*12 Decision will be entered under Rule 50.
Decedent created a testamentary trust devising to the trustee certain property and, under a general power of appointment in a prior trust, the income from such prior trust during the further term thereof, and also the principal of the prior trust upon its termination. The prior trust was to terminate upon the death of decedent's brother. Testamentary trustee was directed to pay the income of the testamentary trust to decedent's widow during her life and was authorized to make payments from principal thereof for her use and benefit as it, in its sole discretion, might deem advisable. Certain charitable bequests were to be paid after widow's death. Held:
(1) The value of the property passing under the power of appointment exercised by decedent in his will is the sum of the separate values of the life estate and the remainder.
(2) The value of the charitable bequests is not ascertainable at date of decedent's death, since the power of trustee to invade principal for the use and benefit of the widow is not limited to any fixed standard of expenditure,
(3) Trustee of prior trust is acting in a fiduciary capacity for trustee of testamentary trust and is liable for payment of estate tax deficiency to the extent of the assets of the testamentary trust held in the prior trust.
*1305 Respondent determined a deficiency in Federal estate tax in the amount of $ 22,221.89 against the estate of Nathan P. Cutler, Jr. This is contested in Docket No. 3684. This proceeding involves two questions. The first is the measure of the value of the property includible in the gross estate by reason of the exercise by the decedent in his will of a power of appointment. The second is whether certain bequests to charities are allowable as deductions from the gross estate, or must be disallowed on the ground that the amount thereof which will vest is not ascertainable. The proceeding in Docket No. 3683 involves the question of the liability of Newton Trust Co., in its capacity as trustee of a trust created September 9, *15 1926, by Nathan P. Cutler, Sr., as trustee and transferee, for payment of the Federal estate tax and interest due from the estate of Nathan P. Cutler, Jr. The proceedings were consolidated for hearing and opinion. Some of the facts are stipulated. The facts are found from the stipulation of facts, documentary evidence, and oral testimony adduced at the hearing.
FINDINGS OF FACT.
Nathan P. Cutler, Jr., the decedent, died testate on September 10, 1940, a resident of Newton, Massachusetts. The Newton Trust Co. is the executor of his estate. The estate tax return was filed with the collector of internal revenue at Boston, Massachusetts. The executor elected to have the gross estate valued as of the date of decedent's death.
*1306 On September 9, 1926, Nathan P. Cutler, Sr., father of the decedent, created a trust, transferring certain properties to the Newton Trust Co. as trustee. The trust indenture provided that the net income of the trust fund was to be paid to the grantor during his lifetime. After his death the net income was to be paid in equal shares to his two children, Nathan P. Cutler, Jr., and William H. Cutler, as long as they should live. Paragraphs 5 and 6 *16 of the indenture provided:
5. Upon the death of William H. Cutler, Nathan P. Cutler, Jr., or either of them, that proportion of the entire income which the deceased person or persons had been receiving to go in accordance with the wills of the deceased persons, or if they die intestate, then to their heirs-at-law.
6. Upon the death of the survivor of my two children above named the principal of the trust is to be divided into two equal parts, one of which shall be paid as my said son, William H. Cutler may by will appoint, or in default of appointment to his then heirs-at-law. The other part to be paid as my son, Nathan P. Cutler, Jr., may by will appoint and in default of such appointment to his then heirs-at-law.
The indenture contained no prohibition against anticipation of income or principal.
Nathan P. Cutler, Sr., died September 2, 1931. After his death the net income of the trust was paid to William H. Cutler and Nathan P. Cutler, Jr., in equal parts until the death of this decedent. Nathan P. Cutler, Jr., in his will exercised the power of appointment given to him by the trust instrument of September 9, 1926.
The will of Nathan P. Cutler, Jr., dated July 27, 1940, after*17 leaving certain personal effects to the testator's wife, Edith Talbot Cutler, and making a specific bequest of $ 1,000, devised and bequeathed:
Third: To the Newton Trust Company, a banking corporation duly organized under the laws of the Commonwealth of Massachusetts, and having a usual place of business in Newton, Middlesex County, Commonwealth aforesaid, or its successor, all the rest and residue of my property, real or personal, of which I shall die seized or possessed, or to which at the time of my decease I shall be in any way entitled or over which I may have any power of appointment but In Trust Nevertheless for the following purposes:
A. To manage, invest and reinvest, the same and to pay the net income thereof as often as quarter-yearly to or for the use and benefit of my said wife, Edith Talbot Cutler, during her lifetime. My Trustee shall have power to make such payment or payments from principal to or for the use and benefit of my said wife as it may in its sole discretion, deem advisable.
B. Upon the decease of my said wife my Trustee shall pay to the Children's Hospital, a Massachusetts charitable corporation, located in the City of Boston, County of Suffolk, sufficient*18 moneys from the principal of the fund to endow a bed in the said Hospital. This gift is made in memory of my mother, Annah W. Cutler and I request that the bed or fund be so designated.
My Trustee shall also pay from the principal of the fund to the New England Peabody Home for Crippled Children, a Massachusetts charitable corporation located in said Newton, sufficient moneys to endow a bed in the said Home. I request that this bed or fund be designated as in memory of my beloved wife Edith Talbot Cutler.
*1307 C. After making the payments from principal described in the preceding paragraph my Trustee shall pay from the income of the fund the sum of One Hundred Dollars ($ 100.00) per month to each of the following persons during their respective lives:
Bertha Farnum, cousin of my wife
Marion U. Chapman of SalemMass., my esteemed friend.
If at any time such action seems advisable to my Trustee, said Trustee is authorized to purchase annuities of One Hundred Dollars ($ 100.00) per month in lieu of the income payments given by this paragraph, such annuities to be purchased, if at all, from an Insurance Company or Companies of high financial standing.
D. Upon the decease*19 of my said wife, Edith Talbot Cutler, my said Trustee is authorized to pay the sum of Five Thousand Dollars ($ 5,000.00) to each of the following named persons:
Ruth Bean, my said friend
Edna F. Gould, step-mother of my wife
Elizabeth G. McKelvey, half-sister of my wife
Mildred F. Munn, half-sister of my wife
E. The remainder of the fund, upon the decease of my said wife, shall be paid to said Newton Trust Company as it is trustee of the "Permanent Charity Fund" under an Agreement and Declaration of Trust dated April 2, 1932, to be held upon the trusts of said Agreement and Declaration of Trust, and to be known as the "Nathan P. Cutler and Edith Talbot Cutler Fund." I direct that in making payment from this fund preference be given to needy individuals who are residents of the City of Newton rather than using the fund or any part thereof to assist charitable corporations or organizations.
The will empowered the trustee, inter alia, to mortgage, lease, or sell real or personal property in the estate or trust fund and to determine what should be charged to income and what to principal, and further provided that all decisions made by the executor or trustee in good faith should*20 be conclusive on all parties at interest.
At the time of the death of the decedent the trust created by his father under indenture dated September 9, 1926, was still in existence and decedent's brother, William H. Cutler, was still living. After the death of the decedent one-half of the income from this trust was paid to William H. Cutler and one-half was paid to the Newton Trust Co. as trustee of the trust created under the will of the decedent.
William H. Cutler, the decedent's brother, was born June 7, 1872. His age on September 10, 1940, was 68 years, 3 months. Edith Talbot Cutler, widow of the decedent, was born January 6, 1873. Her age on September 10, 1940, was 67 years, 8 months. On September 10, 1940, Bertha Farnum, named in the will, was 62 years of age and Marion U. Chapman, also named in the will, was 64 years of age.
In the estate tax return filed by the executor the value of the one-half interest in the trust of September 9, 1926, over which Nathan P. Cutler, Jr., had a power of appointment was reported at $ 195,433.78. In the return the executor deducted $ 122,143.46 from the gross estate *1308 as the value of charitable bequests deductible under
Edith Talbot Cutler filed no disclaimer under the provisions of
The value of the property passing under the power of appointment exercised by Nathan P. Cutler, Jr., in his will is the sum of the separate values of the life estate and the remainder, which is $ 195,778.35.
On September 10, 1940, the value of the bequests to charities made by the will was not presently ascertainable.
The Newton Trust Co., as trustee of the trust created September 9, 1926, *22 by Nathan P. Cutler, Sr., is acting in a fiduciary capacity for the Newton Trust Co., as trustee of the trust created by decedent in his will. The Newton Trust Co., as trustee of the trust created under the will, is a transferee of assets of decedent's estate.
OPINION.
The first issue is whether the value of the one-half interest in the trust created September 9, 1926, over which decedent exercised a power of appointment by will, to be included in the gross estate of decedent is $ 201,382.99, as determined by respondent, or a lesser amount, as contended by petitioner.
It is clear that the power of appointment given the decedent was a general power, *24 that it was exercised, and that certain property passed under the power. In
* * * the net value of a trust, such as is here involved, must be the actual value of the securities composing the trust as of the decedent's death, less any restrictions which may go to depreciate that value.
The decedent in the instant case appointed all that he had the power to appoint. However, he did not have power to appoint the immediate transfer of half the principal of the 1926 trust. Under its terms that trust continued, and the disposition of the principal was postponed until the death of the surviving brother, William. The income during the continuance of the trust could be appointed, and the disposition of the principal at that future date could be appointed. The Newton Trust Co., as trustee of the trust created by the decedent in his will, did not immediately acquire the possession or use of the corpus, such right being postponed until termination of the 1926 trust. It received at decedent's*25 death only the right to the income therefrom during the continuance of the 1926 trust. As a result of this restriction upon the transfer of the principal, the value of these two separate property rights passing under the exercise of the power of appointment is less than the present value of the corpus subject to the power.
Where the value of a life estate has been included as part of a decedent's gross estate it has been computed upon an actuarial basis. The correct method of computing the value of a remainder or reversionary interest was prescribed in
We now come to the actuarial problem of computation of the value of the charitable devise as of the date of death of decedent. Petitioner contends that the value of the devise should be determined by first valuing the life estate and then subtracting that value from the value of the total residuum at the date of death, the remainder being the value of the devise to charity. Inasmuch as the problem here is to compute the value as of the date of decedent's death of the remainder to charity, we think it clear that the proper method, *26 which was employed by respondent, is to compute the value of the charitable devise subject to the life estate. We have previously approved this treatment of the problem. *1310
In the instant case the value of the property passing under the power of appointment exercised by decedent in his will is the sum of the values of (1) the right to receive the income from $ 201,382.99 during the life of decedent's brother, and (2) the right to receive the principal amount upon the death of the brother. We agree with petitioner that these rights should be separately valued and we have found the values of these combined rights to be $ 195,778.35.
The second issue is whether certain charitable bequests made by decedent in his will are deductible, under
Respondent stipulated that the charities named in decedent's will are of the type of charitable organizations bequests to which are allowable as deductions under
Under Regulations 105, section 81.44, where a trust is created for both charitable and private purposes, the charitable bequest, to be deductible, must have at the decedent's death a value "presently ascertainable and hence severable from the interest in favor of the private use." In
For a deduction under § 303 (a) (3) to be allowed, Congress and the Treasury require that a highly reliable appraisal of the amount the charity*29 will receive be available, and made, at the death of the testator. Rough guesses, approximations, or even the relatively accurate valuations on which the market place might be willing to act are not sufficient. Cf.
The widow was 67 years of age, and in the 4 years and 7 months after the death of decedent she expended $ 48,682.04 out of an income of $ 87,362.66, including income from property of her own worth about $ 104,000. The Court concluded that under the language of the power the purposes for which the widow could and might wish to have the funds spent could not be reliably predicted, and that her possible use of the funds was not limited to any standard. Hence, it was held that the amount which might ultimately be received by the charities was not presently ascertainable and no deduction therefor was allowable.
*30 Petitioner contends that under the rule of
In the Ithaca Trust Co. case the trustees were to pay the income to the widow for life and the remainder to charity, with authority to use from the principal any sum that might be necessary suitably to maintain the widow "in as much comfort as she now enjoys." The Supreme Court held the value of the remainder was ascertainable and therefore deductible, saying:
* * * The principal that could be used was only so much as might be necessary to continue the comfort then enjoyed. The standard was fixed in fact and capable of being stated in definite terms of money. It was not left to the widow's discretion. The income of the estate at the death of the testator and even after debts and specific legacies had been paid was more than sufficient to maintain the widow as required. There was no uncertainty appreciably greater than the general uncertainty that attends*31 human affairs.
Petitioner introduced testimony tending to show that prior to 1940 decedent and his wife had lived on the income from the 1926 trust; that Edith Talbot Cutler, after 1940, had property, including her home, of the value of approximately $ 50,000; that she received income in excess of $ 10,000 per annum from the trust created by decedent; that she had income of about $ 1,000 per annum from her own property; that she lived upon the income from these sources and had no *1312 need to resort to the use of her capital for living expenses; that her standard of living has not changed since her husband's death; and that since 1940 she has invested several thousand dollars of surplus income.
It is further argued by the petitioner that the trustee of the decedent's trust is not in a position to invade the principal of the 1926 trust for the support of the widow until after the death of the decedent's brother, William; and that, since William is only seven months older than the widow, the brother and the widow have substantially the same life expectancy and, therefore, there will be little, if any, opportunity for invasion of the principal of the 1926 trust.
The decisions in*32 the cases dealing with the issue whether a power given trustees to invade the principal of a trust for the benefit of the life tenant renders a bequest of the remainder to charity indefinite depend generally upon two factors: (1) The language of the power, and (2) the likelihood of its exercise as disclosed by the facts. As in the Ithaca Trust Co. case, supra, where the language fixes a standard or limit of expenditure and the income of the beneficiary is substantially in excess of an amount sufficient to maintain that standard of expense, so that the likelihood of the exercise of the power is remote, the bequest is deemed ascertainable and is deductible. In the Merchants National Bank Co. case, supra, although the income was adequate to provide for the support of the widow according to her previous standard of living, the language of the power fixed no such standard or any other standard by which the possibility of invasion could be gauged.
In
The deduction of charitable remainders has been allowed in a number of cases where, the income being sufficient, the language of the power was held not to render the bequest indefinite. In
In the cases mentioned in the preceding paragraph the language of the power to use the principal fixed the purposes for which it might be used, or else prescribed, *36 or was construed as prescribing, a standard or limit of expenditure. In those cases the facts showed that the income was adequate to maintain the standard without resort to the principal. On the other hand, even though a standard is prescribed, the bequest will be considered not presently ascertainable if the anticipated income does not afford a safe margin over the likely expenditure, as in
We think payments authorized to be made from principal by the testamentary trustee "to or for the use and benefit of my said wife *1314 as it may in its sole discretion, deem advisable" are not limited to the widow's comfort, maintenance, and support in her accustomed method of living. "Use and benefit" is a term of broader meaning than "comfort, maintenance, and support," and a power to "use" is a power to consume.
Petitioner contends that under Massachusetts law the discretionary power of the trustee may be exercised only as sound judgment may indicate in the light of all the attendant conditions, citing
The fact that the principal of the trust created in 1926 could not be reached and appropriated to the use of the widow during the further term of that trust, which would continue until the death of decedent's brother, does not require a different conclusion. *38 If the decedent's brother should die before the widow, the 1926 trust would terminate, half the principal thereof would pass to the trustee of the trust created by decedent's will, and the trustee could then make use of it under the power to invade. Whether the brother or the widow will die first is purely speculative and is not a matter upon which an actuarial calculation for tax purposes can be made. Cf.
*1315 The testamentary trustee is empowered to purchase from insurance companies annuities for Bertha Farnum and Marion U. Chapman in lieu of the annuities payable out of income. Whether the trustee in its discretion will purchase annuities, or when it might exercise such discretion, or the cost of such annuities, can not be predicted as of the time of decedent's death. These circumstances but add to the uncertainty of appraising the amount ultimately going to charity.
The Newton Trust Co. in this matter is acting in three capacities: (1) As executor of the estate of the decedent, (2) as trustee of the trust created by decedent in his will, and (3) as trustee of the trust created by decedent's father in 1926. However, notwithstanding the fact that the fiduciary is identical, the estate and the two trusts are three distinct persons. In Docket No. 3683 respondent seeks to hold the Newton*40 Trust Co., as trustee of the 1926 trust, liable as a trustee and transferee, for the estate tax due from decedent's estate. Respondent's argument is that the trustee of decedent's trust is a transferee, within the definition in
*41 Transferee liability, in general, is based upon the trust fund doctrine, or similar theory, that one who receives property in liquidation or by gift, devise, or inheritance may be called upon to pay taxes due the United States from the donor or estate or other person which, except for the transfer, might have been collected from the property transferred. The administrative procedure for collection by assessment and distraint is also provided for enforcing the liability under section 3467 of the Revised Statutes 4 of a fiduciary who pays debts of the person for whom he acts without paying debts due the United States from such person. Section 901 (b) permits the Commissioner *1316 to enforce collection of the estate tax against a transferee by reaching assets held by a fiduciary for the benefit of the transferee.
*42 The trustee of the trust created by decedent in his will is a transferee of property of the decedent within the definition of
Decision will be entered under Rule 50.
Opper, J., dissenting: If the decedent had appointed life estate and remainder to the same person, there is a serious question whether the estates would not merge, giving the appointee the entire estate in the trust property. See 1
Whether or not that occurred, life estate and remainder are but the two parts of a whole. The latter may be measured by deducting from the full value of the property that of intervening life estates. Thus, in
* * * The value of the remainder interest should be computed by*44 determining the present worth of the entire trust estate, giving effect to the life tenancy * * *
Where life estate and remainder are both subject to a decedent's disposition, the process of subtraction is unnecessary, and it would seem to follow that nothing but the value of the whole can adequately account for its two components.
Footnotes
1.
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, wherever situated, except real property situated outside of the United States --
* * * *
(f) Property Passing Under General Power of Appointment. -- To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, * * *↩
2.
SEC. 900 . TRANSFERRED ASSETS.* * * *
(e) Definition of "Transferee". -- As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee.↩
3. SEC. 901. NOTICE OF FIDUCIARY RELATIONSHIP.
* * * *
(b) Fiduciary of Transferee. -- Upon notice to the Commissioner that any person is acting in a fiduciary capacity for a person subject to the liability specified in
section 900↩ , the fiduciary shall assume on behalf of such person the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person), until notice is given that the fiduciary capacity has terminated.4. R. S. Sec. 3467 (
U. S. C., Title 31, § 192 ) --"Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid."↩