DocketNumber： Docket No. 95318
Citation Numbers： 40 T.C. 970, 1963 U.S. Tax Ct. LEXIS 53
Judges： Opper
Filed Date： 9/18/1963
Status： Precedential
Modified Date： 11/14/2024
*53
Inter vivos trusts created by decedent under which he retained powers of invasion of corpus and accumulation of income
*970 Respondent determined a deficiency in Federal estate tax of $ 162,072.88. The issues remaining for decision are: (1) Whether, in respect of the three trusts, the enjoyment thereof was subject at the date of decedent's death to any change through the exercise of a power by decedent to alter, amend, or revoke under
FINDINGS OF FACT
The stipulated facts are hereby found accordingly.
The petitioner is the estate of John J. Round, Sr., deceased, late of Wakefield, Mass. (hereinafter called decedent), of which Boston Safe Deposit & Trust Co. (hereinafter called Boston), a banking corporation of Boston, Mass., and John J. Round, Jr., of Lynnfield Center, Mass. (hereinafter called Junior), are coexecutors.
Decedent was born on April 8, 1872, and died on April 4, 1958. The U.S. Estate Tax Return (Form 706) for the estate of decedent was filed with the district director of internal revenue, Boston, Mass.
In 1934 and 1935 decedent established three "spendthrift" trusts for his children. On September 14, 1934, decedent and Old Colony Trust Co. (hereinafter called Colony) entered into an agreement of trust (hereinafter called the*56 September trust). On August 21, 1935, decedent and State Street Trust Co. of Boston (hereinafter called *971 State) entered into an agreement of trust (hereinafter called the August trust). On December 31, 1935, an agreement of trust was entered into between decedent and State (hereinafter called the December trust).
With the exception of differences in the names of the corporate trustees, all three trust instruments provided, in part, as follows:
WHEREAS said [decedent] desires that the said securities shall be held in trust for the benefit of his children by said [Colony] and himself, hereinafter called Trustees * * *
* * * *
The said Trustees shall divide the trust property into gve equal shares and hold one of said shares in trust for each of the following children of the Donor, to wit: -- John Jay Round, Jr. -- born July 22, 1923 David H. Round -- born November 14, 1924 Janet B. Round -- born May 23, 1926 William H. Round -- born August 14, 1927 Katherine M. Round -- born November 18, 1929
The September trust and the December trust both contained the following paragraphs 1 and 2:
1. The said shares shall be held, managed, invested*57 and reinvested for the benefit of said children until they shall respectively arrive at the age of twenty-five (25) years * * * and as they shall arrive at said age, the Trustees shall pay over to said children, free and discharged of all trusts, one-half of the share held for his or her benefit. The remainder of said share shall be held in trust by said Trustees and managed and invested and reinvested for the benefit of said children until they shall respectively arrive at the age of thirty (30) years, and as they shall arrive at said age, the Trustees shall pay over and deliver to said children the remainder of said trust share, together with all accumulations, free and discharged of all trusts, PROVIDED, HOWEVER, in the event that in the sole discretion of the Trustees they shall be of the opinion that it would be injudicious to pay over to said children the principal of his or her share for any reason upon any one of them arriving at the respective ages of twenty-five and thirty years, then said Trustees may, in their sole discretion, withhold the distribution of principal for a period not exceeding ten years from the date on which said principal is first withheld. If, in the*58 opinion of the Trustees, it is desirable to make distribution of said trust property to any of said children before the expiration of said ten year period, but after said child whose share or part thereof has been withheld has arrived at the age of said twenty-five and thirty years, then distribution of said share may be made during said period, and in such amounts as the Trustees shall, in their sole discretion, determine, PROVIDED, HOWEVER, that at the expiration of said ten year period, said trust share shall be paid over and conveyed, together with all of its accumulations, free and discharged of all trusts.
2. In the event of the death of any of said children leaving no issue surviving, before receiving any part or all of his or her share, then such part thereof or all, together with all accumulations thereon, shall be added equally to and become a part of the shares held for the benefit of his or her then surviving brothers and sisters, and such brothers and sisters as may have deceased leaving *972 issue surviving, said issue then living taking in equal shares their parent's share by right of representation. In the event of the death of any of said children leaving issue*59 surviving, before receiving any part or all of his or her share of the trust property, then such part or all of said share as shall remain, together with all accumulations thereon, shall be paid over and delivered, free and discharged of all trusts, to such issue, in equal shares.
The December trust added the following sentence to paragraph 2:
In the event of the death of all of said children before receiving any part or all of their respective shares, leaving no issue surviving, then said trust property shall be paid over, free and discharged of all trusts, to the then surviving heirs-at-law of the Donor, per stirpes and not per capita.
The August trust contained the following paragraphs 1 and 2:
1. The said shares shall be held, managed, invested and reinvested by said Trustees for the benefit of said children so long as they shall live, paying to said children all of the income from their respective shares held in trust.
The Trustees may in their sole discretion pay over to any of said children any part or all of the share held for his or her benefit if at any time in their sole discretion they shall deem such a distribution desirable.
2. In the event of the death of any of said*60 children before reaching the age of twenty-one years leaving no issue surviving and before receiving all of his share, then such part thereof or all shall be added equally to and become a part of the shares held for the benefit of his or her then surviving brothers and sisters, and such brothers and sisters as may have deceased leaving issue surviving, said issue then living taking in equal shares their parent's share by right of representation. In the event of the death of any of said children before attaining the age of twenty-one years and leaving issue surviving, and before receiving all of his or her share of the trust property, then such part or all of said share as shall remain shall be paid over and delivered free and discharged of all trusts to such issue in equal shares. In the event of the death of any of said children after attaining the age of twenty-one years and before receiving all of his or her share, then such part or all shall be paid over upon such estate or interests, in trust or otherwise, and in such proportions as any such deceased child may by his or her last will and testament appoint, provided, however, that said power of appointment shall be limited to*61 the surviving husband or wife of such child, the issue of such child, including issue by adoption, brothers and sisters of such child or their issue, including issue by adoption. In the event that any such child shall fail to exercise the power of appointment herein given, then said share, or so much thereof as shall remain, shall be paid over and delivered free and discharged of all trusts to his issue surviving, if any, including issue by adoption; if there be no issue, then to his brothers and sisters in equal shares, issue of deceased brothers and sisters taking their parent's share by right of representation, and in the event that there be no issue surviving, including issue by adoption, and no brothers or sisters or issue of deceased brothers and sisters then living, then to the then surviving heirs at law of the Donor per stirpes and not per capita.
Paragraph 3 of the three trust instruments dealt with income and principal payments, and provided, in part, as follows:
3. During the period while any part or all of said shares and any additions thereto are held in trust for the benefit of any of said children, all of the income *973 therefrom shall be paid to said children*62 in quarterly installments or oftener, as shall be convenient for the Trustees, * * *.
The September and August trusts contained the following proviso to the first sentence of paragraph 3:
PROVIDED, HOWEVER, that during the lifetime of said [decedent] the Trustees may, if the guardian or guardians of any of said children shall desire, withhold the actual payment of income hereunder to any of said children or their guardians, adding said income from time to time to the principal of their respective shares.
And the September and December trusts added this final sentence to paragraph 3:
The said Trustees may also, in case of emergency, from time to time and upon such conditions as in their sole discretion they shall determine to be for the best interests of said children, advance such part of the principal of their respective shares as they, in their sole discretion shall determine to be reasonably necessary or desirable.
Paragraph 8 of both the August and December trusts provided as follows:
8. The Trustees shall invest in securities of a character usual for the investment of trust funds. Any Trustee hereunder may resign by giving a notice in writing mailed to the last known*63 address of all of the persons immediately interested therein, stating the fact of such resignation and the said Trustee shall, after the expiration of the effective date of such resignation, have no duties and obligations hereunder except to account for the administration of his or its trust to the date of such resignation.
Paragraph 8 of the September trust differed from the August and December instruments in the following manner:
8. The Trustees shall invest in securities of a character usual for the investment of trust funds, PROVIDED, HOWEVER, that the Trustees shall invest in accordance with the written instructions of said [decedent] so long as he shall desire to act in that capacity. The Corporate Trustee shall have no investment duties or obligations except to act in accordance with such instructions, but the said [decedent] may at any time by a writing filed with the Corporate Trustee, terminate his supervision of said investments, at which time the said Corporate Trustee shall attend to all of the investment duties and obligations hereunder.
All the trusts included the following paragraphs 6 and 9. The portions in parentheses were included in the September trust only:
*64 6. Upon the decease, resignation or incapacity of [decedent], said [Colony] shall act as sole Trustee hereunder and shall exercise all of the rights, privileges, immunities, discretions and duties hereunder.
9. The Trustees, in addition to all common law and statutory authority, shall have power to mortgage, lease, with or without an option to purchase, to sell, in whole or in part at public or private sale without the approval of any court and without liability upon any person dealing with the Trustees to see to the application of any money or property delivered to them; to exchange property for other property, (to purchase or retain any securities, the purchase or retention of *974 which is requested by said [decedent]); to keep any or all securities or other property in the name of some person or corporation without disclosing the fact that said property or securities are held in trust; to determine the respective charges or credits to income and principal, notwithstanding any previous determination in respect thereof by the courts, and in particular to make such determination with regard to stock and cash dividends, rights and all other receipts in respect of the ownership*65 of stock; to purchase or retain stocks or securities, which pay dividends or income in whole or in part, otherwise than in cash; to determine who are the distributees hereunder and the proportions which they respectively receive, and to make all divisions sic], amortization, taxes or waste, and the amounts thereof; to pay, compromise or contest any claim or other matter directly or indirectly affecting the trust property; to employ counsel for any of the above or other purposes and to determine whether or not to act upon his advice, and generally to do all things in relation to the trust fund which the said [decedent] could do if personally present and this trust had not been executed. All such divisions and decisions made by the Trustees in good faith shall be final, binding and conclusive on all parties in interest.
The Trustees shall receive reasonable compensation for their services*66 hereunder. (The said compensation shall be equally divided between [Colony] and [decedent] so long as said [decedent] shall act as Trustee hereunder and shall not have terminated his supervision of investments.)
As of the date of his death, decedent had never tendered in writing his resignation as cotrustee of any of the trusts. Decedent sent the following letter to Colony on May 31, 1946:
Reference is made to the Agreement and Declaration of Trust dated September 14, 1934, paragraph eight (8) thereof * * *.
In accordance with the provision of said paragraph of said Trust, I hereby terminate my supervision of investments and desire that you record this writing as evidence thereof.
On March 4, 1949, decedent irrevocably transferred to the Emmanuel Episcopal Church "all of his rights under and by virtue of [the three trusts] * * * which he may have or which may accrue to him as a Donor, if any, in the event that there be a complete failure of beneficiary*67 under said agreements and declarations of trust." On March 14, 1949, the rector of the church acknowledged receipt in writing and accepted such gift for the church.
In the latter part of 1955, or early part of 1956, decedent became unable to do regular routine tasks, such as balancing his checkbook. He was losing checks. He had difficulty keeping track of coupons from bonds. At that time decedent told his son, Junior, that he definitely had to have help in the management of his affairs. As a result, on April 6, 1956, decedent gave to Junior the following general power of attorney:
*975 to collect and endorse all checks payable to me, to sell, transfer and endorse all stock certificates and other securities in my name, to draft and sign checks drawn upon any bank deposits in my name, to collect all moneys due me, and to do all things necessary or incidental to the management and disposition of all property and rights in or to property owned by me and to convey real estate.
After the execution of the power of attorney, Junior handled most of decedent's affairs. In October 1956 decedent's securities were placed in a nonsupervised custodian account with Boston. Under this*68 type of account Boston had custody of the securities, did the bookkeeping, collected income, and disbursed income. It had no other duties.
After the establishment of the custodian account, decedent continued to have trouble with small items, such as milk bills. He was unable to keep track of amounts of money in the bank or the canceled checks. There was available at that time with Boston a different type of custodian account called a supervised account. Under such an arrangement Boston would have supervision of the securities. It would review the portfolio periodically and make suggestions to the owner of the securities for his approval as to any action that might be taken.
In 1957 decedent continued to have difficulty in handling, investing, and reinvesting his money. In earlier years, decedent had served as a conservator for a friend and he suggested to Junior that perhaps they should have a conservator appointed to manage decedent's affairs.
As a result of this conversation Junior communicated with George M. Poland, an attorney who was a lifelong friend of decedent, concerning decedent's inability to manage his affairs. Poland had several talks with the decedent at his home. *69 Decedent told Poland that he could not keep track of his affairs.
Poland explained to decedent what the appointment of a conservator would accomplish and discussed the manner of securing such an appointment. Poland told decedent that it would be best for decedent himself to petition. If someone else petitioned there would have to be a citation served upon decedent; some of the children were out of State and under such circumstances a citation would probably have to be published. Because of these considerations, Poland suggested that decedent himself sign a petition for a conservator. Decedent agreed to the suggestion of Poland.
There was never any talk among the decedent, Junior, and Poland that the decision to have a conservator appointed was motivated by tax considerations. The only reason discussed for the move was the decedent's incapacity to manage his affairs. Poland prepared the petition for the appointment of a conservator and performed the necessary legal work in court to secure the appointment.
On October 25, 1957, decedent represented to the Probate Court in and for the County of Middlesex that he had "become incapacitated by *976 reason of advanced age to care*70 properly for his property" and asked that Boston be appointed conservator of his property. As required by law, the certificate of Dr. Robert Dutton was filed in court on the same day certifying that he was a registered physician, that he had personally examined decedent within 1 day of the signing of the certificate, and that in his opinion "[decedent was] mentally competent to petition the Court for the appointment of a conservator of his property and [was] incapable by reason of advanced age to care for himself and his estate."
On or about October 28, 1957, the Middlesex County Probate Court, after hearing, noted that "it appears * * * that [decedent] is incapable of caring properly for his property," and decreed that Boston be appointed conservator of the property of decedent. In both the petition and the decree the words following "by reason of advanced age" in the form employed were "mental weakness." These latter words are stricken. This decree was in full force and effect from on or about October 28, 1957, until the death of decedent and was not revoked nor modified.
Upon the entry of the conservatorship decree, Boston took charge of the property of decedent as conservator*71 and had sole management and responsibility until the date of death of the decedent. Shortly after its appointment as conservator, Boston forwarded to Colony and to State certified copies of its appointment as conservator.
The records of Colony disclose that no action was taken by the decedent as a cotrustee after the receipt by Colony of the decree of conservatorship. Prior to the conservatorship and during the period when decedent was cotrustee of the Colony trust, he received compensation from the trust for his services as cotrustee. After the conservatorship, he received no compensation as trustee.
After receipt of the copy of the decree of conservatorship, State acted as sole trustee of the August and December trusts. On January 2, 1958, Francis H. Brooks, the trust officer at State responsible for the August and December trusts, sent the following interoffice memorandum:
[Boston] was appointed Conservator of the property of [decedent] on October 28, 1957, and in accordance with the provisions of these two trust instruments we have automatically become sole trustee as of October 29, 1957.
The usual accounting date is August 31st. Will you please take off short accounts covering*72 the period September 1, 1957 through October 28, 1957 for each trust.
Will you please figure [decedent's] share of compensation up to the date of the Conservator's appointment and give me checks covering this compensation payable to [Boston] as Conservator for [decedent].
While the decedent was cotrustee, prior to the appointment of the conservator, the securities of the two State trusts were kept in registered *977 form in the name of the trustees. On January 21, 1955, State suggested to the decedent that the securities be held in nominee form and the decedent disapproved. After the appointment of the conservator, the bank transferred the trust securities into nominee registration.
In connection with the administration of the two State trusts, the trustees rendered written accounts to the beneficiaries. In each of the trusts a separate account was rendered in the name of the cotrustees for a period up to the appointment of the conservator; thereafter, accountings were rendered in the name of State as sole trustee.
The transfers involved in the establishment of the three trusts, the transfer to the Emmanuel Episcopal Church, and Federal gift tax returns filed in connection*73 with said trusts were reported in Schedule G of the Federal estate tax return.
In addition, gifts totaling $ 23,657 which were made after March 28, 1956, were reported in Schedule G. Included among these gifts was a gift of real estate to Junior valued at $ 11,000 on September 26, 1957.
The three trusts had undistributed income which had been accumulated and added to principal in the following amounts for the following periods:
| September trust -- December 21, 1934, to October 2, | |
| 1950 | $ 71.996.59 |
| August trust -- August 21, 1935, to August 31, 1951 | 35,641.90 |
| December trust -- December 31, 1935, to August 31, 1951 | 20,588.03 |
On April 4, 1958, the assets of the September trust included $ 2,882.69 of undistributed income.
It is stipulated that the fair market value *74 his deficiency notice, respondent included the corpus of the three trusts in decedent's gross estate with the following statement:
The value of the corpora of the agreements and declarations of trust by and between [decedent] and [State] under date of August 21, 1935, with [State] and [decedent], Trustees; and under date of December 31, 1935 also with [State] and [decedent], Trustees; and, the agreement and declaration of trust by and between [decedent] and [Colony] dated September 14, 1934 with [Colony] and [decedent], Trustees are included in the gross estate because it has been determined that the decedent as grantor-settlor and co-trustee retained such powers as trustee, that considered as a whole, are so all inclusive, the trustees could shift the economic benefits between the life beneficiaries and remaindermen and further that the said powers as co-trustee where [
In the alternative, it has been determined that the corpora of the said trusts are includible in the gross estate in accordance with 1954 Code
OPINION
Petitioner states the issues in its opening brief as follows:
1. Were the three trusts established in contemplation of death and thus taxable under
2. In respect of the three trusts, did the decedent at date of death possess 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 and thus make the corpora of the trust taxable under
3. In respect of the three trusts was the enjoyment thereof subject at the date of death of the decedent to any change through the exercise of a power, either by the decedent*76 alone or in conjunction with any person, to alter, amend or revoke and thus make the corpora of the trusts taxable under
4. In respect of the three trusts, did the decedent relinquish a power in contemplation of death, thus giving rise to tax under
5. In respect of the three trusts, did the decedent relinquish any power to alter, amend or revoke in contemplation of his death, thus giving rise to tax under
6. If the value of the corpora of the trusts at date of death included income undistributed but added to principal, are such amounts of income in any event subject to estate tax?
Respondent having conceded in his brief that the contemplation of death issues have been adandoned, petitioners' sole argument, except as to the subsidiary question of includability of accumulations, *77 make the corpora taxable under either
Although the trust instrument provided that "upon the * * * incapacity of [decedent], [the corporate trustee] shall
"The statute is not concerned with the
In
"It is true that in the opinion of his physician the decedent was not capable of making normal decisions respecting property rights at the time of his death or at any time after the fall of 1939. But,
To this it may be added that the State court decision, which we accept at face value, adjudicated decedent's capacity to file the petition*80 for conservatorship. He would hence have had capacity to resign at that time had it been his intention to abandon the trusteeship. Whether this would then have constituted a relinquishment of his power within 5 months of his death so as to bring
*980 Any question as to the existence of, as distinguished from ability to exercise, a power "at the date of [decedent's] death" *82 which would require the inclusion of the corpora in the gross estate under
the * * * beneficiaries * * * were granted no "present right to immediate enjoyment of either income or principal." * * * To get this full enjoyment they had to wait until they reached the age of twenty-five unless their father sooner gave them the money and stocks by terminating the trust under the power to change he kept to the very date of his death * * *. "A donor who keeps so strong a hold over the actual and immediate enjoyment of what he puts beyond his own power to retake has not divested himself of that degree of control which
See also
The September and December trusts in the case before us gave the trustees the power to invade. A power may be limited by an external standard, such as support, so as not to constitute an unlimited power to invade corpus,
There is even less difficulty in finding an includable power under
In two of the trusts (September and August), the trustees had the express power to withhold and accumulate income. *86 In the third trust (December), despite the absence of any express power, more than $ 20,000 in undistributed income was accumulated to principal. *85 by the parties to it
We are accordingly of the opinion that at the date of his death decedent possessed the power in conjunction with others to alter, amend, or revoke the trusts he had established; and that at a time not ascertainable without reference to his death he had a similar right to designate the beneficiaries of the enjoyment of the property *982 or its income. The transferred property is hence includable*87 in the gross estate under both
Even so, petitioners contend that there is a subsidiary question whether the accumulations were "transferred" and hence that the value of the trusts to be included in decedent's gross estate should not include undistributed and accumulated income which has been added to the principal of the three trusts. With this we cannot agree.
The net estate upon the transfer of which the tax is imposed is not limited to property that passes from decedent at death.
Decedent's power to alter, amend, or revoke, and his right to designate the beneficiaries "extended not only to the property originally transferred to the trusts, but also to the properties acquired with trust income."
1. The December trust included "or separations" at this point in par. 9.↩
2. This presumably includes the accumulations.↩
3. Petitioner's position on this subordinate issue of whether undistributed and accumulated income should be included in decedent's gross estate, if a power sufficient to cause inclusion is found, will be dealt with later.↩
4.
5. The situation in this respect differs from
6. Respondent relies heavily on the general powers contained in par. 9, which, it is to be noted, in at least one of the trusts, were not fiduciary powers but were retained by decedent in his individual capacity. See
7. The August trust included the following power:
"The Trustees may in their sole discretion pay over to any of said children any part or all of the share held for his or her benefit if at any time in their sole discretion they shall deem such a distribution desirable."↩
8. The September and December trusts included the following power:
"The said Trustees may also, in case of emergency, from time to time and upon such conditions as in their sole discretion they shall determine to be for the best interests of said children, advance such part of the principal of their respective shares as they, in their sole discretion shall determine to be reasonably necessary or desirable."↩
9. "PROVIDED, HOWEVER, that during the lifetime of said [decedent] the Trustees may, if the guardians of any of said children shall desire, withhold the actual payment of income hereunder to any of said children or their guardians, adding such income from time to time to the principal of their respective shares."↩
10. In this regard State's trust officer responsible for the December trust testified as follows:
"Q. And similarly, on the second trust, that dated December 31, 1935, do the records of the State Street Trust Company indicate that there were various amounts of accumulated income to principal in the amount of $ 20,588.03?
"A. That is correct."↩
11.
Lober v. United States , 74 S. Ct. 98 ( 1953 )
Hurd v. Commissioner of Internal Revenue , 160 F.2d 610 ( 1947 )
Porter v. Commissioner , 53 S. Ct. 451 ( 1933 )
Seward's Estate v. Commissioner of Internal Revenue , 164 F.2d 434 ( 1947 )
Smith v. Paquin , 325 Mass. 231 ( 1950 )
michigan-trust-company-of-the-estate-of-r-wallace-hook-v-giles-kavanagh , 284 F.2d 502 ( 1960 )
Industrial Trust Co. v. Commissioner of Internal Rev. , 165 F.2d 142 ( 1947 )
newberrys-estate-v-commissioner-of-internal-revenue-commissioner-of , 201 F.2d 874 ( 1953 )