irrevocable and unqualified refusal by a person to
accept an interest in property but only if--
(1) such refusal is in writing,
(2) such writing is received by the
transferor of the interest, his legal
representative, or the holder of the legal title
to the property to which the interest relates not
later than the date which is 9 months after the
later of--
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(A) the date on which the transfer
creating the interest in such person is made,
or
(B) the day on which such person attains
age 21,
(3) such person has not accepted the interest
or any of its benefits, and
(4) as a result of such refusal, the interest
passes without any direction on the part of the
person making the disclaimer and passes either--
(A) to the spouse of the decedent, or
(B) to a person other than the person
making the disclaimer.
As pertains to the above-quoted section 2518(b)(3)
requirement of no acceptance of benefits, regulations further
provide:
A qualified disclaimer cannot be made with respect to
an interest in property if the disclaimant has accepted
the interest or any of its benefits, expressly or
impliedly, prior to making the disclaimer. Acceptance
is manifested by an affirmative act which is consistent
with ownership of the interest in property. Acts
indicative of acceptance include using the property or
the interest in property; accepting dividends,
interest, or rents from the property; and directing
others to act with respect to the property or interest
in property. * * * The exercise of a power of
appointment to any extent by the donee of the power is
an acceptance of its benefits. * * * [Sec. 25.2518-
2(d)(1), Gift Tax Regs.]
See also H. Rept. 94-1380, at 67 (1976), 1976-3 C.B. (Vol. 3)
738, 801.
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B. Contentions of the Parties
For purposes of the instant case, the estate concedes on
brief that “if Leona accepted the disclaimed property, the
property of Trust B is included in Leona’s gross estate under
I.R.C. secs. 2036 and 2038.” Accordingly, the dispute of the
parties centers primarily on whether decedent manifested
acceptance of the assets purportedly disclaimed within the
meaning of section 2518(b)(3).
Respondent contends that the so-called power of appointment
executed by decedent resulted in an acceptance violative of the
section 2518(b)(3) requirement. Respondent asserts that when
decedent’s exercise of the power became effective and irrevocable
at her death, “there was a ‘manifestation of ownership’ and
acceptance of the benefits of the power.” Hence, it is
respondent’s position that any subsequent disclaimer by the
executor of decedent’s estate was not qualified under section
2518.
Conversely, the estate advances three principal arguments as
to why no acceptance occurred in the circumstances here. The
estate maintains that the power of appointment did not result in
an acceptance because: (1) Execution of the power did not itself
manifest any dominion and control over the property, nor did
exercise of the power ever become effective due to the relation-
back doctrine under State law; (2) execution of the power was not
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specific to Mr. Engelman’s property; and (3) execution of the
document should not be characterized as the exercise of a power
of appointment, due to the extent of decedent’s rights in Trust
A.
C. Analysis
The estate’s point that execution of the power of
appointment did not itself constitute an acceptance rests on
Example (7) of section 25.2518-(2)(d)(4), Gift Tax Regs., which
provides:
Example (7). On January 1, 1980, A created an
irrevocable trust in which B was given a testamentary
general power of appointment over the trust’s corpus.
B executed a will on June 1, 1980, in which B provided
for the exercise of the power of appointment. On
September 1, 1980, B disclaimed the testamentary power
of appointment. Assuming the remaining requirements of
section 2518(b) are satisfied, B’s disclaimer of the
testamentary power of appointment is a qualified
disclaimer.
From the foregoing example, the estate deduces that execution of
a revocable instrument providing for the exercise of a
testamentary power of appointment effective at death does not
preclude a later disclaimer of such power. Yet respondent does
not argue otherwise, pointing out that merely executing an
ambulatory instrument does not constitute acceptance because the
instrument is subject to revision.
Nor does there seem to be any significant disagreement
between the parties about the corollary principle that an
exercise of a power of appointment which has become effective may
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be deemed an acceptance. In fact, the estate maintains that it
may be inferred from the above example that the regulatory
language in section 25.2518-2(d), Gift Tax Regs., describing the
exercise of a power of appointment as an acceptance of its
benefits, “applies only to an exercise that has become
effective.” Rather, the estate claims that the exercise of the
power in this case never became effective, while respondent takes
the opposite view.
Under California law, a power of appointment is generally
revocable until the property subject thereto has been transferred
or has become distributable pursuant to exercise of the power.
Cal. Prob. Code sec. 695 (West 2002). The power at issue in this
case states that it was to take effect at the surviving settlor’s
death. As previously indicated, the estate’s contention that
decedent’s exercise of her power of appointment never became
effective rests on the relation-back doctrine under State law.
Cal. Prob. Code section 282(a) (West 2002) provides:
Unless the creator of the interest provides for a
specific disposition of the interest in the event of a
disclaimer, the interest disclaimed shall descend, go,
be distributed, or continue to be held (1) as to a
present interest, as if the disclaimant had predeceased
the creator of the interest or (2) as to a future
interest, as if the disclaimant had died before the
event determining that the taker of the interest had
become finally ascertained and the taker’s interest
indefeasibly vested. A disclaimer relates back for all
purposes to the date of the death of the creator of the
disclaimed interest or the determinative event, as the
case may be.
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On the basis of the above statute, the estate maintains that the
power of appointment decedent signed on February 5, 1998, never
became effective because the disclaimer subsequently executed by
Ms. Mattson related back to Mr. Engelman’s death on December 30,
1997, and therefore must be treated as predating the exercise.
At the outset, we note that the State law doctrine of
relation back can have no potential applicability to this case
unless the purported disclaimer was effective for State law
purposes. Additionally, this Court has held as a general rule
that a disclaimer will not be treated as qualified under section
2518 unless it is effective under applicable local law, since
State law determines whether a property interest has passed.
Estate of Bennett v. Commissioner, 100 T.C. 42, 67 (1993); Estate
of Chamberlain v. Commissioner, T.C. Memo. 1999-181, affd. 9 Fed.
Appx. 713 (9th Cir. 2001). Hence, as a threshold matter, we
consider the requirements for a valid disclaimer under California
law. As pertinent here, Cal. Prob. Code section 285 (West 2002)
contains restrictions on the ability of a donee to make a
disclaimer:
(a) A disclaimer may not be made after the
beneficiary has accepted the interest sought to be
disclaimed.
(b) For the purpose of this section, a beneficiary
has accepted an interest if any of the following occurs
before a disclaimer is filed with respect to that
interest:
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(1) The beneficiary, or someone acting on behalf
of the beneficiary, makes a voluntary assignment,
conveyance, encumbrance, pledge, or transfer of the
interest or part thereof, or contracts to do so;
provided, however, that a beneficiary will not have
accepted an interest if the beneficiary makes a
gratuitous conveyance or transfer of the beneficiary’s
entire interest in property to the person or persons
who would have received the property had the
beneficiary made an otherwise qualified disclaimer
pursuant to this part.
* * * * * * *
(3) The beneficiary, or someone acting on behalf
of the beneficiary, accepts the interest or part
thereof or benefit thereunder.
Thus, California law, like Federal law, incorporates a rule
denying the effectiveness of a disclaimer in situations
evidencing a prior acceptance of benefits.
The foregoing statute was recently interpreted by the Court
of Appeals for the Ninth Circuit, to which appeal in the instant
case would normally lie, in Cassell v. Kolb (In re Kolb), 326
F.3d 1030 (9th Cir. 2003). There, in the context of a bankruptcy
proceeding, the Court of Appeals considered whether certain acts
by a debtor constituted acceptance of a contingent interest in
trust assets and thereby prevented the debtor from later
disclaiming the property. Id. at 1033-1034. The appellate court
focused on construction of the “broad ‘catch-all’ language” in
Cal. Prob. Code section 285(b)(3). Id. at 1037. After first
noting the dearth of California caselaw on the statute, the Court
of Appeals engaged in an extensive analysis of the language and
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history of the provision, as well as of constructions of similar
enactments by other States. Id. at 1037-1041. The Court of
Appeals then concluded:
we think the language of § 285(b)(3), the definitions
incorporated by the Uniform Disclaimer of Transfers
Act, and the decisions construing analogous state
probate codes, all demonstrate that the California
legislature intended to prohibit the disclaimer of an
interest accepted through conduct by a beneficiary
implying an intent to direct or control the property in
a manner that conveys more than a de minimis benefit to
the beneficiary or a third party. * * * Application of
this standard is a fact-sensitive inquiry that centers
on the conduct of the beneficiary, and the result of
such conduct. [Id. at 1039.]
Applying the just-described rule to the facts before it, the
Court of Appeals held that the debtor’s declaration of an
interest in the disputed trust on several loan applications
constituted an acceptance of his contingent interest in the trust
assets. Id. at 1041. Further, according to the appellate court:
“That acceptance of ‘part’ of the contingent interest thus made
his later disclaimer ineffective under § 285(b)(3) of the
California Probate Code, because acceptance of a part of, or
benefit under, the interest constitutes acceptance of the
interest in its entirety.” Id.
Here, the Court is satisfied that decedent would be
considered under California law to have accepted her interest in,
and power of appointment over, all of the assets contained in
Trust A. Decedent executed a power of appointment which on its
face provides for disposition of the assets of Trust A in their
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entirety. She died without having amended the document’s
language or in any way restricted its reach. Such conduct is
reasonably interpreted as implying an intent to direct or control
the property in a manner that conveys more than a de minimis
benefit to the third parties named in the power of appointment.
Hence, the subsequent disclaimer would lack efficacy for State
law purposes, and the relation-back doctrine would not apply.
Moreover, regardless of the validity of decedent’s
disclaimer under State statutes, caselaw indicates that the
relation-back concept is entitled to only limited recognition for
Federal tax purposes. We acknowledge that, as pointed out by the
estate, this Court has relied on the doctrine in determining the
requisite signatory beneficiaries for a valid special use
valuation election under section 2032A. McDonald v.
Commissioner, 89 T.C. 293, 304-305 (1987), affd. in part on this
issue and revd. in part on other grounds 853 F.2d 1494 (8th Cir.
1988).
In McDonald v. Commissioner, supra at 304-305, we held
insufficient an election signed by the original disclaiming
beneficiary, and not the ultimate recipients, of property to
which the election related. We reasoned that the election was
intended to evidence the written consent of those parties
obtaining an interest in the property to be personally liable for
any recapture tax imposed on later disposition or change in use
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of the property. Id. Practical and administrative concerns
dictated that we define the interested parties in view of State
relation-back laws.
Nonetheless, the U.S. Supreme Court has summarized the
broader policy concerning the relation-back doctrine in Federal
tax contexts as follows:
Cases like Jewett [v. Commissioner, 455 U.S. 305(1982)] and this one illustrate as well as any why it
is that state property transfer rules do not translate
into federal taxation rules. Under state property
rules, an effective disclaimer of a testamentary gift
is generally treated as relating back to the moment of
the original transfer of the interest being disclaimed,
having the effect of canceling the transfer to the
disclaimant ab initio and substituting a single
transfer from the original donor to the beneficiary of
the disclaimer. Although a state-law right to disclaim
with such consequences might be thought to follow from
the common-law principle that a gift is a bilateral
transaction, requiring not only a donor’s intent to
give, but also a donee’s acceptance, state-law
tolerance for delay in disclaiming reflects a less
theoretical concern. An important consequence of
treating a disclaimer as an ab initio defeasance is
that the disclaimant’s creditors are barred from
reaching the disclaimed property. The ab initio
disclaimer thus operates as a legal fiction obviating a
more straightforward rule defeating the claims of a
disclaimant’s creditors in the property disclaimed.
The principles underlying the federal gift tax
treatment of disclaimers look to different objects,
however. As we have already stated, Congress enacted
the gift tax as a supplement to the estate tax and a
means of curbing estate tax avoidance. Since the
reasons for defeating a disclaimant’s creditors would
furnish no reasons for defeating the gift tax as well,
the Jewett Court was undoubtedly correct to hold that
Congress had not meant to incorporate state-law
fictions as touchstones of taxability when it enacted
the Act. Absent such a legal fiction, the federal gift
tax is not struck blind by a disclaimer. * * * [United
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States v. Irvine, 511 U.S. 224, 239-240 (1994);
citations and fn. ref. omitted.]
The instant case fails to present any compelling
considerations of the nature seen in McDonald v. Commissioner,
supra. Nor would recognition of the relation-back concept serve
to advance the object of protecting the disclaimed assets from
the reach of decedent’s State-law creditors. Accordingly,
precedent does not justify use of the relation-back doctrine in
these circumstances to relieve decedent of the effects of having
exercised her power of appointment.
Having concluded that the legal fiction of relation back
should not be employed to prevent decedent’s power of appointment
from becoming effective at her date of death, the Court is
satisfied that such effective power should be construed as an
acceptance of the Trust A property within the meaning of section
2518. Regulations under that section make explicit reference not
only to exercise of a power of appointment but also more
generally to “directing others to act with respect to the
property or interest in property” as marks of acceptance. Sec.
25.2518-2(d)(1), Gift Tax Regs. Decedent’s conduct falls within
these guidelines.
Moreover, the estate’s further argument that decedent’s
execution of the power fails as an acceptance because it was not
specific to Mr. Engelman’s property is misplaced on account of
the timing issues inherent in the preceding discussion. The
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estate alleges that because the power of appointment simply
applied “to whatever property happens to be in Trust A on the
death of Leona and might not apply to any of Samuel’s property”,
nothing in the document’s execution signaled that decedent
claimed ownership of Mr. Engelman’s property. Yet our focus is
not on when the power was executed but on the date of decedent’s
death when it became effective. When decedent died without
having revoked or limited the document, and the power on its face
disposed of all property in Trust A now alleged to be part of her
gross estate, she asserted control over all the relevant assets.
In the alternative, the estate seeks to avoid the result
stemming from characterization of the February 5, 1998, document
as the exercise of a power of appointment that became effective
at decedent’s death by arguing that, on account of the extent of
her rights in Trust A, decedent could not have held or exercised
a power of appointment. The estate’s contentions are founded in
large part on the State law doctrine of merger. Generally, where
an equitable and legal estate become united in a single person,
i.e., where the sole beneficiary is also the sole trustee, the
two interests merge and the trust terminates. Nellis v. Rickard,
66 P. 32, 33 (Cal. 1901); 60 Cal. Jur. 3d, Trusts, sec. 286.
The estate alleges: “Because Samuel left his property to
Trust A where Leona had an immediate and unrestricted right of
withdrawal, there was no restriction on Leona’s current interest
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in the property to support the granting of a separate power of
appointment in the same property.” Rather, the estate would have
us view decedent’s rights over Trust A as a power to alter,
amend, or revoke the trust.1
However, California by statute provides an exception to the
doctrine of merger:
If a trust provides for one or more successor
beneficiaries after the death of the settlor, the trust
is not invalid, merged, or terminated in either of the
following circumstances:
* * * * * * *
(b) Where there are two or more settlors, one or
more of whom are trustees, and the beneficial interest
in the trust is in one or more of the settlors during
the lifetime of the settlors. [Cal. Prob. Code sec.
15209 (West 1991).]
Operation of this statute is illustrated by Ammco Ornamental
Iron, Inc. v. Wing, 31 Cal. Rptr. 2d 564 (Ct. App. 1994). There,
upon his mother’s death, Mr. Wing became the sole trustee of a
trust with respect to which he held a life income interest; a
power to invade principal for support, health, or maintenance;
and a testamentary power of appointment exercisable in favor of
any persons other than himself, his estate, or his creditors.
Id. at 566-567. If Mr. Wing failed to exercise the power of
1
We further note that acceptance of the premises underlying
this argument could lead to inclusion of the assets of the living
trust, in their entirety, in decedent’s gross estate under other
rules, such as those which can apply under secs. 2031 and 2033 as
though decedent owned the property outright.
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appointment, the trust instrument provided that the corpus should
go to his children in equal shares. Id. at 566.
Given these facts, the court of appeal emphasized that
“persons in existence, who are specifically designated in a trust
instrument to take in default of the exercise of a power of
appointment by the holder of the preceding estate, are
beneficiaries of that trust and acquire vested remainder
interests, although their interests are subject to complete
divestment.” Id. at 569. Because Mr. Wing’s children were
living when the trust was created, the court held the doctrine of
merger inapplicable, concluding that the children were additional
beneficiaries of the trust whose interests could not be
disregarded. Id. at 569-570.
We see no material distinction between the situation at
issue in Ammco Ornamental Iron, Inc., and that presented here.
Like Mr. Wing, decedent was granted a life income interest in, a
power to invade, and a power of appointment over the relevant
trust. Although decedent’s powers were in some respects broader
than those of Mr. Wing, none of the differentiating features
figured in the California court’s analysis. The crucial
similarity lies in the fact that the two trust instruments both
named beneficiaries in existence at the time of execution to take
if the respective powers of appointment were not exercised.
These vested future interests were sufficient in Ammco Ornamental
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Iron, Inc., to prevent merger. The naming of default
beneficiaries here, under the Trust B provisions, should yield an
identical result.
The estate also makes the further contention that, even
apart from the merger doctrine, “Leona’s unlimited right of
withdrawal over all of Trust A (and her rights to alter, amend or
revoke Trust A) and her failure to withdraw the property made her
effectively the settlor of all property of Trust A and eliminated
the distinction of his former property or hers.”2 A fortiori,
the estate alleges that as sole settlor of Trust A, decedent was
unable to grant a power of appointment to herself over the
property therein.
Yet, the estate has cited no California authority indicating
that courts of that State would disregard the actual parties and
the express drafting of the instrument at issue. Additionally,
as respondent points out, the definitions with respect to powers
of appointment contained in Cal. Prob. Code section 610 (West
2002) appear to contemplate that an individual’s retained power
to direct disposition of his or her property would be
characterized as a power of appointment. See Cal. Prob. Code
sec. 610(e) (“‘Donor’ means the person who creates or reserves a
power of appointment.”); Cal. Prob. Code sec. 610(d) (“‘Donee’
2
See supra note 1.
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means the person to whom a power of appointment is given or in
whose favor a power of appointment is reserved.”).
D. Conclusion
We conclude that decedent’s execution of the document
entitled “POWER OF APPOINTMENT”, which became effective upon and
by reason of her death, constituted an acceptance of the property
in Trust A within the meaning of section 2518. Consequently, the
later attempted disclaimer by her executor was not qualified for
Federal estate tax purposes. The trust assets of approximately
$617,317 that were the subject of the disclaimer are therefore
includable in decedent’s gross estate.
II. Deductions From the Gross Estate for Charitable Gifts
A. General Rules
Section 2055(a) provides a deduction from the gross estate
for the value of bequests, legacies, devises, or transfers to,
inter alia, (1) the United States or a political subdivision
thereof, for public purposes; (2) corporations organized and
operated exclusively for religious, charitable, scientific,
literary, or educational purposes; and (3) trustees or fraternal
organizations, but only if the gifts are to be used exclusively
for religious, charitable, scientific, literary, or educational
purposes. Sec. 2055(a)(1), (2), and (3). Federal courts have
construed gifts to foreign political units, when clearly
restricted to charitable purposes, as gifts in trust within the
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meaning of section 2055(a)(3). E.g., Kaplun v. United States,
436 F.2d 799 (2d Cir. 1971); Natl. Sav. & Trust Co. v. United
States, 193 Ct. Cl. 775, 436 F.2d 458 (1971). The Internal
Revenue Service has adopted this position, as follows: “A
deduction is allowable under section 2055 of the Code with
respect to a transfer of property to a foreign government or
political subdivision thereof for exclusively charitable
purposes.” Rev. Rul. 74-523, 1974-2 C.B. 304. Conversely,
“where the use of such property is not limited to exclusively
charitable purposes within the meaning of sections 2055(a)(2) and
2055(a)(3)”, the deduction will be disallowed. Id.
B. Contentions of the Parties
The estate argues that if the assets transferred to Trust B
are included in decedent’s gross estate, charitable deductions
are allowable for the bequests thereunder to the American Cancer
Society, Yale Law School, and the State of Israel. It is the
estate’s position that even if the disclaimer was not qualified
under section 2518, it was nonetheless effective for State law
purposes. Therefore, according to the estate, decedent is
treated as having made gifts to the corresponding beneficiaries
when property was distributed pursuant to the terms of Trust B.
Respondent cites three principal reasons why the
distributions made to entities specified in Trust B do not yield
charitable deductions. The estate responds to each such
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allegation. First, respondent maintains that the explicit
language of the trust agreement precludes any argument that a
disclaimer not effective under section 2518 can, nonetheless, be
effective under State law to bring into operation the provisions
of Trust B. The trust instrument states that allocation to Trust
B would occur in the event that the surviving settlor
“effectively disclaims (under Code Section 2518 or any successor
provision then in effect)”. The estate counters that the
foregoing terms create no express requirement but only an
inference, alerting the trustee to be aware of the statute.
Second, respondent contends that even if the disclaimer was
effective under State law, the property at issue passed to Trust
B as a result of a discretionary act of the executor in making
the disclaimer, and not because of an act by decedent. It is
respondent’s position that decedent’s own actions in executing
the power of appointment and her subsequent death caused all
property to be treated at that time as subject to the Trust A
provisions. To this point, the estate once again responds with
reference to the relation-back doctrine.
Third, with respect to the distribution to the State of
Israel, respondent avers that a deduction is not allowable in any
event because Trust B provides only for an unrestricted gift.
Accordingly, respondent characterizes the gift as having failed
the requirement that the donor restrict use of a gift made to a
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foreign government to charitable uses. The estate, in contrast,
alleges that any such failure is cured by the following text of
Decision 6171 of the Cabinet of the Government of the State of
Israel (Decision 6171), dated October 1995 (a copy and
translation of which have been stipulated by the parties):
2.(a) Estates for the benefit of the State, whether or
not the testator has specified the ultimate purpose,
shall be designated by the Administrator General,
Ministry of Justice, for the purposes and to the bodies
as determined by the Public Committee as hereinafter
provided. Where the testator has specified the object,
the allocation shall be made within the scope of that
object.
(b) In estates for the benefit of the State where the
testator has not specified their object or where the
object is incapable of fulfillment, the Committee shall
make the designation exclusively for charitable
purposes, namely - welfare, education, health, culture,
religion, science, art and the advancement of all other
humanitarian and social aims.
(c) Monies from estates shall not be designated in
substitution of monies that have been budgeted in the
State Budget and shall not be designated for the
financing of activities which are directly carried out
by Government Ministries.
C. Analysis
Regulations promulgated under section 2055 clarify that a
deduction is allowed under the statute “for the value of property
included in the decedent’s gross estate and transferred by the
decedent during his lifetime or by will”. Sec. 20.2055-1(a),
Estate Tax Regs. (emphasis added). Courts likewise have declined
to permit deductions where the amounts passing to charity turned
upon the actions either of the decedent’s personal
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representatives, see Estate of Marine v. Commissioner, 97 T.C.
368, 378-379 (1991), affd. 990 F.2d 136 (4th Cir. 1993), or of
beneficiaries of the estate, see Bach v. McGinnes, 333 F.2d 979,
983-984 (3d Cir. 1964).
Here, we agree with respondent that the circumstances of
this case preclude treating the amounts received by the Trust B
beneficiaries as having been transferred by decedent. Rather,
the record reveals that those named in Trust B obtained
distributions on account of discretionary acts by Ms. Mattson.
By the terms of the Engelman Living Trust, allocation to Trust B
was conditioned on an effective disclaimer under section 2518.
Ms. Mattson’s decision to place assets in Trust B and ultimately
to distribute the property to the named beneficiaries
consequently did not occur within the framework of the trust
instrument. The estate’s suggestion that we disregard the
written language as merely an advisory reminder to the trustee is
unsupported and unconvincing. The relevant documents do not show
that a State law disclaimer could suffice to render operative the
provisions of Trust B.
Furthermore, even if a disclaimer effective under State
statutes could operate to transfer assets from Trust A to Trust B
within the confines of the written agreement, we have already
concluded that the disclaimer executed here would not be
recognized under pertinent California law. As a result,
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decedent’s disposition of the Trust A corpus by means of her
power of appointment became irrevocable at her death and cannot,
on account of the relation-back doctrine, be disregarded.
Decedent acted to transfer the property of Trust A to those named
in her power of appointment, rather than to Trust B and its
beneficiaries. Ms. Mattson’s actions to do otherwise cannot be
attributed to decedent.
As pertains to the gift to the State of Israel, caselaw is
contrary to the estate’s position. The donor, not the donee,
must restrict use of the gift to charitable purposes. The
foregoing principle has been recognized by Federal courts both in
construing the predecessor of section 2055 in the Revenue Act of
1926, ch. 27, sec. 303, 44 Stat. 72, and in interpreting section
2055 itself. See Contl. Ill. Natl. Bank & Trust Co. v. United
States, 185 Ct. Cl. 642, 403 F.2d 721 (1968); Levey v. Smith, 103
F.2d 643 (7th Cir. 1939). As stated in an early pronouncement:
Plaintiff urges that the statutory test “is the
use to which the property is to be put.” In our view
the test is: For what purpose is the property devised?
Consequently, a declaration by the donee that property
will be used for a charitable purpose cannot determine
the use for which it was bequeathed. It is the act of
the testator that determines, for purposes of
deduction, whether gifts or contributions which have
been bequeathed to a legatee “are to be used”
exclusively for religious, charitable and educational
purposes. We do not hold that parol evidence is not
admissible for the purpose of showing that a bequest,
absolute on its face, was in fact intended by the
testator and understood by the legatee to be burdened
by a trust. But such evidence to be material must
relate to words or acts of the testator and must tend
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to disclose the purpose of the testator in using the
testamentary language. * * * [Levey v. Smith, supra at
648; fn. ref. omitted.]
To like effect:
The fact that the gift involved here was used for
a charitable purpose presents plaintiff’s most
appealing argument. But this is not sufficient to meet
the requirements of sec. 2055(a)(3). If the right to
make the deduction could be met by showing only a
charitable use of the contribution, the applicability
of the estate tax in all similar situations would
depend upon the vagaries of post-estate planning. The
testator, and he alone, must order the recipient to
hold or use the contribution exclusively for charitable
purposes. Further, the statute does not permit the
deduction unless it is shown that the testator intended
that the gift be used exclusively for a charitable
project. * * * [Contl. Ill. Natl. Bank & Trust Co. v.
United States, supra at 725-726; emphasis added.]
Here, the language in the trust agreement pertaining to the
foreign bequest reads in its entirety: “The remainder of the
Trust Estate shall be distributed to the STATE OF ISRAEL.” Thus,
the governing instrument is devoid of any restrictions
circumscribing uses of the gift. Moreover, the record contains
no evidence from which it can be inferred that decedent intended
to limit the contribution to charitable purposes. It is
noteworthy that Decision 6171, on which the estate relies, did
not come into being until October 1995, long after the provision
granting the residue of Trust B to the State of Israel was
executed as part of the Engelman Living Trust on January 10,
1990. Accordingly, Decision 6171 sheds no light on decedent’s
intentions and, as a unilateral declaration by the donee, is
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insufficient in and of itself to satisfy the requirements of
section 2055.
D. Conclusion
For the reasons discussed above, the estate is not entitled
to charitable deductions for the amounts distributed to
beneficiaries named in Trust B of the Engelman Living Trust.
To reflect the foregoing and concessions,
Decision will be entered
under Rule 155.