Opinion
Docket No. 25873.
1952-02-15
ESTATE OF ARTHUR S. DWIGHT, DECEASED, BARBARA CHAPIN HAMBY AND JOSEPH C. BENSON, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Dana R. Koons, Esq., and George J. Schaefer, Esq., for the petitioners. William A. Schmitt, Esq., for the respondent.
Held, that where decedent, in making transfers of property in trust with income to be paid to his wife retained no right to have income applied towards her support, he did not retain the right to the possession, enjoyment or income from the property and the trusts are not includible in the valuation of his gross estate. Dana R. Koons, Esq., and George J. Schaefer, Esq., for the petitioners. William A. Schmitt, Esq., for the respondent.
The respondent determined against the petitioner an estate tax deficiency in the amount of $257,496.38. Since the mailing of the deficiency notice and the filing of the petition, the petitioner has paid the respondent the sum of $173,147.44 and now asserts that it has made an overpayment in the amount of tax of at least $163,618.32. Petitioner contests those adjustments made by respondent whereby he increased the value of the gross estate by adding thereto the value of the corpora of two trusts established by the decedent during his lifetime, and the sole question presented is whether respondent erred in so increasing the value of the estate.
By oral stipulation at the hearing the parties agreed to compute the amount of the deduction for legal expenses and the amount of credit against the estate tax for state legacy, inheritance and succession taxes, in accordance with Rule 50 of the Rules of Practice, after the Court has rendered its opinion determining the issue presented.
FINDINGS OF FACT.
Part of the facts were stipulated and are so found.
The decedent, Arthur S. Dwight, died on April 1, 1946, while a resident of Great Neck, Nassau County, New York. His last will and testament was duly admitted to probate by the Surrogate's Court of Nassau County, New York, on April 18, 1946. The Federal estate tax return for his estate was duly filed on June 24, 1947, with the collector of internal revenue for the first district of New York.
On March 15, 1930, the decedent married Anne Howard Chapin. At that time she had six children by a former marriage. All were then adults with the exception of one who was 17 years of age, having been born on January 24, 1913. From the time of their marriage until the date of decedent's death, decedent and his wife lived together as husband and wife. Their principal home was at Great Neck, Long Island, although they spent their winters in Florida.
By indenture dated December 21, 1931, and executed by the decedent on that day, he established a trust (hereinafter referred to as the first trust) for the benefit of his wife and six stepchildren. This trust indenture reads in part as follows:
KNOW ALL MEN BY THESE PRESENTS, that I, ARTHUR S. DWIGHT, of the Village of Kings Point, Great Neck, in the County of Nassau, State of New York, hereinafter called the ‘grantor‘, desiring to make certain provisions for the support and maintenance of the persons hereinafter named and referred to as the ‘Beneficiaries‘, and in consideration of the acceptance of the obligations hereinafter described, by the BANK OF NEW YORK AND TRUST COMPANY, a corporation organized under the Banking Law of the State of New York, hereinafter called the ‘Trustee‘, have irrevocably paid, transferred and set over, and do herewith pay, transfer and set over, absolutely and irrevocably, unto the said Bank of New York and Trust Company, the sum of One hundred and seventy thousand ($170,000.00) Dollars, lawful money of the United States, hereinafter referred to as the ‘Trust Fund‘, IN TRUST NEVERTHELESS for the uses and purposes and on the terms and conditions hereinafter set forth, that is to say:
FIRST: During the lives of the Grantor and his wife, Anne Howard Chapin commissions of the Trustee thereon, the Federal and State Income Taxes, if any, and lawful and proper expenses of administration, to pay over and t distribute the net income in equal quarterly instalments (the first payment to be within four months from the date of this instrument) to and among the Beneficiaries for their support and maintenance, without power of anticipation, in the following proportions, that is to say:
Forty percentum thereof to the said ANNE HOWARD CHAPIN DWIGHT;
Ten percentum thereof to each of the children of said Anne Howard Chapin Dwight, namely, RUTH CHAPIN, BARBARA CHAPIN HAMBY, HELEN SPRING CHAPIN, CONSTANCE CHRISTY CHAPIN, THOMAS CHRISTY CHAPIN and ANNE HOWARD CHAPIN. Such payments of income to the persons named shall be made on their respective sole receipts (including the said Anne Howard Chapin, notwithstanding that she is under the age of twenty-one years), and the Trustee shall not be responsible for the use or application of such income.
SECOND: On the death of any beneficiary during the lives of the Grantor and said Anne Howard Chapin Dwight leaving issue him or her surviving, such issue shall be substituted for its parent so dying as a beneficiary or beneficiaries, and the share of income to which such parent would have been entitled if living shall be paid to such issue or to the surviving parent or guardian, if any, of such issue for the use of such issue if under the age of twenty-one years, in equal shares per stirpes until the death of the survivor of the Grantor and said Anne Howard Chapin Dwight. If the beneficiary so dying leave no issue him or her surviving, or if such issue die before the death of the survivor of the Grantor and said Anne Howard Chapin Dwight, then the income to which such beneficiary or issue would have been entitled if living shall be added to the shares of income of surviving beneficiaries in the proportions which their respective original shares bear to the aggregate of the shares of all surviving beneficiaries.
THIRD: On the death of the survivor of the Grantor and said Anne Howard Chapin Dwight, the trust hereinbefore created shall terminate and the principal thereof, with any undistributed income shall vest in, and be transferred and paid over in equal shares to such of the children above-named of my wife as are then living and the issue of any deceased child per stirpes, such issue to take the share which its parent would have taken if living, to their own use and benefit free of any trust.
FOURTH: The Trustee shall have the power to invest and reinvest the Trust Fund in interest bearing bonds or dividend-paying preferred stocks of industrial, railway or public utility corporations, which for a period of five years next preceding shall have paid dividends on their common stocks, or which shall be recommended in a writing addressed to the Trustee by the said Anne Howard Chapin Dwight, as well as in any securities which are legal investments for Trustees. The Trustee shall under no circumstances be held responsible for loss to the trust suffered through the exercise, in good faith, of any power hereby conferred.
FIFTH: The Grantor hereby authorizes and empowers the said Anne Howard Chapin Dwight, by instrument in writing addressed to the Trustee, from time to time and as often as she may deem proper, to vary the proportions of income to which the beneficiaries other than herself may be entitled, but the exercise of such power shall not affect the proportions in which the principal of the Trust Fund shall be distributed on the termination of the Trust.
On December 25, 1934, the decedent added the sum of $25,000 in cash to the principal of this trust.
By a second indenture dated August 15, 1935, and executed by the decedent on that date, he established a second trust (hereinafter referred to as the second trust) which provided that the income was to be paid to his wife for life, and on her death the principal was to be paid to her six children (by her former marriage) and two other relatives of the decedent. This trust indenture reads in part as follows:
KNOW ALL MEN BY THESE PRESENTS, That I, ARTHUR S. DWIGHT, of the Village of Kings Point, Great Neck, in the County of Nassau, State of New York, (hereinafter called the ‘grantor‘), consideration of the sum of One Dollar ($1) to me in hand paid and the acceptance of the obligations hereinafter described, by Bank of New York and Trust Company, a domestic corporation, having its office at 48 Wall Street, New York City, (hereinafter called the ‘Trustee ‘), have assigned, transferred and delivered and do hereby assign, transfer and delivery, irrevocably, to the Trustee, the securities specifically enumerated in the schedule hereinafter set forth, and referred to as the ‘Trust Fund‘, to have and to hold the same unto said Trustee, and its successors in trust nevertheless, for the following uses and purposes and on the terms, conditions and limitations hereinafter set forth, that is to say:
FIRST: During the life of Anne H. C. Dwight, the wife of the Grantor, to hold, manage, invest and reinvest the said Trust Fund, collect and receive the rents, interest, income and profits thereof, and after deducting all proper charges and expenses, to pay the net income thereof to said Anne H. C. Dwight in monthly installments, for her support and maintenance, without power of anticipation.
SECOND: Upon the death of said Anne H. C. Dwight, the trust hereinbefore created shall terminate and the principal thereof, with any undistributed income shall vest in, and be transferred and paid over in equal shares to such of the following named eight persons as are then living and the issue then living of any of said persons who shall have died, per stirpes and not per capita, (such issue to take in equal proportions the share which its parent would have taken if living), to their own use and benefit free of any trust, viz:
Ruth Chapin, Barbara Chapin Hamby, Helen S. Chapin, Constance Chapin de la Ossa, Thomas C. Chapin, Anne Chapin Weston, children of said Anne H. C. Dwight, and Dr. Alfred Raymond Bellinger and Louisa Bellinger, the two lastnamed being cousins of the Grantor and now residing at New Haven, Connecticut.
The Federal gift tax was duly assessed and paid on this transfer in the amount of $12,606.14.
The establishment of the second trust was prompted by the decedent's desire that his wife should have sufficient income to meet both maintenance expenses of the family's Florida home, which decedent had presented to his wife as a gift in 1934, and the substantial medical expenses of caring for her two invalid daughters by her prior marriage.
At all times during their marriage, the decedent paid all the expenses of running the family home at Great Neck, Long Island, and after the first trust was established the decedent's wife paid for her own clothing and other personal needs.
OPINION.
HILL, Judge:
The sole issue presented concerns the question whether the values of the whole or any part of the corpora of two trusts created by the decedent, one in 1931 and the other in 1935, are includible in decedent's gross estate. No issue has been raised that the transfers were made in contemplation of death.
It is respondent's position that the decedent retained the enjoyment of the transferred property or the income therefrom during his lifetime, thereby rendering the values of the trusts includible in decedent's gross estate under the applicable provisions of the internal revenue law.
In support of this position respondent argues that the decedent had a legal obligation existing at the time of his death to support the beneficiaries and that when the decedent transferred the property in trust he retained the right to have the income therefrom applied toward the satisfaction of this obligation.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, whereever situated, except real property situated outside of the United States—(c) TRANSFERS IN CONTEMPLATION OF, OR TAKING EFFECT AT, DEATH.—GENERAL RULE.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise—(B) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) 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; orThe above section is applicable to the transfer made by the decedent during the year 1935. However, the first transfer was made by him in December 1931; therefore, the Joint Resolution of Congress on March 31, 1931, amending the Revenue Act of 1926, is applicable thereto by virtue of the provisions of section 7(b) of the Technical Changes act of 1949, as amended, which read as follows:(b) The amendment made by subsection (a) shall be applicable with respect to estates of decedents dying after February 10, 1939. The provisions of Section 811(c) of the Internal Revenue Code, as amended by subsection (a), shall (except as otherwise specifically provided in such section or in the following sentence) apply to transfers made on, before, or after February 26, 1926. The provisions of Section 811(c)(a)(B) of such code shall not, in the case of a decedent dying prior to January 1, 1950, apply to—(1) a transfer made prior to March 4, 1931; or(2) a transfer made after March 3, 1931, and prior to June 7, 1932, unless the property transferred would have been includible in the decedent's gross estate by reason of the amendatory language of the joint resolution of March 3, 1931 (46 Stat. 1516).Section 302 of the Revenue Act of 1926 as amended by Joint Resolution of March 31, 1931, reads as follows:SEC. 302. 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, whereever situated—(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or moeny's worth. * * *While the provisions of section 811(c) of the Code include certain amendments made with respect to the provisions of the Joint Resolution, both laws contain provisions which require that where a decedent made an inter vivos transfer of property but retained the income from such property or the enjoyment thereof, the transferred property is includible in the value of his gross estate. Accordingly, for the purposes of the issue presented herein, there is no need for discussion of any distinctions which exist between the two provisions. We previously decided a similar issue as is presented herein where the governing law was the Joint Resolution of March 31, 1931, in Mathilde B. Hooper, Admnx., Estate of James P. Hooper, 41 B.T.A. 114.
It has been held that where a decedent transferred property in trust, but retained the right to have the income therefrom applied towards the payment of the legal obligations existing at the time of his death, he retained income from the property and its value is includible in his gross estate. Mathilde B. Hooper, Admnx., 41 B.T.A. 114; Estate of John Howard Helfrich, 1 T.C. 590, affd. 143 F.2d 43. Cf. Estate of Paul F. Donnelly, 38 B.T.A 1234, revd. Helvering v. Mercantile-Commerce Bank & Trust Co., 111 F.2d 224; Estate of Clayton William Sherman, 9 T.C. 594 (appeal dismissed); Wishard v. United States, 143 F.2d 704; Estate of Payson Stone Douglass, 2 T.C. 487, aff. 143 F.2d 961.
With respect to the existence of a legal obligation on the part of the decedent to support the beneficiaries, we agree with the respondent that at the time of the decedent's demise he was under a legal obligation to support his wife, the recipient of all the income from the second trust and part of under no legal obligation to furnish their support.
New York Social Welfare Law, Section 101, as amended, L. 1945, c. 656, section 1. See People v. Williams, 292 N.Y.S. 458.
The respondent has made no alternative argument that only part of the corpus of the first trust should be included in the value of the decedent's estate. However, we deem it unnecessary to consider this question since we wife. In this respect we agree the respondent's argument that the ultimate question to be decided is not to what use the income was put but rather whether the decedent reserved to himself an enforceable right to have the income applied towards his wife's support. Estate of Clayton William Sherman, supra. Respondent points to the language contained in each of the trust instruments to the effect that the trustee was required to pay over to the beneficiaries the net income of the trusts for their ‘support and maintenance‘
as conclusive proof that the decedent retained this right.
This language is contained in paragraph First of each of the two trust indentures, set out in our findings of fact above.
Looking at the two transfers made by the decedent, we see that both trusts were irrevocable. In each case the trustee was a third party and decedent-settlor retained no control over the trustee. The provisions of the instruments stated definitely and unequivocally that decedent's wife was to receive 40 per cent of the net income of the first trust and (all) the income of the second trust. Nowhere in either trust indenture is there any provision that the trustee should have the power to refrain from paying the income to the wife if she failed to meet her expenses for maintenance and support, nor do the instruments contain any provisions empowering the trustee to pay such expenses directly if the beneficiary failed or refused to pay. No provision is contained in either instrument which would indicate that decedent intended that his wife's use of the income was to be restricted to the payment of her expenses for support and maintenance.
Helvering v. Mercantile-Commerce Bank & Trust Co., supra, was relied upon by the respondent. There the decedent-settlor established a trust in favor of his wife and the trust instrument provided that she was to receive a certain sum monthly to be used and applied by her upon their family and joint living expenses. Such payments were to provide in full for her own bills and expenses and for her own care, maintenance and support, and if at any time she did not use such income to pay such expenses then the trustees were empowered to apply and use the income to pay and discharge and take care of her maintenance, care and support and apply any excess to the joint living expenses. The trustees were to continue to make payments to her until such time as the settlor might deliver to them an affidavit accompanied by statements of unpaid accounts incurred by the beneficiary showing that she was not applying the payments as provided in the trust. In so far as the holding in that case may be deemed inconsistent with our holding here, we respectfully decline to follow it. Mathilde B. Hooper, Admnx., supra, is distinguishable. In that case, decided in favor of the respondent, the decedent-settlor, being heavily in debt, transferred all his property to a trust. The trustees were authorized to collect his salary and to use it and other trust income to pay certain insurance premiums, to pay decedent's wife a certain amount yearly, and to pay off decedent's debts. In the trust instrument the payments to decedent's wife were conditioned on her using them to maintain a home for herself and decedent and to pay the cost of supporting and educating their children.
With respect to the use of the phrase ‘for the support and maintenance,‘ its existence in the trust instruments neither adds to nor reduces the rights of the parties as they otherwise appear. At most it merely indicates the motive or desire of the settlor in creating the trusts.
Its value even for such a purpose is limited in this case since the evidence indicates that with respect to the second trust the petitioner had expressed other motives which prompted him to establish that trust.
Cf. Griswold, Spendthrift Trusts, 2d ed., section 433, and Bogert, Trusts and Trustees, section 226, and cases therein cited.
With respect to the decedent's desire in creating the second trust, the evidence indicates that he wished to furnish his wife with additional income to meet the maintenance expenses of their Florida home and to meet the medical expenses of her adult daughters by her former marriage. It is apparent, therefore, he desired that a substantial portion of the payments be used for purposes other than his wife's support and maintenance. Furthermore, the wife testified that in discussions with her husband there was an understanding that the second trust was to provide her with additional money ‘to have it for what I wanted to use it for.‘
Accordingly, we hold that the decedent-settlor did not retain the right to have income from the trusts applied towards his legal obligation to support his wife, and no part of the value of either of the two trusts is includible in the value of the decedent's gross estate.
Reviewed by the Court.
Decision will be entered under Rule 50.