Estate of Leona Engelman, Peggy D. Mattson v. Commissioner

121 T.C. No. 4

UNITED STATES TAX COURT

ESTATE OF LEONA ENGELMAN, DECEASED, PEGGY D. MATTSON, EXECUTOR,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4668-02. Filed July 24, 2003.

In 1990, H and D, husband and wife, established a
living trust. The terms of the trust provided for an
allocation of trust assets between two separate trusts,
Trust A and Trust B, upon the death of the first
spouse. Initially, all assets were to be placed in
Trust A except to the extent disclaimed by the
surviving spouse. Disclaimed assets were to be placed
in Trust B. The surviving spouse was also granted a
power of appointment effective at death over Trust A.

H died on Dec. 30, 1997. On Feb. 5, 1998, D
executed a document entitled “Power of Appointment”
directing disposition of the Trust A corpus. D died on
Mar. 6, 1998. Thereafter, on May 11, 1998, the special
administrator of her estate executed a “Disclaimer” of
D’s interest in Trust A assets valued at approximately
$600,000 as of H’s earlier death. Those assets were
placed in Trust B and distributed to the beneficiaries
thereof.
 - 2 -

Held: Trust assets worth approximately $617,317
at D’s date of death are includable in the gross estate
on account of absence of a disclaimer qualified within
the meaning of sec. 2518, I.R.C.

Held, further, no charitable deduction is
allowable with respect to distributions to the American
Cancer Society, Yale University School of Law, or the
State of Israel.

Richard V. Vermazen, for petitioner.

Christine V. Olsen, for respondent.

OPINION

WHERRY, Judge: Respondent determined a Federal estate tax

deficiency of $356,211 for the Estate of Leona Engelman (the

estate). After concessions, the issues for decision are:

(1) Whether a qualified disclaimer within the meaning of

section 2518 was made with respect to trust assets worth

approximately $617,317 at the date of death of Leona Engelman

(decedent); and

(2) whether, to the extent that the foregoing trust assets

are included in the gross estate, the estate is entitled to a

charitable deduction for certain amounts distributed.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the date of decedent’s

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.
 - 3 -

Background

This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found. The stipulations of the

parties, with accompanying exhibits, are incorporated herein by

this reference. Decedent was a resident of California when she

died testate in that State on March 6, 1998. No probate

proceeding was maintained on behalf of the estate. The executor

and special administrator of decedent’s estate, Peggy D. Mattson

(Ms. Mattson), resided in California at the time the petition in

this case was filed.

Decedent and Samuel Engelman (Mr. Engelman) were husband and

wife. On January 10, 1990, in California, they executed a

declaration of trust placing their assets into the Engelman

Living Trust. The instrument named the settlors, decedent and

Mr. Engelman, as the initial trustees of the trust and set forth

provisions regarding administration and disposition of the trust

estate.

The trust declaration provided generally that, while both

settlors were alive, the trustees were to distribute income or

principal as the settlors directed. Upon the death of the first

spouse, the following provisions were to take effect:

2. DEATH OF FIRST SETTLOR. Upon the death of one
of the SETTLORS, survived by the other, the TRUSTEES
shall divide the Trust Estate into two separate trusts.
These separate trusts will be referred to as: TRUST “A”
and TRUST “B”. Although it is intended that two
separate trusts be created under the laws of California
 - 4 -

for federal and state income tax purposes, the TRUSTEES
may hold all of the Trust Estate as one common fund,
and are not required to make a physical division
thereof.

3. DIVISION AND ALLOCATION OF ASSETS. The Trust
Estate, and distributions received by this Trust from
the estate of the deceased SETTLOR (if any), shall be
allocated among the trusts described above as follows:

A. Except as provided in Subparagraph B and
Paragraph 4 [relating to simultaneous death], the
entire Trust Estate shall be allocated to TRUST “A.”

B. If the surviving SETTLOR, in his or her
capacity as beneficiary, effectively disclaims (under
Code Section 2518 or any successor provision then in
effect) all, or any specific portion, of his or her
interest in TRUST “A”, such disclaimed amount shall be
allocated to TRUST “B” to be held, administered and
distributed according to its provisions.

With respect to Trust A, all income was to be paid to or for

the benefit of the surviving settlor; the surviving settlor could

direct the trustees to distribute principal at any time and for

any reason; and the surviving settlor was granted a power, at his

or her death, to appoint any part of the principal and

undistributed income of Trust A. The latter power was to “be

made by last written instrument filed with the TRUSTEES,

effective at the surviving SETTLOR’s death and specifically

referring to this power of appointment.” Any portion of Trust A

not so appointed was to be added to Trust B.

As regards Trust B, net income was to be paid to the

surviving settlor at least annually, and the trustees were

authorized to distribute principal as they determined necessary
 - 5 -

or advisable for the settlor’s health, education, support or

maintenance (after exhaustion of Trust A). Upon the death of the

surviving settlor, the balance of Trust B (excluding household

goods and personal effects) was to be distributed pursuant to an

enumerated list of specific bequests, with the residue to the

State of Israel. Decedent and Mr. Engelman also on January 10,

1990, signed substantially identical pourover wills devising and

bequeathing their estates to the trustees of the Engelman Living

Trust.

Decedent and Mr. Engelman amended the trust instrument on

December 14, 1990, May 6, 1992, and December 28, 1994. The first

two amendments revised the list of specific beneficiaries to

receive assets from Trust B, and the third amendment provided

further information regarding successor trustees. According to

the second amendment, specific bequests from Trust B were to be

made as follows: To Helen Adams, $50,000; to Carol L. Engelman,

$30,000; to Jerrold W. Engelman, $10,000; to Alan Engelman,

$10,000; to the American Cancer Society, $5,000; and to the Yale

University School of Law, $5,000.

On December 30, 1997, Mr. Engelman died, survived by

decedent. At that time, the total value of assets in the

Engelman Living Trust was approximately $1,546,487. Subse-

quently, on February 5, 1998, decedent executed a document

entitled “POWER OF APPOINTMENT”. The preamble recited: “The
 - 6 -

undersigned at present is the holder of a power of appointment

over the principal of Trust A or the Survivor’s Trust, which came

into existence as the result of the passing of her husband,

pursuant to that certain revocable Declaration of Trust executed

by SAMUEL ENGELMAN and LEONA ENGELMAN on January 10, 1990.”

Thereafter, the instrument directed that the Trust A corpus

remain in trust for the benefit of Helen Adams and then upon her

death be distributed 10 percent each to the American Cancer

Society, the University of California at San Diego, the City of

Hope, and Sharon Commings, with the residue to Jeffrey McCoy.

The power of appointment was delivered to the trustees of the

Engelman Living Trust.

Decedent died on March 6, 1998. On May 11, 1998, Ms.

Mattson, in her capacity as special administrator of decedent’s

estate, executed a document entitled “DISCLAIMER OF INTEREST IN

TRUST PROPERTY”. Language therein stated that Ms. Mattson, on

behalf of decedent, “absolutely disclaims and renounces” all

interest in assets listed on an attached schedule. The

referenced schedule set forth Trust A assets valued at

approximately $600,000 as of Mr. Engelman’s date of death. The

document further specified that “such disclaimed assets shall

constitute Trust ‘B’ as per the express provisions” of the

Engelman Living Trust.
 - 7 -

Ms. Mattson, as successor trustee of the Engelman Living

Trust, then distributed from Trust A to Trust B property worth

approximately $617,317, representing the appreciated value of the

disclaimed assets on the date of the distribution. After this

allocation, property valued at approximately $930,557 as of

decedent’s date of death remained in Trust A. On July 2, 1998,

checks written on the account of “Engelman Living Trust B” were

issued to the following beneficiaries: To the Estate of Helen

Adams, $50,000; to Carol L. Engelman, $30,000; to Jerrold W.

Engelman, $10,000; to Alan Engelman, $10,000; to Yale University,

$5,000; and to the American Cancer Society, $5,000. In August of

1998, a transmittal letter referencing “the balance of the B

Trust portion of the Engelman Trust” and a check in the amount of

$432,901.41 were sent to the State of Israel.

Thereafter, in December of 1998, a Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return, was filed

on behalf of decedent’s estate. The reported value of the gross

estate, $936,476 as of the alternate valuation date, excluded the

disclaimed assets. The return claimed a charitable deduction of

$285,777, comprising $95,259 each to the American Cancer Society,

the University of California at San Diego, and the City of Hope.

The Form 706 also reported, with respect to individual

noncharitable beneficiaries, that Sharon Commings received

$95,529 and Jeffrey McCoy received $535,565 from the estate.
 - 8 -

During relevant times, Ms. Mattson also served as the

appointed conservator for the person and estate of Helen Adams.

In this capacity, on September 17, 1999, Ms. Mattson executed a

document entitled “DISCLAIMER OF INTEREST IN TRUST PROPERTY”.

The writing purported to disclaim “an income interest only in the

residue of Trust “A” of the * * * ENGELMAN LIVING TRUST * * *

created by a Power of Appointment executed by LEONA ENGELMAN on

February 5, 1998”. The estate concedes that this attempted

disclaimer was untimely and “is moot”.

Discussion

I. Inclusion of Trust Assets in the Gross Estate

A. General Rules

As a general rule, the Internal Revenue Code imposes a

Federal tax “on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States.”

Sec. 2001(a). The taxable estate, in turn, is defined as “the

value of the gross estate”, less applicable deductions. Sec.

2051. Section 2031(a) specifies that the gross estate comprises

“all property, real or personal, tangible or intangible, wherever

situated”, to the extent provided in sections 2033 through 2045.

Section 2033 broadly states that “The value of the gross

estate shall include the value of all property to the extent of

the interest therein of the decedent at the time of his death.”

Sections 2034 through 2045 then explicitly mandate inclusion of
 - 9 -

several more narrowly defined classes of assets. Among these

specific sections are section 2036, which includes transfers

where the decedent retained the possession of, the enjoyment of,

or the right to designate persons who shall possess or enjoy

transferred property or income therefrom; section 2038, which

includes revocable transfers; and section 2041, which includes

property over which the decedent held a general power of

appointment.

However, inclusion of certain assets in the gross estate may

be avoided through operation of the disclaimer provisions of the

Internal Revenue Code. For purposes of the estate tax, section

2046 incorporates by reference section 2518, which reads in part:

SECTION 2518. DISCLAIMERS.

(a) General Rule.--For purposes of this subtitle,
if a person makes a qualified disclaimer with respect
to any interest in property, this subtitle shall apply
with respect to such interest as if the interest had
never been transferred to such person.

(b) Qualified Disclaimer Defined.--For purposes of
subsection (a), the term “qualified disclaimer” means
an irrevocable and unqualified refusal by a person to
accept an interest in property but only if--

(1) such refusal is in writing,

(2) such writing is received by the
transferor of the interest, his legal
representative, or the holder of the legal title
to the property to which the interest relates not
later than the date which is 9 months after the
later of--
 - 10 -

(A) the date on which the transfer
creating the interest in such person is made,
or

(B) the day on which such person attains
age 21,

(3) such person has not accepted the interest
or any of its benefits, and

(4) as a result of such refusal, the interest
passes without any direction on the part of the
person making the disclaimer and passes either--

(A) to the spouse of the decedent, or

(B) to a person other than the person
making the disclaimer.

As pertains to the above-quoted section 2518(b)(3)

requirement of no acceptance of benefits, regulations further

provide:

A qualified disclaimer cannot be made with respect to
an interest in property if the disclaimant has accepted
the interest or any of its benefits, expressly or
impliedly, prior to making the disclaimer. Acceptance
is manifested by an affirmative act which is consistent
with ownership of the interest in property. Acts
indicative of acceptance include using the property or
the interest in property; accepting dividends,
interest, or rents from the property; and directing
others to act with respect to the property or interest
in property. * * * The exercise of a power of
appointment to any extent by the donee of the power is
an acceptance of its benefits. * * * [Sec. 25.2518-
2(d)(1), Gift Tax Regs.]

See also H. Rept. 94-1380, at 67 (1976), 1976-3 C.B. (Vol. 3)

738, 801.
 - 11 -

B. Contentions of the Parties

For purposes of the instant case, the estate concedes on

brief that “if Leona accepted the disclaimed property, the

property of Trust B is included in Leona’s gross estate under

I.R.C. secs. 2036 and 2038.” Accordingly, the dispute of the

parties centers primarily on whether decedent manifested

acceptance of the assets purportedly disclaimed within the

meaning of section 2518(b)(3).

Respondent contends that the so-called power of appointment

executed by decedent resulted in an acceptance violative of the

section 2518(b)(3) requirement. Respondent asserts that when

decedent’s exercise of the power became effective and irrevocable

at her death, “there was a ‘manifestation of ownership’ and

acceptance of the benefits of the power.” Hence, it is

respondent’s position that any subsequent disclaimer by the

executor of decedent’s estate was not qualified under section

2518.

Conversely, the estate advances three principal arguments as

to why no acceptance occurred in the circumstances here. The

estate maintains that the power of appointment did not result in

an acceptance because: (1) Execution of the power did not itself

manifest any dominion and control over the property, nor did

exercise of the power ever become effective due to the relation-

back doctrine under State law; (2) execution of the power was not
 - 12 -

specific to Mr. Engelman’s property; and (3) execution of the

document should not be characterized as the exercise of a power

of appointment, due to the extent of decedent’s rights in Trust

A.

C. Analysis

The estate’s point that execution of the power of

appointment did not itself constitute an acceptance rests on

Example (7) of section 25.2518-(2)(d)(4), Gift Tax Regs., which

provides:

Example (7). On January 1, 1980, A created an
irrevocable trust in which B was given a testamentary
general power of appointment over the trust’s corpus.
B executed a will on June 1, 1980, in which B provided
for the exercise of the power of appointment. On
September 1, 1980, B disclaimed the testamentary power
of appointment. Assuming the remaining requirements of
section 2518(b) are satisfied, B’s disclaimer of the
testamentary power of appointment is a qualified
disclaimer.

From the foregoing example, the estate deduces that execution of

a revocable instrument providing for the exercise of a

testamentary power of appointment effective at death does not

preclude a later disclaimer of such power. Yet respondent does

not argue otherwise, pointing out that merely executing an

ambulatory instrument does not constitute acceptance because the

instrument is subject to revision.

Nor does there seem to be any significant disagreement

between the parties about the corollary principle that an

exercise of a power of appointment which has become effective may
 - 13 -

be deemed an acceptance. In fact, the estate maintains that it

may be inferred from the above example that the regulatory

language in section 25.2518-2(d), Gift Tax Regs., describing the

exercise of a power of appointment as an acceptance of its

benefits, “applies only to an exercise that has become

effective.” Rather, the estate claims that the exercise of the

power in this case never became effective, while respondent takes

the opposite view.

Under California law, a power of appointment is generally

revocable until the property subject thereto has been transferred

or has become distributable pursuant to exercise of the power.

Cal. Prob. Code sec. 695 (West 2002). The power at issue in this

case states that it was to take effect at the surviving settlor’s

death. As previously indicated, the estate’s contention that

decedent’s exercise of her power of appointment never became

effective rests on the relation-back doctrine under State law.

Cal. Prob. Code section 282(a) (West 2002) provides:

Unless the creator of the interest provides for a
specific disposition of the interest in the event of a
disclaimer, the interest disclaimed shall descend, go,
be distributed, or continue to be held (1) as to a
present interest, as if the disclaimant had predeceased
the creator of the interest or (2) as to a future
interest, as if the disclaimant had died before the
event determining that the taker of the interest had
become finally ascertained and the taker’s interest
indefeasibly vested. A disclaimer relates back for all
purposes to the date of the death of the creator of the
disclaimed interest or the determinative event, as the
case may be.
 - 14 -

On the basis of the above statute, the estate maintains that the

power of appointment decedent signed on February 5, 1998, never

became effective because the disclaimer subsequently executed by

Ms. Mattson related back to Mr. Engelman’s death on December 30,

1997, and therefore must be treated as predating the exercise.

At the outset, we note that the State law doctrine of

relation back can have no potential applicability to this case

unless the purported disclaimer was effective for State law

purposes. Additionally, this Court has held as a general rule

that a disclaimer will not be treated as qualified under section

2518 unless it is effective under applicable local law, since

State law determines whether a property interest has passed.

Estate of Bennett v. Commissioner, 100 T.C. 42, 67 (1993); Estate

of Chamberlain v. Commissioner, T.C. Memo. 1999-181, affd. 9 Fed.

Appx. 713 (9th Cir. 2001). Hence, as a threshold matter, we

consider the requirements for a valid disclaimer under California

law. As pertinent here, Cal. Prob. Code section 285 (West 2002)

contains restrictions on the ability of a donee to make a

disclaimer:

(a) A disclaimer may not be made after the
beneficiary has accepted the interest sought to be
disclaimed.

(b) For the purpose of this section, a beneficiary
has accepted an interest if any of the following occurs
before a disclaimer is filed with respect to that
interest:
 - 15 -

(1) The beneficiary, or someone acting on behalf
of the beneficiary, makes a voluntary assignment,
conveyance, encumbrance, pledge, or transfer of the
interest or part thereof, or contracts to do so;
provided, however, that a beneficiary will not have
accepted an interest if the beneficiary makes a
gratuitous conveyance or transfer of the beneficiary’s
entire interest in property to the person or persons
who would have received the property had the
beneficiary made an otherwise qualified disclaimer
pursuant to this part.

* * * * * * *

(3) The beneficiary, or someone acting on behalf
of the beneficiary, accepts the interest or part
thereof or benefit thereunder.

Thus, California law, like Federal law, incorporates a rule

denying the effectiveness of a disclaimer in situations

evidencing a prior acceptance of benefits.

The foregoing statute was recently interpreted by the Court

of Appeals for the Ninth Circuit, to which appeal in the instant

case would normally lie, in Cassell v. Kolb (In re Kolb), 326

F.3d 1030 (9th Cir. 2003). There, in the context of a bankruptcy

proceeding, the Court of Appeals considered whether certain acts

by a debtor constituted acceptance of a contingent interest in

trust assets and thereby prevented the debtor from later

disclaiming the property. Id. at 1033-1034. The appellate court

focused on construction of the “broad ‘catch-all’ language” in

Cal. Prob. Code section 285(b)(3). Id. at 1037. After first

noting the dearth of California caselaw on the statute, the Court

of Appeals engaged in an extensive analysis of the language and
 - 16 -

history of the provision, as well as of constructions of similar

enactments by other States. Id. at 1037-1041. The Court of

Appeals then concluded:

we think the language of § 285(b)(3), the definitions
incorporated by the Uniform Disclaimer of Transfers
Act, and the decisions construing analogous state
probate codes, all demonstrate that the California
legislature intended to prohibit the disclaimer of an
interest accepted through conduct by a beneficiary
implying an intent to direct or control the property in
a manner that conveys more than a de minimis benefit to
the beneficiary or a third party. * * * Application of
this standard is a fact-sensitive inquiry that centers
on the conduct of the beneficiary, and the result of
such conduct. [Id. at 1039.]

Applying the just-described rule to the facts before it, the

Court of Appeals held that the debtor’s declaration of an

interest in the disputed trust on several loan applications

constituted an acceptance of his contingent interest in the trust

assets. Id. at 1041. Further, according to the appellate court:

“That acceptance of ‘part’ of the contingent interest thus made

his later disclaimer ineffective under § 285(b)(3) of the

California Probate Code, because acceptance of a part of, or

benefit under, the interest constitutes acceptance of the

interest in its entirety.” Id.

Here, the Court is satisfied that decedent would be

considered under California law to have accepted her interest in,

and power of appointment over, all of the assets contained in

Trust A. Decedent executed a power of appointment which on its

face provides for disposition of the assets of Trust A in their
 - 17 -

entirety. She died without having amended the document’s

language or in any way restricted its reach. Such conduct is

reasonably interpreted as implying an intent to direct or control

the property in a manner that conveys more than a de minimis

benefit to the third parties named in the power of appointment.

Hence, the subsequent disclaimer would lack efficacy for State

law purposes, and the relation-back doctrine would not apply.

Moreover, regardless of the validity of decedent’s

disclaimer under State statutes, caselaw indicates that the

relation-back concept is entitled to only limited recognition for

Federal tax purposes. We acknowledge that, as pointed out by the

estate, this Court has relied on the doctrine in determining the

requisite signatory beneficiaries for a valid special use

valuation election under section 2032A. McDonald v.

Commissioner, 89 T.C. 293, 304-305 (1987), affd. in part on this

issue and revd. in part on other grounds 853 F.2d 1494 (8th Cir.

1988).

In McDonald v. Commissioner, supra at 304-305, we held

insufficient an election signed by the original disclaiming

beneficiary, and not the ultimate recipients, of property to

which the election related. We reasoned that the election was

intended to evidence the written consent of those parties

obtaining an interest in the property to be personally liable for

any recapture tax imposed on later disposition or change in use
 - 18 -

of the property. Id. Practical and administrative concerns

dictated that we define the interested parties in view of State

relation-back laws.

Nonetheless, the U.S. Supreme Court has summarized the

broader policy concerning the relation-back doctrine in Federal

tax contexts as follows:

Cases like Jewett [v. Commissioner, 455 U.S. 305
(1982)] and this one illustrate as well as any why it
is that state property transfer rules do not translate
into federal taxation rules. Under state property
rules, an effective disclaimer of a testamentary gift
is generally treated as relating back to the moment of
the original transfer of the interest being disclaimed,
having the effect of canceling the transfer to the
disclaimant ab initio and substituting a single
transfer from the original donor to the beneficiary of
the disclaimer. Although a state-law right to disclaim
with such consequences might be thought to follow from
the common-law principle that a gift is a bilateral
transaction, requiring not only a donor’s intent to
give, but also a donee’s acceptance, state-law
tolerance for delay in disclaiming reflects a less
theoretical concern. An important consequence of
treating a disclaimer as an ab initio defeasance is
that the disclaimant’s creditors are barred from
reaching the disclaimed property. The ab initio
disclaimer thus operates as a legal fiction obviating a
more straightforward rule defeating the claims of a
disclaimant’s creditors in the property disclaimed.

The principles underlying the federal gift tax
treatment of disclaimers look to different objects,
however. As we have already stated, Congress enacted
the gift tax as a supplement to the estate tax and a
means of curbing estate tax avoidance. Since the
reasons for defeating a disclaimant’s creditors would
furnish no reasons for defeating the gift tax as well,
the Jewett Court was undoubtedly correct to hold that
Congress had not meant to incorporate state-law
fictions as touchstones of taxability when it enacted
the Act. Absent such a legal fiction, the federal gift
tax is not struck blind by a disclaimer. * * * [United
 - 19 -

States v. Irvine, 511 U.S. 224, 239-240 (1994);
citations and fn. ref. omitted.]

The instant case fails to present any compelling

considerations of the nature seen in McDonald v. Commissioner,

supra. Nor would recognition of the relation-back concept serve

to advance the object of protecting the disclaimed assets from

the reach of decedent’s State-law creditors. Accordingly,

precedent does not justify use of the relation-back doctrine in

these circumstances to relieve decedent of the effects of having

exercised her power of appointment.

Having concluded that the legal fiction of relation back

should not be employed to prevent decedent’s power of appointment

from becoming effective at her date of death, the Court is

satisfied that such effective power should be construed as an

acceptance of the Trust A property within the meaning of section

2518. Regulations under that section make explicit reference not

only to exercise of a power of appointment but also more

generally to “directing others to act with respect to the

property or interest in property” as marks of acceptance. Sec.

25.2518-2(d)(1), Gift Tax Regs. Decedent’s conduct falls within

these guidelines.

Moreover, the estate’s further argument that decedent’s

execution of the power fails as an acceptance because it was not

specific to Mr. Engelman’s property is misplaced on account of

the timing issues inherent in the preceding discussion. The
 - 20 -

estate alleges that because the power of appointment simply

applied “to whatever property happens to be in Trust A on the

death of Leona and might not apply to any of Samuel’s property”,

nothing in the document’s execution signaled that decedent

claimed ownership of Mr. Engelman’s property. Yet our focus is

not on when the power was executed but on the date of decedent’s

death when it became effective. When decedent died without

having revoked or limited the document, and the power on its face

disposed of all property in Trust A now alleged to be part of her

gross estate, she asserted control over all the relevant assets.

In the alternative, the estate seeks to avoid the result

stemming from characterization of the February 5, 1998, document

as the exercise of a power of appointment that became effective

at decedent’s death by arguing that, on account of the extent of

her rights in Trust A, decedent could not have held or exercised

a power of appointment. The estate’s contentions are founded in

large part on the State law doctrine of merger. Generally, where

an equitable and legal estate become united in a single person,

i.e., where the sole beneficiary is also the sole trustee, the

two interests merge and the trust terminates. Nellis v. Rickard,

66 P. 32, 33 (Cal. 1901); 60 Cal. Jur. 3d, Trusts, sec. 286.

The estate alleges: “Because Samuel left his property to

Trust A where Leona had an immediate and unrestricted right of

withdrawal, there was no restriction on Leona’s current interest
 - 21 -

in the property to support the granting of a separate power of

appointment in the same property.” Rather, the estate would have

us view decedent’s rights over Trust A as a power to alter,

amend, or revoke the trust.1

However, California by statute provides an exception to the

doctrine of merger:

If a trust provides for one or more successor
beneficiaries after the death of the settlor, the trust
is not invalid, merged, or terminated in either of the
following circumstances:

* * * * * * *

(b) Where there are two or more settlors, one or
more of whom are trustees, and the beneficial interest
in the trust is in one or more of the settlors during
the lifetime of the settlors. [Cal. Prob. Code sec.
15209 (West 1991).]

Operation of this statute is illustrated by Ammco Ornamental

Iron, Inc. v. Wing, 31 Cal. Rptr. 2d 564 (Ct. App. 1994). There,

upon his mother’s death, Mr. Wing became the sole trustee of a

trust with respect to which he held a life income interest; a

power to invade principal for support, health, or maintenance;

and a testamentary power of appointment exercisable in favor of

any persons other than himself, his estate, or his creditors.

Id. at 566-567. If Mr. Wing failed to exercise the power of

1
We further note that acceptance of the premises underlying
this argument could lead to inclusion of the assets of the living
trust, in their entirety, in decedent’s gross estate under other
rules, such as those which can apply under secs. 2031 and 2033 as
though decedent owned the property outright.
 - 22 -

appointment, the trust instrument provided that the corpus should

go to his children in equal shares. Id. at 566.

Given these facts, the court of appeal emphasized that

“persons in existence, who are specifically designated in a trust

instrument to take in default of the exercise of a power of

appointment by the holder of the preceding estate, are

beneficiaries of that trust and acquire vested remainder

interests, although their interests are subject to complete

divestment.” Id. at 569. Because Mr. Wing’s children were

living when the trust was created, the court held the doctrine of

merger inapplicable, concluding that the children were additional

beneficiaries of the trust whose interests could not be

disregarded. Id. at 569-570.

We see no material distinction between the situation at

issue in Ammco Ornamental Iron, Inc., and that presented here.

Like Mr. Wing, decedent was granted a life income interest in, a

power to invade, and a power of appointment over the relevant

trust. Although decedent’s powers were in some respects broader

than those of Mr. Wing, none of the differentiating features

figured in the California court’s analysis. The crucial

similarity lies in the fact that the two trust instruments both

named beneficiaries in existence at the time of execution to take

if the respective powers of appointment were not exercised.

These vested future interests were sufficient in Ammco Ornamental
 - 23 -

Iron, Inc., to prevent merger. The naming of default

beneficiaries here, under the Trust B provisions, should yield an

identical result.

The estate also makes the further contention that, even

apart from the merger doctrine, “Leona’s unlimited right of

withdrawal over all of Trust A (and her rights to alter, amend or

revoke Trust A) and her failure to withdraw the property made her

effectively the settlor of all property of Trust A and eliminated

the distinction of his former property or hers.”2 A fortiori,

the estate alleges that as sole settlor of Trust A, decedent was

unable to grant a power of appointment to herself over the

property therein.

Yet, the estate has cited no California authority indicating

that courts of that State would disregard the actual parties and

the express drafting of the instrument at issue. Additionally,

as respondent points out, the definitions with respect to powers

of appointment contained in Cal. Prob. Code section 610 (West

2002) appear to contemplate that an individual’s retained power

to direct disposition of his or her property would be

characterized as a power of appointment. See Cal. Prob. Code

sec. 610(e) (“‘Donor’ means the person who creates or reserves a

power of appointment.”); Cal. Prob. Code sec. 610(d) (“‘Donee’

2
See supra note 1.
 - 24 -

means the person to whom a power of appointment is given or in

whose favor a power of appointment is reserved.”).

D. Conclusion

We conclude that decedent’s execution of the document

entitled “POWER OF APPOINTMENT”, which became effective upon and

by reason of her death, constituted an acceptance of the property

in Trust A within the meaning of section 2518. Consequently, the

later attempted disclaimer by her executor was not qualified for

Federal estate tax purposes. The trust assets of approximately

$617,317 that were the subject of the disclaimer are therefore

includable in decedent’s gross estate.

II. Deductions From the Gross Estate for Charitable Gifts

A. General Rules

Section 2055(a) provides a deduction from the gross estate

for the value of bequests, legacies, devises, or transfers to,

inter alia, (1) the United States or a political subdivision

thereof, for public purposes; (2) corporations organized and

operated exclusively for religious, charitable, scientific,

literary, or educational purposes; and (3) trustees or fraternal

organizations, but only if the gifts are to be used exclusively

for religious, charitable, scientific, literary, or educational

purposes. Sec. 2055(a)(1), (2), and (3). Federal courts have

construed gifts to foreign political units, when clearly

restricted to charitable purposes, as gifts in trust within the
 - 25 -

meaning of section 2055(a)(3). E.g., Kaplun v. United States,

436 F.2d 799 (2d Cir. 1971); Natl. Sav. & Trust Co. v. United

States, 193 Ct. Cl. 775, 436 F.2d 458 (1971). The Internal

Revenue Service has adopted this position, as follows: “A

deduction is allowable under section 2055 of the Code with

respect to a transfer of property to a foreign government or

political subdivision thereof for exclusively charitable

purposes.” Rev. Rul. 74-523, 1974-2 C.B. 304. Conversely,

“where the use of such property is not limited to exclusively

charitable purposes within the meaning of sections 2055(a)(2) and

2055(a)(3)”, the deduction will be disallowed. Id.

B. Contentions of the Parties

The estate argues that if the assets transferred to Trust B

are included in decedent’s gross estate, charitable deductions

are allowable for the bequests thereunder to the American Cancer

Society, Yale Law School, and the State of Israel. It is the

estate’s position that even if the disclaimer was not qualified

under section 2518, it was nonetheless effective for State law

purposes. Therefore, according to the estate, decedent is

treated as having made gifts to the corresponding beneficiaries

when property was distributed pursuant to the terms of Trust B.

Respondent cites three principal reasons why the

distributions made to entities specified in Trust B do not yield

charitable deductions. The estate responds to each such
 - 26 -

allegation. First, respondent maintains that the explicit

language of the trust agreement precludes any argument that a

disclaimer not effective under section 2518 can, nonetheless, be

effective under State law to bring into operation the provisions

of Trust B. The trust instrument states that allocation to Trust

B would occur in the event that the surviving settlor

“effectively disclaims (under Code Section 2518 or any successor

provision then in effect)”. The estate counters that the

foregoing terms create no express requirement but only an

inference, alerting the trustee to be aware of the statute.

Second, respondent contends that even if the disclaimer was

effective under State law, the property at issue passed to Trust

B as a result of a discretionary act of the executor in making

the disclaimer, and not because of an act by decedent. It is

respondent’s position that decedent’s own actions in executing

the power of appointment and her subsequent death caused all

property to be treated at that time as subject to the Trust A

provisions. To this point, the estate once again responds with

reference to the relation-back doctrine.

Third, with respect to the distribution to the State of

Israel, respondent avers that a deduction is not allowable in any

event because Trust B provides only for an unrestricted gift.

Accordingly, respondent characterizes the gift as having failed

the requirement that the donor restrict use of a gift made to a
 - 27 -

foreign government to charitable uses. The estate, in contrast,

alleges that any such failure is cured by the following text of

Decision 6171 of the Cabinet of the Government of the State of

Israel (Decision 6171), dated October 1995 (a copy and

translation of which have been stipulated by the parties):

2.(a) Estates for the benefit of the State, whether or
not the testator has specified the ultimate purpose,
shall be designated by the Administrator General,
Ministry of Justice, for the purposes and to the bodies
as determined by the Public Committee as hereinafter
provided. Where the testator has specified the object,
the allocation shall be made within the scope of that
object.

(b) In estates for the benefit of the State where the
testator has not specified their object or where the
object is incapable of fulfillment, the Committee shall
make the designation exclusively for charitable
purposes, namely - welfare, education, health, culture,
religion, science, art and the advancement of all other
humanitarian and social aims.

(c) Monies from estates shall not be designated in
substitution of monies that have been budgeted in the
State Budget and shall not be designated for the
financing of activities which are directly carried out
by Government Ministries.

C. Analysis

Regulations promulgated under section 2055 clarify that a

deduction is allowed under the statute “for the value of property

included in the decedent’s gross estate and transferred by the

decedent during his lifetime or by will”. Sec. 20.2055-1(a),

Estate Tax Regs. (emphasis added). Courts likewise have declined

to permit deductions where the amounts passing to charity turned

upon the actions either of the decedent’s personal
 - 28 -

representatives, see Estate of Marine v. Commissioner, 97 T.C.

368, 378-379 (1991), affd. 990 F.2d 136 (4th Cir. 1993), or of

beneficiaries of the estate, see Bach v. McGinnes, 333 F.2d 979,

983-984 (3d Cir. 1964).

Here, we agree with respondent that the circumstances of

this case preclude treating the amounts received by the Trust B

beneficiaries as having been transferred by decedent. Rather,

the record reveals that those named in Trust B obtained

distributions on account of discretionary acts by Ms. Mattson.

By the terms of the Engelman Living Trust, allocation to Trust B

was conditioned on an effective disclaimer under section 2518.

Ms. Mattson’s decision to place assets in Trust B and ultimately

to distribute the property to the named beneficiaries

consequently did not occur within the framework of the trust

instrument. The estate’s suggestion that we disregard the

written language as merely an advisory reminder to the trustee is

unsupported and unconvincing. The relevant documents do not show

that a State law disclaimer could suffice to render operative the

provisions of Trust B.

Furthermore, even if a disclaimer effective under State

statutes could operate to transfer assets from Trust A to Trust B

within the confines of the written agreement, we have already

concluded that the disclaimer executed here would not be

recognized under pertinent California law. As a result,
 - 29 -

decedent’s disposition of the Trust A corpus by means of her

power of appointment became irrevocable at her death and cannot,

on account of the relation-back doctrine, be disregarded.

Decedent acted to transfer the property of Trust A to those named

in her power of appointment, rather than to Trust B and its

beneficiaries. Ms. Mattson’s actions to do otherwise cannot be

attributed to decedent.

As pertains to the gift to the State of Israel, caselaw is

contrary to the estate’s position. The donor, not the donee,

must restrict use of the gift to charitable purposes. The

foregoing principle has been recognized by Federal courts both in

construing the predecessor of section 2055 in the Revenue Act of

1926, ch. 27, sec. 303, 44 Stat. 72, and in interpreting section

2055 itself. See Contl. Ill. Natl. Bank & Trust Co. v. United

States, 185 Ct. Cl. 642, 403 F.2d 721 (1968); Levey v. Smith, 103

F.2d 643 (7th Cir. 1939). As stated in an early pronouncement:

Plaintiff urges that the statutory test “is the
use to which the property is to be put.” In our view
the test is: For what purpose is the property devised?
Consequently, a declaration by the donee that property
will be used for a charitable purpose cannot determine
the use for which it was bequeathed. It is the act of
the testator that determines, for purposes of
deduction, whether gifts or contributions which have
been bequeathed to a legatee “are to be used”
exclusively for religious, charitable and educational
purposes. We do not hold that parol evidence is not
admissible for the purpose of showing that a bequest,
absolute on its face, was in fact intended by the
testator and understood by the legatee to be burdened
by a trust. But such evidence to be material must
relate to words or acts of the testator and must tend
 - 30 -

to disclose the purpose of the testator in using the
testamentary language. * * * [Levey v. Smith, supra at
648; fn. ref. omitted.]

To like effect:

The fact that the gift involved here was used for
a charitable purpose presents plaintiff’s most
appealing argument. But this is not sufficient to meet
the requirements of sec. 2055(a)(3). If the right to
make the deduction could be met by showing only a
charitable use of the contribution, the applicability
of the estate tax in all similar situations would
depend upon the vagaries of post-estate planning. The
testator, and he alone, must order the recipient to
hold or use the contribution exclusively for charitable
purposes. Further, the statute does not permit the
deduction unless it is shown that the testator intended
that the gift be used exclusively for a charitable
project. * * * [Contl. Ill. Natl. Bank & Trust Co. v.
United States, supra at 725-726; emphasis added.]

Here, the language in the trust agreement pertaining to the

foreign bequest reads in its entirety: “The remainder of the

Trust Estate shall be distributed to the STATE OF ISRAEL.” Thus,

the governing instrument is devoid of any restrictions

circumscribing uses of the gift. Moreover, the record contains

no evidence from which it can be inferred that decedent intended

to limit the contribution to charitable purposes. It is

noteworthy that Decision 6171, on which the estate relies, did

not come into being until October 1995, long after the provision

granting the residue of Trust B to the State of Israel was

executed as part of the Engelman Living Trust on January 10,

1990. Accordingly, Decision 6171 sheds no light on decedent’s

intentions and, as a unilateral declaration by the donee, is
 - 31 -

insufficient in and of itself to satisfy the requirements of

section 2055.

D. Conclusion

For the reasons discussed above, the estate is not entitled

to charitable deductions for the amounts distributed to

beneficiaries named in Trust B of the Engelman Living Trust.

To reflect the foregoing and concessions,

Decision will be entered

under Rule 155.