DocketNumber： Docket Nos. 38348, 38349, 38350, 38351, 38352
Judges： Muedock
Filed Date： 12/22/1953
Status： Precedential
Modified Date： 11/14/2024
*11
Estate Tax -- Contemplation of Death -- Funded Life Insurance Trust --
*377 The Commissioner determined a deficiency of $ 245,123.98 in estate tax against the estate and held that the other petitioners were liable as transferees to the extent of the value of assets of the estate received by them. The only issue requiring decision is whether the value of bonds and life insurance policies transferred by the decedent to four trusts on December 1, 1931, was properly included in the decedent's gross estate under the provisions of
FINDINGS OF FACT.
Charles I. Aaron, the decedent, died testate on October 24, 1947, while residing in Pittsburgh, Pennsylvania. A Federal estate tax return for his estate was filed with the collector of internal revenue for the twenty-third district of Pennsylvania.
The decedent created four trusts on December 1, 1931, in which he named his nephew, Marcus Lester Aaron, trustee. The trusts were irrevocable and were for the benefit of the four grandnieces and grandnephews of the decedent then living, to wit: Maxine Goldmark Aaron, Jr. (now Rosston), Marcus Aaron II, Jean Louise Friedman (now Nathan), and Ruth Frances Friedman (now Ornitz). The decedent completely and irrevocably assigned to the trustee ordinary life and 20-payment life insurance policies on the decedent's life taken out by *378 him from 1911 through September 2, 1931, together with corporate and Government bonds. The following table shows the face and cash surrender values of the insurance policies and the face and market values of the bonds at the time transferred:
| Insurance policies | Bonds | |||
| Beneficiary | Cash surrender | |||
| Face value | value | Face value | Market value | |
| Maxine | $ 110,000.00 | $ 36,254.00 | $ 75,000.00 | $ 71,398.44 |
| Marcus II | 125,000.00 | 38,696.25 | 65,000.00 | 60,368.75 |
| Ruth | 125,000.00 | 13,797.00 | 70,000.00 | 61,933.75 |
| Jean | 95,000.00 | 26,082.00 | 85,000.00 | 67,268.75 |
*13 The four trust deeds were substantially alike. The trustee was to apply the income of the trust first to the payment of premiums and could use corpus to pay premiums if he deemed it advisable. Excess income could be used to educate and maintain the beneficiary during minority, but when the beneficiary became 21, all accumulated and all future income in excess of that needed to pay premiums was to be paid to the beneficiary. Each trust was to terminate by payment of the trust estate to the beneficiary when the beneficiary became 30 or upon the death of the settlor, whichever should be later. The trust was to continue for others than the settlor if the principal beneficiary died before the termination of the trust.
The decedent became concerned about the security of the family fortunes after the stock market crash of 1929. He had always considered life insurance the most secure form of saving. He placed $ 455,000 of insurance on his own life, most of which had been taken out prior to 1929, in trust for the three grandnieces and one grandnephew, together with the bonds, to provide the beneficiaries with economic security and financial independence when they became old enough to*14 have those things count in their lives. He intended that the insurance policies would be retained in the trusts until he died. He knew before making the gifts that Congress was considering the reestablishment of a gift tax. He thought the income of the trusts would be taxed to the trustee and that the gifts would not be a part of his estate for estate tax purposes.
The trusts did not realize sufficient income to pay the premiums on the policies of insurance. The trustee had to sell securities worth about $ 107,000 to pay premiums on the policies. The decedent never paid any of the premiums on the policies after transferring them to the trusts and made no additional gifts to the trusts. The proceeds of the policies at the death of the decedent amounted to $ 590,181.36.
*379 The amounts of the income of each trust and the amounts of the premiums paid by the trusts up to the end of 1947 were as follows:
| Beneficiary | Income | Premiums | Deficit |
| Maxine | $ 46,789.40 | $ 57,332.00 | $ 10,542.60 |
| Marcus II | 31,172.71 | 56,795.86 | 25,623.15 |
| Ruth | 22,095.12 | 110,944.00 | 88,848.88 |
| Jean | 54,322.96 | 54,767.55 | 444.59 |
The decedent, a bachelor, had a fortune in excess of $ 1,000,000*15 as early as 1920, and was worth in excess of $ 800,000 after making the gifts on December 1, 1931. He lived simply but comfortably. He was vice president of the Homer Laughlin China Company until the time of his death and he voluntarily served without salary after January 1931. The Homer Laughlin China Company is said to be the largest manufacturer of earthenware for table use in the world. He was very close throughout his life to his older brother, Marcus, from whom he had received great financial assistance. Marcus had two children, Marcus Lester Aaron, born October 8, 1900, and Fannie H. Aaron, later Friedman, born September 9, 1902.
Marcus Lester Aaron, a member of the Pennsylvania Bar, served as treasurer of the Homer Laughlin China Company from 1930 to 1940 and has been president of that company since January 1, 1940. He prepared the December 1, 1931, trust agreements for the decedent.
Marcus Lester and Fannie had the following children living when the decedent died:
| Marcus | Date of birth | Fannie | Date of birth |
| Maxine | Sept. 6, 1927 | Ruth | Nov. 9, 1928 |
| Marcus II | Oct. 24, 1929 | Jean | Feb. 13, 1931 |
| Frances | Jan. 16, 1933 | Louis | Dec. 13, 1934 |
| Elinor | Dec. 31, 1935 |
The decedent, *16 by his will dated June 2, 1938, left his residuary estate to his nephew, Marcus Lester Aaron, in trust for the above-named grandnephews and grandnieces.
The decedent made the following substantial gifts in addition to those here in controversy: He placed 1,300 shares of the Homer Laughlin China Company stock in trust for Marcus Lester and a like number in trust for Fannie on September 20, 1920. He transferred 1,000 shares of the same stock in trust for Fannie on January 3, 1922, and 1,402 shares of the same stock in trust for Marcus Lester on January 24, 1924. He made an outright gift to Marcus Lester of 524 1/2 shares of the Knowles, Taylor and Knowles Company stock and 305 1/2 shares of Edwin M. Knowles China Company stock on January 24, 1924. He placed securities worth $ 373,294.54 in trust on December *380 18, 1935, for his two grandnieces, Frances and Elinor, and his grandnephew, Louis, all born after 1931. The trusts were to continue until the beneficiary was 30 years of age in all cases except two, in which the age was 35.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
The Commissioner does not argue that the condition of the*17 health of the decedent in any way prompted the 1931 transfers, and clearly it did not. The justification for the determination that those transfers were made in contemplation of death must be found in the use and the terms of the trusts, the nature and possibilities of the property transferred, and the intent of the settlor shown by that and all other evidence in the record. The decedent was keen and intelligent. He knew what could be expected of the trusts. He knew that the income from the securities which the trusts would hold would not be sufficient to pay the premiums on the policies of insurance. He knew that he was not the person on whom the beneficiaries would naturally depend for support during their lives or for their inheritances since the parents and grandparents of the beneficiaries needed no help from him to support, maintain, and educate the four children but were well-to-do and able to provide abundantly for those children, then ranging in age from one to four. He knew and intended that the trusts would not provide any economic or other benefits for the children until his death would bring into the trusts the proceeds of the insurance on his life and relieve the*18 trusts of the expense of the premiums. Then, for the first time, would the trusts be holding unrestricted property which would produce income for the beneficiaries and become theirs at the termination of the trusts. That was what the decedent intended and that was the way in which the transfers were made by him in contemplation of his death.
The petitioners argue that a funded life insurance trust is not ipso facto a transfer in contemplation of death and can be shown by other evidence to have been made for motives connected with life, citing
It does not appear that the decedent made the transfers to relieve himself of the expense of paying the premiums. Income and gift tax saving were no more important as motives to the decedent than estate tax saving. Gift tax saving could scarcely account for more than the timing of the transfers. The petitioners point to an alleged established course of giving and use of trusts to protect against youthful indiscretion, but the particulars in which these transfers differ from the others are those upon which the Commissioner relies to show contemplation of death. A family tradition and a moral obligation are mentioned, but the argument is not helpful. It is said that the decedent's primary motives for the transfers were generosity and affection. That*20 is probably true of all or most gifts whether in contemplation of death or not. The petitioners argue that the decedent regarded life insurance merely as an investment and, therefore, these transfers were like any transfers of securities in trust where income was to be accumulated for a period. But these trusts were unlike other trusts in which current income accumulates for the beneficiaries during the grantor's life. The similarity begins only when the grantor dies.
The decedent could have preserved all of the advantages which he perceived in life insurance and obtained all of the benefits suggested had he never made the transfers. All he had to do was to retain the policies and the bonds so that the proceeds would become a part of his residuary estate which he left to his grandnieces and grandnephews. The decedent knew this. Those advantages and benefits were not the kind of important motives for the transfers which would show that the transfers were not in contemplation of death. The transfers were like bequests. His dominant motive was to have the gifts ripen at and by reason of his death. No motive associated with life emerges to overcome the determination and evidence*21 of the Commissioner that the transfers were made in contemplation of death.
Transferee liability and the matter of administration expenses are not contested.
1. Proceedings of the following petitioners are consolidated herewith: Marcus Lester Aaron, Trustee for Maxine Goldmark Aaron, Jr., Trustee and Transferee, Docket No. 38349; Marcus Lester Aaron, Trustee for Jean Louise Friedman, Trustee and Transferee, Docket No. 38350; Marcus Lester Aaron, Trustee for Ruth Frances Friedman, Trustee and Transferee, Docket No. 38351; and Marcus Lester Aaron, Trustee for Marcus Aaron II, Trustee and Transferee, Docket No. 38352.↩