Opinion
Docket No. 6389.
1947-01-31
ESTATE OF JOHN W. NEAL, DECEASED, ELIZABETH MITCHELL NEAL AND THE SECOND NATIONAL BANK OF HOUSTON, TEXAS, INDEPENDENT COEXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Palmer Hutcheson, Esq., and Robert K. Jewett, Esq., for the petitioners. Frank B. Schlosser, Esq., and L. R. Van Burgh, Esq., for the respondent.
Decedent, in 1929, created an irrevocable trust wherein he reserved power to modify, alter, or amend the trust agreement, except that he did not have power to change any beneficial interests under the agreement. Under the original trust agreement the trust fund was to be divided into as many shares as decedent had grandchildren. Each grandchild was to receive the income from its share for life and one-third of the principal of its share upon reaching age 35, and had the right to appoint by will, if survived by a spouse or lineal descendants, the persons to whom its share of the principal should be paid upon grandchild's death. In default of appointment, each grandchild's share of principal was to be distributed to its lineal descendants, or, if there were no lineal descendants, to specified classes of remaindermen. Only upon the failure to take by the designated remaindermen was such share to revert to the decedent, or, in event of decedent's prior death, to pass to such persons as decedent might by will appoint, or to his heirs. In 1936 decedent purported to amend the original agreement so as to deprive each grandchild of its power of appointment. On several other occasions decedent also purported to amend the agreement in regard to administrative matters. Held, that decedent had no such power of alteration or amendment as to make the corpus of the trust includible in his gross estate under section 811(d)(2), Internal Revenue Code. Palmer Hutcheson, Esq., and Robert K. Jewett, Esq., for the petitioners. Frank B. Schlosser, Esq., and L. R. Van Burgh, Esq., for the respondent.
This case involves a deficiency in estate taxes determined in the amount of $510,104.25, subject to a reduction upon the submission of proper proof of the payment of state inheritance taxes. The deficiency results from several adjustments made by the respondent to the net estate as reported in the estate tax return filed by the executors and contained in the notice of deficiency.
The only adjustment which is here controverted by the petitioners is explained, as follows, in a statement attached to the deficiency notice:
+-----------------------------------------+ ¦Schedule G-Transfers¦Returned¦Determined ¦ +--------------------+--------+-----------¦ ¦Item 1-Added ¦ ¦$594,854.49¦ +-----------------------------------------+
Item 1— Added: on July 8, 1929, from community property of decedent and surviving spouse there was created a trust for the benefit of three grandchildren. the community contribution of this decedent to said trust had fair market value at date of decedent's death of $594,854.49 as set forth in a detail list of such properties previously furnished you.
The value at the time of decedent's death of the property embraced in the trust created July 8, 1929, has been included in the decedent's gross estate under Sections 811(c) and 811(d) of the Internal Revenue Code.
On January 24, 1947, respondent informed this Court that he now withdraws any contention that the transfer in trust is includible in the gross estate as a transfer to take effect in possession or enjoyment at or after death under subdivision (c) of section 811 of the Internal Revenue Code, but continue to contend that the transfer is includible in the gross estate under subdivision (d) of section 811.
Effect will be given under Rule 50 to the adjustments which are not here at issue.
FINDINGS OF FACT.
The facts have been presented to the Court by stipulation and through documentary evidence. The facts stipulated are found to be as stipulated.
The petitioners are independent coexecutors and testamentary trustees under the last will and testament of John W. Neal, who died a resident of Houston, Texas, on August 31, 1940, at the age of 75 years.
By an instrument executed on July 8, 1929, the decedent transferred to John F. Sloan, as trustee, certain securities to be held in trust. Petitioner Second National Bank of Houston is lawfully acting as the successor trustee under this trust agreement.
The trust instrument of July 8, 1929, provided in part as follows:
ARTICLE FIRST
The Settlor hereby assigns, transfers, conveys and sets over unto the Trustee and his successors all the property described in Schedule A, hereto annexed and made a part of this agreement.
TO HAVE AND TO HOLD unto the Trustee, in trust however, until the death of the survivor of the Settlor, LIZZIE H. NEAL, wife of the Settlor, JAMES R. NEAL, son of the Settlor and MARION [sic] NEAL, JAMES R. NEAL, JR. AND NINA MARGARET NEAL, grandchildren of the Settlor, and for a period of twenty-one years after the death of such survivor, unless sooner terminated in whole or in part as hereinafter provided, and to divide the trust fund into three equal shares, one for each of the Settlor's above named grandchildren and within the limits of the trust term to dispose of the income and principal of said shares as follows:
A. To accumulate the income of each share and add such accumulated income to the principal of said share until the grandchild for whom the share is held shall have attained the age of twenty-one years, and thereafter to pay over or apply the income of such share thereafter accruing to or to the use of the grandchild for whom the same was set apart during his or her life and upon the death of such grandchild or upon the expiration of the trust term as hereinabove defined, whichever event shall first occur, to convey, transfer and pay over the principal thereof to the grandchild for whom the same was set apart, of if he or she shall not then be living, and provided such grandchild is survived by a spouse or by any lineal descendant, to the persons appointed and in the shares designated in the Last Will and Testament of such grandchild, or in default of such appointment, in equal shares per stirpes to the then surviving lineal descendants of such grandchild, or if there be no lineal descendant of such grandchild then surviving, to distribute the principal of such share equally among, and consolidate the same with the other shares then held hereunder, or if no share is then held hereunder to convey, transfer and pay over the principal of such share to JAMES R. NEAL, son of the Settlor, or if he is not then living, to his then surviving lineal descendants, in equal shares per stirpes, or if no lineal descendant of his shall then survive, to the Settlor, or if he is not then living to the persons appointed and in the shares designated in the Last Will and Testament of the Settlor, or in default of such appointment, to such persons as shall then constitute the heirs at law of the Settlor according to the laws of the State of Texas then in force governing the descent of real estate. The Trustee shall from time to time convey, transfer and pay over to any grandchild who has attained the age of thirty-five years, such portion of the principal of the share held for his or her benefit as such grandchild may from time to time request in writing; provided, however, that the payments so made shall not exceed in the aggregate an amount equal to 33 1/3 per cent of the principal of such share as the same existed when the share was originally set apart.
B. In the event that any grandchildren of the Settlor are born after the date of this agreement, then upon the birth of each such grandchild the Trustee shall unite principal or remaining principal of all shares then held here under and shall redivide the trust fund then in his hands into so many equal shares that there shall be one for each grandchild then living and shall dispose of the income and principal of said shares in the manner provided in Paragraph ‘A‘ hereof.
ARTICLE SEVENTH.
The Settlor shall have the power at any time during his life, by an instrument in writing delivered to the Trustee to modify, alter or amend this agreement, Provided, however, that the duties, powers and liability of the Trustee hereunder shall not be substantially increased without his written consent, and provided, further, that the Settlor shall not have the power to revoke or terminate the agreement nor to change any of the beneficial interests hereunder.
Under article third of the trust instrument, the trustee was given broad discretionary powers of managing the trust properties, but the settlor reserved the right, at his option, to direct the trustee to retain any investment or to direct the sale or exchange of any investment, to designate the stocks, bonds or other property in which the trust fund or any reinvestment thereof should be invested, and to direct the issuance of voting proxies under any stock held under the trust. Article fifth expressly provided that this should be deemed a Texas trust and in all respects governed by the laws of the State of Texas.
By an instrument in writing executed on June 10, 1933, the decedent purported to modify, alter, and amend the trust instrument by adding thereto a new article which provided for the decedent's approval of the trustee's accounts.
On March 4, 1936, the decedent executed an instrument in writing addressed to ‘The Second National Bank of Houston, as Successor and/or Substitute Trustee ‘ under the trust agreement of July 8, 1929, which reads in part as follows:
WHEREAS, said Trust was originally created, primarily, for the benefit of the three grandchildren of the Settlor, viz.— Marian Neal, James R. Neal, Jr. and Nina Margaret Neal,— and other members of Settlor's immediate family viz.—Lizzie H. Neal, wife of Settlor, and James R. Neal, son of the Settlor,— were vested with certain interests under remote contingencies, viz: in the event all three of the aforementioned grandchildren of Settlor should die without any lineal descendants surviving any of said grandchildren and without any of said grandchildren being survived by a surviving spouse, or without having executed a Last Will and Testament; and
WHEREAS, it was the original intent of Settlor that the Trust created for the benefit of the three grandchildren above named, was created primarily for their joint benefit and the benefit of their lineal descendants:
NOW, THEREFORE, in the exercise of the power so reserved to me by the provisions of Article Seventh of said agreement, I, the undersigned John W. Neal, the Settlor named in said agreement, do hereby modify, alter and amend said agreement so as to cause sub-head (A) of the Article First to read as follows:
To accumulate the income of each share and add such accumulated income to the principal of said share until the grandchild for whom the share is held shall have attained the age of twenty-one years, and thereafter to pay over or apply the income of such share thereafter accruing to, or to the use of, the grandchild for whom same was set apart, during his or her life, and upon the death of such grandchild the Trustee is authorized and directed to pay the net income produced by the share belonging to such deceased grandchild to the surviving children of said deceased grandchild until the youngest thereof has attained the age of twenty-one years, after which time the Trustee is authorized and directed that the trust herein created, as to the share of the deceased grandchild, shall terminate and the Trustee is authorized and directed to distribute such deceased grandchild's share to his or her lineal descendants, per stirpes and not per capita. In the event such deceased grandchild of John W. Neal, the Settlor, is not survived by any lineal descendants, then and in that event the share formerly belonging to such deceased grandchild shall remain in trust for the surviving grandchildren or grandchild of John W. Neal, Settlor, under the exact and same terms and conditions as is herein provided for in connection with the original shares or share vested in the other grandchildren or grandchild of the Settlor, and to their, or his, or her lineal descendants him or her surviving; that is to say, if there by no lineal descendants of such deceased grandchild then surviving, to distribute the principal of such share equally among and to consolidate the same with the other shares held hereunder, or if no share is then held hereunder, to convey, transfer and pay over the principal of such share to James R. Neal, son of Settlor, or if he is not then living, to his then surviving lineal descendants, in equal shares, per stirpes, or if no lineal descendants of him shall then survive, to the Settlor, of if he is not then living, to the persons appointed and the shares designated in the Last Will and Testament of the Settlor, or in default of such appointment, to such terms as shall then constitute the heirs at law of the Settlor, according to the laws of the State of Texas then in force governing the descent of real estate. The Trustee shall, from time to time, convey, transfer and pay over to any grandchild who has attained the age of thirty-five years, such portion of the principal of the share held for his or her benefit, as such grandchild may from time to time request in writing; provided, however, that the payments so made shall not exceed, in the aggregate, an amount equal to 33 1/3% of the principal of such share as the same existed when the share was originally set apart.
This amendment of March 4, 1936, also revoked a provision of the original agreement whereunder the trustee was given the privilege of dealing with itself or any corporation, association, partnership, or firm which might be affiliated with the trustee.
The decedent purported to amend further the trust agreement by an instrument in writing executed by him on February 7, 1939, wherein the decedent relinquished his right of directing the investments of the trust and the issuance of voting proxies and vested it in his son, J. R. Neal, Sr.
On December 1, 1939, the decedent purported to add a proviso to the agreement authorizing and directing the trustee to counsel with the three beneficiaries of the trust, Marian Neal Rubey, James Robert Neal, Jr., and Nina Margaret Neal, if they should so desire, as to the trust investments.
In each of the purported amendments to the original trust instrument the settlor quoted article seventh of the original instrument and expressly stated that the amendment was being made in the exercise of the power reserved to him by the article. In connection with each amendment except the first one of June 20, 1933, the trustee executed a statement acknowledging that its duties, powers, and liabilities were not substantially increased by the amendment.
The decedent in his will, executed on December 16, 1939, created two trusts, ‘Trust Estate A‘ and ‘Trust Estate B.‘ ‘Trust Estate A,‘ consisting of 20 per cent of the decedent's entire net estate, not in excess of $500,000, was created for the benefit of the decedent's daughter-in-law, who was to receive the income therefrom during her life. Upon the death of this beneficiary the principal of this trust and all accumulated income was to become a part of ‘Trust Estate B.‘ The decedent's will also provided that all the rest, residue, and remainder of his property and estate, including lapsed or void legacies, devises, and any property over which he might have any power of appointment of testamentary control, was to be held in trust for certain uses and purposes under ‘Trust Estate B.‘ The income of this trust was payable to the decedent's widow for life, and if the income proved insufficient to support and maintain her adequately and properly the trustees were empowered to invade the principal of the trust. With the consent of the trustees, the widow also was given the right to withdraw limited amounts of the principal. upon the death of decedent's widow, the income of ‘Trust Estate B‘ was to be used for the benefit of the three grandchildren of the decedent, Marian Neal Rubey, James Robert Neal, Jr., and Nina Margaret Neal, until they reached the age of 21 years, after which each grandchild was entitled to receive its respective share of the income. As each grandchild became 25 years of age, the trustees were directed to deliver to him or her one-third of his or her share of the principal and accumulated income of the trust estate. One-half of the remainder of each grandchild's share was to be paid to him or her upon attaining the age of 30 years and the balance at the age of 35 years. During the period prior to the final distributions at age 35 each grandchild was to receive the income from the remaining portion of his or her share of the trust estate. The child or children of a deceased grandchild were entitled to any unrecovered part of their parent's share of the trust estate. In the event of the death of a grandchild without issue, his or her interest in the trust estate was to be divided equally between the surviving grandchildren. If all of the grandchildren predeceased the testator, without issue, or survived the testator but died without issue before receiving their entire interest in the trust estate, the will provided that the then existing trust estate be held in trust for the benefit of certain designated charitable institutions.
At the date of decedent's death the trust created by the instrument of July 8, 1929, was still in existence and no part of the trust assets had ever been repossessed by or had reverted to the decedent. The three grandchildren named as beneficiaries in the trust instrument, who were the only grandchildren of the decedent, were alive when the decedent died. Marian Neal Rubey (nee Marina Neal) was then 22 years old, James Robert Neal, Jr., 19 years old, and Nina Margaret Neal, 15 years old. A great-grandchild, William B. Rubey, Jr., the son of Marian Neal Rubey, was born on September 18, 1940, a few weeks after the decedent's death. J. R. Neal, Sr., the son of the decedent, died on November 26, 1939. Marian Seward Neal, widow of J. R. Neal, Sr., was 43 years of age at the time of the decedent's death, and had a life expectancy of 25.12 years.
At the date of the death of decedent his widow, Elizabeth Mitchell Neal, was 68 years of age and had a life expectancy of 9.47 years. Decedent's life expectancy at the date of his death was 6.27 years. At the same time, the life expectations of the three grandchildren were as follows: Marian Neal Rubey 40.85 years, James Robert Neal, Jr., 42.87 years, and Nina Margaret Neal 45.17 years.
OPINION.
KERN, Judge:
The question here before us for determination is whether the value at the date of death of the decedent's community one-half interest in the properties embraced within the trust created by the decedent on July 8, 1929, is includible in the decedent's gross estate under the provisions of section 811(d) of the Internal Revenue Code.
When respondent determined the deficiency herein he was contending that the transfer in trust was includible in the decedent's gross estate under the provisions of section 811(c) of the Internal Revenue Code. After this deficiency was determined, however, section 81.17 of Regulations 105 was amended by T.D. 5512 (C.B. 1946-1, p. 264). Respondent now, in effect, concedes that the transfer in trust is not includible in the decedent's gross estate under suction 811(c), and has recently withdrawn any contention to that effect. Respondent's present position on this point is, in our opinion, correct. See Estate of Edward P. Hughes, 7 T.C. 1348.
There is left for our decision the question whether the transfer here involved comes within the ambit of subparagraph (2) of section 811(d), which relates to transfers made on or before June 22, 1936. In so far as her material, section 811(d)(2) requires that there shall be included in the determination of the gross estate of a decedent the value of all property previously transferred by the decedent, by trust or otherwise, the enjoyment of which remains at the time of his death subject to any change through the exercise of a power by the decedent to alter, amend, or revoke.
It is the respondent's position that the decedent here had retained the power to alter or amend the trust agreement of July 8, 1929, and actually and expressly did so during his lifetime to the extent that the beneficial interests were thereby materially changed. The petitioners deny that the decedent had retained any such power under the specific provisions of the trust agreement and contend that the purported amendment of March 4, 1936, was void in so far as it undertook to change any beneficial interest or enjoyment of the original trust agreement. In the alternative, petitioners contend that that portion of the purported amendment of March 4, 1936, which recited that it undertook to amend section (a) of article first, was, if not void, merely declaratory of the original intent of the decedent as to the beneficial interests provided for in the trust agreement as originally executed. Petitioners also contend, in the alternative, that the amendment of March 4, 1936, if not void or if not merely declaratory as stated above, created definite beneficial interests which could not be subsequently changed in view of the express provisions of the original instrument.
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.* * * *(d) REVOCABLE TRANSFERS.—(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, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. . . .
Article seventh of the trust agreement reserved to the decedent the power to modify, alter, or amend the agreement, but the power to change the beneficial interests arising out of the trust agreement was expressly denied him. What effect, then, shall be given to the various amendments to the trust agreement executed by the decedent? The amendment of June 20, 1933, provided for the approval of the trustee's accounts by the decedent and respondent admits in his brief that this was probably only an administrative change which did not materially affect the interests of the beneficiaries. The power to make such a change would not be a power to change the enjoyment of the trust property within the meaning of the section. See Dort v. Helvering, 69 Fed.(2d) 836; certiorari denied, 293 U.S. 569, and Mellon v. Driscoll, 117 Fed.(2d) 477; certiorari denied, 313 U.S. 579. Similarly, the amendments of February 7, 1939, (whereby the decedent relinquished his right and responsibilities of directing the investments of the trust and vested them in his son) and December 1, 1939, (whereby the decedent authorized and directed the trustee to counsel with the three beneficiaries of the trust, if they should so desire, as to the trust investments) did not, in our opinion, affect the enjoyment of the trust properties. See Estate of Henry S. Downe, 2 T.C. 967, and Estate of George W. Hall, 6 T.C. 933. We therefore conclude that there is no merit in respondent's argument that the placing by the decedent of the right to direct the investment policy of the trustee in the hands of others had the effect of changing the enjoyment of the beneficiaries.
This leaves us with the problem of considering the effect to be given to the amendment of March 4, 1936. The parties have not referred us to any authorities determinative on this point, nor has our independent search brought any to light. Under the trust agreement as originally executed, each grandchild had the right to receive, during its life, the income from its share of the trust corpus, the right to receive one-third of its share of the principal upon reaching the age of thirty-five, and the right to appoint by will the persons to whom its share of the trust principal should be paid. The grandchild's share of the principal could pass to the persons appointed by it only if the grandchild was survived by a spouse or by lineal descendants. However, the condition of survival by a spouse or lineal descendants being met, there was no limitation as to the persons whom the grandchild could appoint. The grandchild could appoint a creditor or even a stranger without coming in conflict with the trust provisions. The amendment of March 4, 1936, attempted to take away the power of appointment from each grandchild, leaving the grandchild only with the right to receive the income during its life and the right upon reaching the age of thirty-five to one-third of the principal. Clearly, each grandchild's beneficial interest was materially changed by the amendment.
In Schoelkopf v. Marine Trust Co., 267 N.Y. 358; 196 N.E. 288, 290, the term ‘beneficial interest‘ was defined as follows: ‘Any person who, under the terms of the instrument, has a right, whether present or future, whether vested or contingent, to income or principal of the trust fund, has a beneficial interest in the trust. * * * The test is one of substance, not of form. Any right to receive a benefit from the trust in some contingency is a 'beneficial interest’ in the trust.‘
It is apparent, therefore, that by the 1936 amendment the decedent did attempt to change ‘beneficial interests‘ created by the original trust instrument, which attempt was beyond his reserved powers. In so far as this amendment sought to change any beneficial interests, it must be regarded as a nullity. This conclusion finds support in Guitar Trust Estate v. Commissioner, 72 Fed.(2d) 544, and Boyd v. United States, 34 Fed.(2d) 488.
Although the facts of these cases are clearly distinguishable from those of the case at bar, none the less we believe that the rationale of these holdings is applicable here. In the Guitar case the grantors, after having reserved no control over the trust in the original trust deed, later executed a supplementary deed which had the effect of making the income of the trust distributable annually to the beneficiaries, whereas the original deed provided for distributions at the discretion of the trustees. The Court, in holding that the grantors could not change the distribution requirements of the original deed said, in part: ‘The original deed reserved no control over the trust in the grantors. After it took effect they had no right or interest save as fixed by the deed. * * * The supplemental deed of itself accomplished nothing unless to express a consent on the part of its signers to the annual distribution therein described. * * * So far as the present evidence shows, the trust continued to be one in which the income was distributable in the discretion of the trustee.‘
In Boyd v. United States, supra, the court also dealt with a trust in which there was no power reserved to amend or revoke. The first valid trust provided for the settlor to receive certain fixed income for life. By subsequent amendment the settlor attempted to increase the income payable to him annually. The latter amendment was held to be a nullity.
The Guitar and Boyd cases indicate that a trust settlor can exercise no powers of amendment or control over the trust except as are reserved to him by the instrument creating the trust. See also James v. James, 260 Mass. 19; 156 N.E. 745. Thus, in the case here before us the decedent could exercise only such powers of amendment as he expressly reserved in the original trust instrument, and, when he attempted to make a change greater than within his reserved power, the attempt must be regarded as being ineffective.
We think it appropriate to consider the various amendments to the original trust instrument in endeavoring to ascertain the intent of the decedent in retaining certain powers of modification, alteration, or amendment in the original instrument, but, ‘while the intent of the parties is a prime factor in construing such an instrument and in the case of doubt this is accorded high evidentiary value, yet the instrument itself, where it is sufficiently plain, must determine its character and scope.‘ Commissioner v. McIlvaine, 78 Fed. (2d) 787, 789; affd., 296 U.S. 488. We are of the opinion that the original trust instrument of July 8, 1929, is sufficiently plain to establish that it did not reserve to the decedent such powers of amendment or alteration as he sought to exercise in 1936. That the decedent himself had the mistaken notion that he could change the beneficial interests by his 1936 amendment is not sufficient to establish the existence of such power. Even though the decedent did attempt to change the beneficial interests, it does not follow that he, therefore, actually had the power to alter or amend within the meaning of section 811(d)(2). As we see it, it is of the essence in that section of the code that the decedent actually have the power to change the enjoyment at the time of death.
Having sustained the petitioners' contention as to the invalidity of the 1936 amendment, we need not consider their alternative contentions on this point.
We are of the opinion that the decedent here did not have such powers of modification, alteration, or amendment as to affect the enjoyment of any interest transferred by decedent to the trust here in question. Therefore, we conclude that the corpus of the trust is not includible in decedent's gross estate by reason of section 811(d)(2) of the Internal Revenue Code.
Decision will be entered under Rule 50.