DocketNumber： Docket No. 7055
Citation Numbers： 7 T.C. 705, 1946 U.S. Tax Ct. LEXIS 85
Judges： Hill
Filed Date： 9/10/1946
Status： Precedential
Modified Date： 10/19/2024
*85
1. Decedent established a trust for the benefit of his wife as life tenant and his children as remaindermen. Decedent, in his capacity as cotrustee, had the power to distribute any or all of the trust corpus, without limitation or qualification, to the wife, thus permitting a diminution or extinguishment of the remainder interests. The wife's interest was subject to divestment on her not continuing as decedent's wife or remarrying after his death.
2. Decedent's mother established a trust for the benefit of decedent and his brother. The trust was to terminate on the death of decedent's mother, at which time the trust corpus then remaining in trust was to go absolutely and equally to decedent and his brother, if living, otherwise as they had appointed by will. Decedent predeceased his mother and exercised the power of appointment by will. *86 Subsequent to decedent's death, but prior to the trust's termination, the trustee, as authorized by the trust instrument, distributed portions of trust corpus to certain beneficiaries.
*705 Respondent has determined a deficiency in estate tax in the amount of $ 64,286.70. Respondent has conceded one issue. The remaining questions for our decision are, (1) whether all or any part of the *706 corpus of a trust created by decedent on June 19, 1928, is properly includible in decedent's gross estate under
Petitioner filed*88 its estate tax return with the collector of internal revenue for the district of Michigan at Detroit on January 12, 1942. The record consists of a stipulation of facts, testimony, and exhibits. The facts as stipulated are so found.
FINDINGS OF FACT.
On June 19, 1928, decedent created a trust for the benefit of his wife and three children. Decedent constituted himself and petitioner as trustees. The trust instrument refers to petitioner as depositary trustee and to decedent in his fiduciary capacity as cotrustee. The provisions of this trust instrument which are here material are as follows:
2. The Co-Trustee shall have the sole right at his discretion to exercise on behalf of the Trustees the following powers:
(a) To sell any part of the trust estate and direct the reinvestment or distribution*89 of the proceeds thereof or of any income, subject, however, to the provisions of Paragraph 5.
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3. * * * The Depositary Trustee shall be bound by any act or direction of the Co-Trustee within the above specified powers. * * *
4. * * * The judgment of the Co-Trustee in directing the withholding or distribution of income and/or principal or in directing investments in stock or speculative securities shall not be questioned, but as to withholding or distribution of income and/or principal shall at all times, however, be subject to the provisions of paragraph 5, * * *
5. * * * No power rests with the Trustees, or either of them while this trust continues, to distribute or direct the distribution of the income or principal to any person other than the wife or legal children of the Settlor, as now or hereafter existing.
6. It is expressly understood and agreed that this trust is created and shall be maintained for the sole benefit of the Settlor's wife, Isabel Bradbeer DuCharme, as long as she lives and remains the wife of the Settlor, or as long as she remains unmarried after the death of the Settlor, and the Settlor's legal children or their legal issue as hereinafter provided, *90 and that during such period this Trust shall be absolutely irrevocable. Should the Settlor die before his said wife, Isabel, the Trust shall continue until said wife, Isabel, remarries, otherwise until the death *707 of said wife, Isabel. Should the Settlor's wife, Isabel, die before the Settlor, or should she cease to be the Settlor's wife while the Settlor lives, the entire corpus of the Trust Estate and all accumulated income shall, subject hereto, vest in the legal children of the Settlor in equal shares. During the continuance of said Trust thereafter the entire income therefrom shall be distributed to or for said children periodically and portions of the principal may be advanced in the discretion of the Trustee, and the share of any child who has attained the age of thirty (30) years shall be turned over to such child or (except the family home) to such child's legal issue should such child die before attaining the age of thirty (30), and the Depositary Trustee shall continue to hold the remaining portions or portion of the Trust Estate until the youngest child of the Settlor shall have reached the age of thirty (30) years, provided, always, that if the family home be*91 a part of this trust, the home shall not be sold for the purpose of making a division and the issue of a deceased child shall have no interest therein or right to any part thereof, but the Depositary Trustee shall convey an undivided interest therein to the child becoming thirty (30) years of age, and if any child shall die before then with or without issue, the surviving children shall take the share of the deceased child. The Depositary Trustee is directed to have itself appointed Guardian of the Settlor's minor children, if it becomes necessary or advisable.
7. In the event of the death of the Settlor prior to the death of the Settlor's wife, Isabel, she still being his wife, the Trust shall continue until the death of the wife, Isabel, or until she remarries, whichever occurs first, and shall thereafter belong to and be disposed of to the legal children of the Settlor in the same manner as provided in the previous Paragraph 6 hereof.
8. While the Settlor lives and the Co-Trustee remains mentally competent, the Co-Trustee may direct portions of the principal to be paid or transferred to the Settlor's wife, Isabel, during her lifetime, but to no other person, as long as she remains*92 the wife of the Settlor. The income shall be distributed to the Settlor's wife, Isabel, except as she may from time to time direct the accumulation thereof, which income so accumulated shall become principal and shall remain a part of the Trust Estate. After the death of the Settlor, the Co-Trustee, or in the event of the Co-Trustee becoming mentally incompetent, the Depositary Trustee shall pay such portions of the income and principal to the Settlor's wife, Isabel Bradbeer DuCharme, as she may request, as long as she remains his wife, or, the Settlor being dead, as long as she remains unmarried, provided the requested portions of the principal are to be used for her personal needs, comforts, welfare or happiness, or the needs, comfort, welfare, happiness, education or mental or physical care or development of the Settlor or Settlor's children, or any of them. The Depositary Trustee shall see that the portions of principal so transferred are so applied. * * * Upon the remarriage of the Settlor's wife, the Settlor being dead, or upon Isabel Bradbeer DuCharme ceasing to be the wife of the Settlor, this Trust shall terminate as to her and this Trust shall thereafter either terminate*93 entirely or belong to and be disposed of to the legal children of the Settlor as herein provided.
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12. The provisions of this Trust may be changed or amended during the life time of the Settlor upon the written request of the Settlor's wife, Isabel Bradbeer DuCharme, and with the written approval of the Settlor, but same shall not be amended or changed after the death of the Settlor. Upon any such request and approval the trust shall be amended accordingly.
As of the optional valuation date, the value of the corpus of such trust was $ 80,138.28, no part of which was included in the estate tax *708 return and all of which has been added by respondent. Respondent, in the explanation accompanying the deficiency notice, stated:
Under item 3, the value of the property comprising the trust created by the decedent for the benefit of his wife and children, pursuant to the terms of a trust agreement dated June 16, 1928, is included in the gross estate, it being determined that as the decedent reserved the power to alter, amend, revoke or terminate the trust, it is subject to inclusion in the gross estate under the provisions of
The*94 parties have stipulated that the agreement referred to as dated June 16, 1928, in the above quotation, is intended to refer to the agreement of June 19, 1928.
2: The Co-Trustees shall have the sole right at their discretion to exercise on behalf of the Trustees the following powers:
(a) To sell any part of the Trust Estate and direct the reinvestment or distribution of the proceeds thereof or of any income, subject, however, to the provisions of Paragraph 5.
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5: * * * No power rests with the Trustees, or any of them while this trust continues, to distribute or direct the distribution of the income or principal to any person or persons other than Charles B. DuCharme and Harold DuCharme, sons of the Settlor, or their heirs-at-law as hereinafter *95 provided, except, in case both of the Settlor's said sons should predecease her the income shall be paid to the Settlor during her lifetime.
6: It Is Expressly Understood and Agreed that this Trust is created and shall be maintained for the sole and equal use and benefit of the Settlor's two sons, Charles B. DuCharme and Harold DuCharme, and that it shall be continued and held In Trust for and during the lifetime of the Settlor and that during such period this trust shall be absolutely irrevocable and shall terminate upon the death of the Settlor. During the life of this Trust the income shall be distributed and paid over, share and share alike, to the Settlor's said two sons, Charles B. DuCharme and Harold DuCharme, in monthly installments. Should one of her said sons die during the lifetime of the Settlor, the entire income shall be paid to the survivor of her said sons. Should both of the Settlor's sons die during the lifetime of the Settlor, the entire income shall, until the termination of the Trust upon the death of the Settlor, be paid to the Settlor.
7: The income from the trust estate shall be distributed to the Settlor's said two sons except as they may from time to time*96 direct the accumulation thereof, which income so accumulated shall become principal and shall remain as part of the trust estate.
8: On the death of the Settlor this trust shall terminate and all of the moneys, properties and securities then constituting the trust estate shall be transferred *709 and paid over forthwith, free from the trust, share and share alike to the Settlor's said sons, Charles B. DuCharme and Harold DuCharme, or to the nominees or appointees by their last Wills and Testaments, the right and power to dispose of their respective shares in the Trust Estate by their last Wills and Testaments being hereby vested in and conferred upon the Settlor's said sons; * * *
Decedent, by Article VII of his will dated June 8, 1937, left his residuary estate in trust for the benefit of his wife and children. This residuary provision included "specifically one-half of the trust property included in a certain Voluntary Trust created by my mother, Caroline B. DuCharme, under agreement with Union Trust Company dated July 17, 1928, in which I am vested with the power of appointment and which power I do hereby exercise; * * *"
By letter dated August 21, 1941, addressed to Harold*97 DuCharme and petitioner, it was stated:
The undersigned, Caroline B. DuCharme, being one of the Co-Trustees under the above mentioned Trust Agreement [Trust agreement dated July 17, 1928] does hereby resign as such Co-Trustee.
On August 25, 1941, Harold DuCharme, acting as sole surviving cotrustee of the trust established July 17, 1928, wrote a letter to petitioner as depositary trustee, directing petitioner to sell certain designated securities constituting a part of the trust corpus. Harold further directed petitioner to distribute the proceeds from such sale one-half to himself and one-half to the heirs at law of decedent.
On August 26, 1941, petitioner filed a bill of complaint with the Circuit Court for the County of Wayne, Michigan, in Chancery. Appropriate parties in interest were named defendants. The bill of complaint,
C. Whether or not said defendant, Harold DuCharme, as Co-Trustee, if the resignation of Caroline B. DuCharme is effective or is permitted by this Court, has the power to sell and distribute the proceeds of sale of any or all of *98 the assets comprising the trust estate or the power to direct this plaintiff, as Depositary Trustee, to sell any or all of the assets of said trust estate and deliver and pay over the net proceeds of said sales in the manner and form as set forth in the written directions, Exhibit D attached hereto, or in any other manner or form.
D. Whether or not the exercise by Charles B. DuCharme of the power of appointment, granted to him by the provisions of paragraph 8 of said trust instrument, in any manner, changes or alters the power which the said Co-Trustees or Harold DuCharme, as Co-Trustee, may have to direct the sale and distribution of the assets of said trust.
On August 28, 1941, the state court issued its decree, which determined in part as follows:
5. That the power of appointment given and granted by paragraph 8 of the trust instrument to Charles B. DuCharme and Harold DuCharme relates only to such property as may be a part of the trust estate on the date of termination *710 thereof; that the death of Charles B. DuCharme and the exercise by him, in his Last Will and Testament of said power of appointment in no manner restricts the power of Harold DuCharme as sole remaining *99 Co-Trustee to direct the sale and distribution of any part or all of the trust estate as hereinbefore set forth.
After the promulgation of the above quoted decree and pursuant to Harold's letter of August 25, 1941, petitioner, during September 1941, sold the securities as directed. The net distributable proceeds from such sale were $ 378,675.41. This amount was distributed as follows:
| Harold DuCharme | $ 189,337.71 |
| Isabel B. DuCharme | 63,112.57 |
| Jerome C. DuCharme | 42,075.04 |
| Charles B. DuCharme, II | 42,075.04 |
| Isabel D. Brannon | 42,075.05 |
Caroline B. DuCharme died on July 4, 1942, which event terminated the trust created by her.
The total value of the trust corpus at that time was $ 69,222.41. The total value of the trust corpus on the optional date related to decedent's death was $ 447,897.82. Caroline B. DuCharme was 79 years of age at the time of decedent's death.
No amount was included in decedent's estate tax return with respect to decedent's power of appointment. Respondent determined that $ 181,754.69 should be included in decedent's estate on account of such power. In the explanation accompanying the notice of deficiency respondent stated:
| Powers of appointment | Returned | Determined |
| Item | $-0- | $ 181,754.69 |
*100 The value of the decedent's one-half interest in the trust created by his mother, Caroline B. DuCharme on July 17, 1928, wherein the decedent was given a general power of appointment by his last will and testament which power the decedent exercised disposing of this interest as part of his residuary estate, is included in the gross estate under
Since the income from this trust was reserved for the life of the decedent's mother who was living at date of the decedent's death, the one-half value of the trust included here is reduced by one-half of the present value of said life income for the life of a person born on February 22, 1862.
The portion of the trust corpus sold in September 1941 is included at the net realized from the sale after deducting trustees and other charges. The balance of the securities are valued at the mean of the high and low sales or bid and ask prices as of the optional date or close thereto. See attached Exhibit C for detail.
Petitioner has agreed by stipulation that the amount of $ 28,090.11 should be included in decedent's gross estate on account of the power of appointment. This amount represents a calculation*101 based on the value of the property in trust at its termination, reduced by the value of the estate intervening between decedent's death and the trust's termination.
*711 The parties have stipulated that any question as to the deduction of fees and expenses in connection with administration of decedent's estate which have been incurred but not yet approved by the state court may be included in a recomputation under Rule 50 without formal amendment to the petition.
OPINION.
Thus, the controversy between the parties essentially involves the proper construction of the trust instrument. In the view we take of this issue it is only necessary to consider the first sentence of paragraph 8 of the trust instrument, which provides:
While the Settlor lives and the Co-Trustee remains mentally competent, the Co-Trustee may direct portions of the principal to be paid or transferred to the Settlor's wife, Isabel, during her lifetime, but to no other person, as long as she remains the wife of the Settlor. * * *
This power to distribute corpus to the life tenant is not qualified or limited elsewhere in the trust. This power, in our opinion, clearly authorized decedent, in his capacity as cotrustee, to distribute any or all the corpus to his wife and thus diminish or extinguish the remainder interests of his children. Thus, the enjoyment of the remainder interests was subject at decedent's death to "change*103 through the exercise of a power * * * to alter, amend or revoke" within the meaning of
Petitioner, in the alternative, contends that, even if certain interests in the trust are includible in decedent's estate, in any event the wife's life estate should be excluded therefrom. Assuming, without deciding, that the principle of petitioner's contention is sound, we are not furnished with sufficient information to determine the value of such life interest. Petitioner, *104 on brief in its requested findings of fact, states in this connection:
* * * The factor for computing the value of a reversion subject to a life estate of a person born August 6, 1891, the date of birth of Isabel B. DuCharme, as of the date of decedent's death on October 12, 1940, is .47088. (Table A Reg. 105, sec. 81.10). The reversionary interest in said trust subject to the widow's life estate was $ 37,730.80.
Petitioner apparently fails to recognize that the possibility of the life estate being divested upon the condition of the wife's remarrying must be considered in evaluating such life estate. See
* * * The petitioner does not refer us to any recognized method by which it would be possible to determine the value of such a contingent reversionary remainder. * * *
See also
Petitioner, in justifying its computation, bases its argument on the meaning of the word "passing" as used in
*107 Petitioner argues that, since decedent was given by his mother's trust power to appoint one-half of the property constituting the trust at its termination, only such property can be considered as having
Petitioner's interpretation of "passing" assumes that that word refers to the event of passing into the possession and enjoyment of the appointees. Such an assumption would require that the process of evaluation for estate tax purposes be postponed until the appointed property ultimately passed into the possession of the designated appointee. Obviously, the statute has no such meaning. Petitioner's construction also ignores the statutory language which marks decedent's death as the time of evaluation.
Petitioner's contention fails to recognize that the word "passing," as used in the statute, refers to property passing at decedent's death rather than to the property which actually may pass into the possession and enjoyment of the appointee as determined by subsequent events. In the instant case property, in the nature of an executory interest, passed*108 at decedent's death under the power of appointment. It is true that the executory interest so passed was subject to powers of encroachment. The trustee was authorized and did distribute amounts of corpus subsequent to decedent's death which diminished the value of the property which the appointees would receive. But the fact that the interest which passed under the power of appointment was executory and subject to powers of encroachment which might and did diminish its ultimate quantum does not prevent the *714 passing of such interest at decedent's death. See A. L. I., Restatement of the Law of Property, Future Interests, vol. 3, § 276.
Petitioner argues that events subsequent to the donee's testamentary exercise of a power can be recognized in determining whether property passed under a power of appointment, citing
Nothing that was decided or said in
Both parties argue extensively on brief with respect to the conclusiveness of the state court decree. In the view we take of the instant case it is unnecessary to consider the *110 conclusiveness of the state court's decree. As here material, the state court decided that the power of appointment exercised by decedent related only to such property as remained in the trust at its termination and did not restrict the trustee's power to distribute the trust corpus. Assuming, for the sake of discussion, that the state court's decree is conclusive, as petitioner contends, we can find no inconsistency between its determination and our conclusions here. The state court has said that the power of appointment relates only to the property remaining in the trust at its termination. Under
* * * Passing the question whether this would be an allowable diminution of decedent's reversion, it seems unquestionable that in any event the contingencies involved are in their nature incapable of actuarial computation and hence that they have no place in the calculation of value.
For the above reasons we are of the opinion, even assuming in petitioner's favor that the state court's decree is conclusive, that the state*112 court's decision is not inconsistent with our conclusions.
It is our conclusion that property in the nature of an executory interest passed under the power of appointment at decedent's death and that the value of such interest is includible in decedent's gross estate under
1.
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, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States --
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(d) Revocable Transfers. --
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(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, * * *↩
2. The amendment of