Estate of Lasker v. Commissioner

ESTATE OF FLORA W. LASKER, DECEASED, MARY L. FOREMAN AND FRANCES LASKER, SUCCESSOR EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Estate of Lasker v. Commissioner Docket No. 101290. United States Board of Tax Appeals 47 B.T.A. 172; 1942 BTA LEXIS 730; June 23, 1942, Promulgated *730 In 1931 decedent made three gifts in trust, naming her children respective beneficiaries. The trust instruments permitted the trustees to acquire insurance policies upon the lives of persons other than the grantor and directed that the net income of the trusts in excess of that necessary to pay the insurance premiums might be paid to the beneficiaries or accumulated, prior to the death of decedent and her husband, at the discretion of the trustees. After the death of the grantor and her husband, and in the event that the beneficiary had attained the age of 25 years, the entire net income of the trusts is to be paid to the beneficiary. The trusts are to terminate not later than 21 years subsequent to the death of certain named persons. The original trust instruments contained a provision permitting amendment or revocation (1) by the grantor in conjunction with the beneficiary of the respective trust, and (2) by two trustees other than the grantor. These provisions for amendment were eliminated from the trust instruments prior to the death of decedent by amendments executed by two trustees other than the grantor. Held: (1) The gifts in trust were not includible in decedent's*731 gross estate under section 302(a) of the Revenue Act of 1926, as amended, or under section 302(d) of the Revenue Act of 1926, as amended. (2) The gifts in trust were not intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 302(c) of the Revenue Act of 1926, as amended. Reinecke v. Northern Trust Co.,278 U.S. 339. A. L. Hopkins, Esq., Jay C. Halls, Esq., and Harry D. Orr, Jr., Esq., for the petitioners. Franklin F. Korell, Esq., and David Altman, Esq., for the respondent. ARUNDELL *173 The petition in this case was filed to test the correctness of respondent's determination of a deficiency in Federal estate tax in the amount of $45,336.79. By amended answer respondent requests that an additional deficiency be determined. All issues presented in the petition have been settled by stipulation of the parties except that additional litigation and administration expenses incurred may be agreed upon at the time of final settlement under Rule 50. At the hearing of this proceeding respondent filed an amended answer raising, for the first time, the question of*732 the taxability of three trusts created by decedent on December 7, 1931. The affirmative issue raised by respondent is whether the three trusts were intended to take effect in possession or enjoyment at or after death and are, therefore, taxable under section 302(c) of the Revenue Act of 1926, as amended; and that the property owned by the trusts is taxable under section 302(a) and section 302(d). (d). Respondent makes no contention that contemplation of death is involved in this proceeding. The facts were stipulated. We set forth here only such of the facts as we think necessary to a disposition of the points in dispute. FINDINGS OF FACT. Flora W. Lasker died on December 19, 1936. Albert D. Lasker, her husband, named as executor in her will, qualified and acted as executor until August 4, 1941, when he resigned, and thereupon Mary L. Foreman and Frances Lasker became successor executors and are now acting *174 as such. The estate tax return for decedent's estate was filed with the collector of internal revenue at Chicago, Illinois. On December 7, 1931, the decedent executed three trust agreements, conveying certain property to Ralph V. Sollitt, Albert L. Hopkins, *733 and Flora W. Lasker, as trustees, for the benefit, respectively, of one of her three children, Mary, Edward, and Frances. The three trusts were substantially identical. Each trust instrument carried provisions substantially as follows: Par. I. "Unless sooner terminated under the terms and provisions hereof" this trust is to terminate not later than 21 years after the death of the last to die of the grantor, her husband, and her children, viz., Mary, Edward, and Frances. Par. II. The trustees may acquire policies which insured the lives of persons (other than the grantor) in whom the grantor or her beneficiaries have an insurable interest. Par. III. The trustees shall pay the premiums upon all life insurance policies out of income or, if necessary, from principal during the lifetime of the grantor and her husband. In their sole and uncontrolled discretion they may distribute so much of the remaining net income as they deem advisable to the named child for whom the trust was created or, in the case of his or her death, to certain successor beneficiaries. Any undistributed net income shall, upon the death of the survivor of the grantor and said Albert D. Lasker, be added*734 to and held as a part of the principal of the trust estate. Par. IV. Upon the maturity, by death or otherwise, of any of the policies of life insurance and upon the collection of the net proceeds thereof, the proceeds are to be added to the principal of the trust estate. Par. V. After the death of the survivor of Albert D. Lasker and the grantor, (a) The entire net income of the trust shall be paid to the child named, if then living, provided, however, if the child has not then reached the age of 25 the payments shall be the amounts deemed proper or desirable for its maintenance, education, and support. (b) If the child named in the instrument dies before the death of the survivor of the grantor and her husband, the child's surviving issue should become "net income" beneficiaries. (c) If the child named in the instrument dies before the death of the survivor of the grantor and her husband without leaving surviving issue, then the child's brothers or sisters become the "net income" beneficiaries. But upon the death of any brother or sister without leaving surviving issue the benefits pass to the survivor of the brother or sister. (d) If all three of the children*735 die without leaving surviving issue the net income is to paid to the "next of kin of the Grantor." *175 (e) Any portion of the principal held for the benefit of the child named in the instrument is to be held and distributed by the trustees, after his or her death, to the alternate contingent beneficiaries upon the same terms and conditions as provided for the deceased child. (f) On the death of Albert D. Lasker and all issue of the grantor prior to her death, the trust may, during the life of the grantor, be revoked, modified, or terminated by two of the trustees other than the grantor, and the trust shall be held and distributed in accordance with the instrument of modification or termination. (This provision was eliminated by modification of December 29, 1934.) If all issue of the grantor die prior to the survivor of Albert D. Lasker and the grantor, on the death of the survivor the trust is to be paid over to the then living brothers and sisters of Albert D. Lasker and issue of such deceased brothers and sisters in equal shares per stirpes, and, if no such persons are living, to the persons who would then be the next of kin of the grantor had she then died*736 intestate, as determined under the laws of Illinois. (g) If after the death of Albert D. Lasker and the grantor there is a complete failure of beneficiaries, the trust estate is to be paid to the brothers and sisters of Albert D. Lasker or their issue. If there are none, to the next of kin of the grantor. (h) Upon the termination of the trust the trust estate shall, without more, immediately become the absolute property of the person or persons who are then receiving the net income. Par. VIII. Originally, the trust could be modified or terminated at any time during the life of the grantor and Albert D. Lasker and of the survivor of them in any of the following ways: (a) This Trust may be modified or terminated in whole or in part, (1) at any time during the lifetime of the Grantor and * * * [the beneficiary] by an instrument in writing signed by the Grantor and said * * * [beneficiary], and (2) after the death of * * * [the beneficiary] and during the lifetime of the Grantor, by an instrument in writing signed by the Grantor and by any beneficiary not a minor who is then entitled to receive any income under the provisions hereof, or for whose benefit any of said*737 income may be applied; provided, however, that no such modification or termination may be made so as to revest in the Grantor any part of the corpus of the Trust Estate or so as to entitle the Grantor to the income of the Trust Estate, or any part thereof. (b) This Trust may be modified or terminated in whole or in part and without consent of the beneficiaries hereunder at any time during the lifetime of the Grantor and the said Albert D. Lasker and of the survivor of them by an instrument in writing signed by any two of the then Trustees of this Trust other than the Grantor; provided that no such modification or termination may be so made as to vest any part of the corpus of the Trust Estate or the right to any part of the income thereof in anyone other than Albert D. Lasker and/or any one or more of the children of the Grantor and/or the issue of any child or children of the Grantor. *176 (c) This Trust may be modified or terminated in whole or in part at any time after the death of the Grantor and during the lifetime of Albert D. Lasker in any of the following ways, that is to say, (1) during the lifetime of * * * [the beneficiary] by an instrument in writing signed*738 by Albert D. Lasker and the said * * * [beneficiary], and (2) after the death of the said * * * [beneficiary] by an instrument in writing signed by the said Albert D. Lasker and by any beneficiary not a minor who is then entitled to receive any income under the provisions hereof or for whose benefit any of said income may be applied; provided, however, that no such modification or termination may be made so as to vest any part of the corpus of the Trust Estate or the right to any part of the income thereof in any one other than any one of more of the children of the Grantor and/or the issue of any child or children of the Grantor. Any instrument in writing so modifying or terminating this Trust shall aptly set forth the terms of such modification or termination, subject, however, to the foregoing limitations, and the Trust Estate and the income thereof shall thereupon be held, managed, and/or distributed in accordance therewith. [This entire paragraph VIII was eliminated on June 26, 1935. ] Following the execution of the three trust instruments on December 7, 1931, the decedent's husband, without receiving money or property of any kind therefor, caused certain policies*739 of insurance, which had been taken out on his life and of which he was the owner, to be assigned to the trustees of the respective trusts. Between December 7, 1931, and the date of the decedent's death the trustees caused additional policies of insurance to be taken out upon the life of the decedent's husband. Under date of December 29, 1934, the two trustees other than the grantor executed three written instruments, each of which, by its terms, modified the provisions of the respective trust agreements executed by the grantor on December 7, 1931, so that paragraph V, subparagraph (f), of each trust instrument would read as follows: (f) In case of the death of all of the issue of the Grantor prior to the death of the survivor of said Albert D. Lasker and the Grantor, then upon the death of the survivor of said Albert D. Lasker and the Grantor, the Trust Estate shall become the property of and be paid over to the then living brothers and sisters of Albert D. Lasker and the issue of any such deceased brother or sister in equal shares, per stirpes and not per capita, and if there are no such brothers or sisters or issue of deceased brothers or sisters of Albert D. Lasker*740 then living, then to such persons as would then be the next of kin of the Grantor had she then died intestate, as determined by and in the proportions specified in the laws of Illinois governing the descent of personal property, in force at the date of the execution of this instrument. Under date of June 26, 1935, the two trustees other than the grantor executed three written instruments which served to modify the provisions of the respective trust agreements executed by the grantor on December 7, 1931, as follows: THIRD: Said original trust agreement of December 7, 1931, as heretofore modified, is hereby modified by striking out paragraph numbered VIII thereof and eliminating each and every provision of said paragraph numbered VIII *177 and eliminating and cancelling all powers of modification, revocation or termination in said paragraph numbered VIII set out. OPINION. ARUNDELL: The issues raised by the petition and answer have been settled by stipulation of the parties or will be determined upon recomputation under Rule 50. The only question remaining for our decision was affirmatively raised by respondent in his amended answer and is whether or not the decedent's*741 gifts in trust are includible in her gross estate under section 302(a), as amended, 1 302(c), as amended, 2 or 302(d), as amended, 3 of the Revenue Act of 1926. Respondent claims that the gifts in trust were conditional because decedent reserved the right to modify, that decedent did not intend to make present gifts at the time of the creation of the trusts, and that, in any event, the intent of decedent was that the possession or enjoyment of the gifts should take effect only at or after her death, thus complying with the literal words of section 302(c), as amended. *742 We must first determine whether the trusts which were in effect at decedent's death were the original trusts as created by her in 1931, or were the trusts as modified by the several amendments, including the amendments of June 26, 1935. If these amendments were valid and effectual modifications of the original instruments, it is clear that decedent retained no interests of any kind in the trusts at the date of her death. As we understand it, respondent questions only the modifications of June 26, 1935. *178 By the amendments of June 26, 1935, made prior to decedent's death, the possibility of further modification of the trusts in any manner was removed. Under the original trust instruments modification or termination of the trusts was possible during the lifetime of decedent by reason of paragraph VIII of each trust. By written instruments signed by two trustees other than decedent and in accordance with the provisions of paragraph VIII, the trustees eliminated paragraph VIII from each trust. Power to modify or terminate a trust may be vested in the trustee. Bogert, Trusts and Trustees, sec. 1000; Scott, The Law of Trusts, secs. 331, 334.1; *743 ; affd., ; . Moreover, the fact that decedent gave the power to modify or terminate to the trustees regardless of the consent of the beneficiaries is strong evidence that the trustees owed no duty to the beneficiaries of the trusts to refrain from exercising that power. See . Thus, the trusts were amended so as to make them completely irrevocable and unamendable. Consequently, at decedent's death she had no power to alter, amend, revoke, or terminate the trusts and, furthermore, had no interests therein. It is these trusts as so amended, rather than the original trusts, which were in effect at decedent's death. The conclusion reached on this point disposes of respondent's contentions that the value of the trusts was includible in decedent's estate either under section 302(a), as amended, or section 302(d), as amended. Decedent retained no interest in the trusts which would be subject to tax under section 302(a), as amended. Moreover, at the date of her death decedent*744 possessed no right to alter, amend, or revoke the trusts nor, as the parties have stipulated that the question of contemplation of death is not here involved, did she relinquish such a right in contemplation of death. Consequently, section 302(d) is not applicable. Since we have determined that the amended trusts were the determinative ones, we need not consider the question of whether the original trusts would have been includible in decedent's estate under section 302(d), as amended. See ; . The principal contention of respondent is that the gifts in trust were intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 302(c) of the Revenue Act of 1926, as amended. He claims that the gifts were originally intended to take effect at or after her death and that nothing which the trustees did or could do subsequent to the creation of the trusts could change the nature of those gifts. With this contention we do not agree. We think it immaterial whether the trusts as originally constituted*745 might have been modified by decedent, since, as we have shown, *179 the trusts with which we are concerned were the amended trusts. Whatever rights decedent might have had in the trusts were eliminated by the action of the trustees in making the several modifications, including the amendment of June 26, 1935. The decision of the Supreme Court in , completely answers respondent's argument that the gifts in trust were intended to take effect at or after death. In that case the Supreme Court had before it the question of the inclusion in a decedent's gross estate of the value of the corpora of certain trusts which decedent had created. In those trusts decedent had created life tenancies in certain individuals but with remainder over five years after the death of the decedent. The Court, in holding that the gifts in trust were not intended to take effect in possession or enjoyment at or after the decedent's death, stated: But the question much pressed upon us remains whether, the donor having parted both with the possession and his entire beneficial interest in the property when the trust was created, the*746 mere passing of possession or enjoyment of the trust fund from the life tenants to the remaindermen after the testator's death, as directed, and after the enactment of the statute, is included within its taxing provisions. * * * * * * * * * In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402(c) "to take effect in possession or enjoyment at or after his death," include any others than those passing from the possession, enjoyment, or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. * * * The Northern Trust Co. case is solid authority for a negative answer to respondent's contention that section 302(c), as amended, should be applied without regard to whether ownership or control is retained in the settlor-decedent. See *747 . The Northern Trust Co. case makes it clear that, in order that a gift may be included in the donor's estate as intended to take effect in possession or enjoyment at or after death, it is necessary that something pass from decedent at death. Here it is obvious that nothing passed. We do not think that the cases of ; , and Estate of mary , require a contrary result. In those cases, incidents of ownership, however slight, were retained by the decedent, and expired, were relinquished, or were eliminated by the death of the decedent. Here we have no life interest such as was retained in the Hughes case, nor do we have a possibility of reverter or other attribute of title in decedent such as was present in the Hallock case. However the Hallock and similar cases may tend to indicate a philosophy of *180 taxation, we are not prepared to attempt to impeach the validity of *748 , which is clearly applicable to the facts here. Accordingly, the issue must be decided for petitioner. We can not agree with the inference respondent sought to draw from the facts stipulated by the parties. The matter in issue was raised by respondent and the burden of proof consequently rests on him. Inferences are not to be resolved in favor of the party having that burden. Decision will be entered under Rule 50. Footnotes 1. 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, wherever situated, except real property situated outside the United States. [As amended by sec. 404, Revenue Act of 1934.] (a) To the extent of the interest therein of the decedent at the time of his death. ↩ 2. (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, or of which he has at any time made a transfer, by trust or otherwise, 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 (1) the possession or enjoyment of, or the right to the income from, the property, or (2) 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; except in case of a bone fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. [As amended by sec. 803(a), Revenue Act of 1932.] ↩ 3. (d) (1) 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. [As amended by Sec. 401, Revenue Act of 1934.] * * * ↩