Summary
holding that in a trust instrument authorizing invasion of trust corpus for the beneficiary's "support, maintenance, welfare, and comfort", the addition of the words "comfort" and "welfare" did not cause the instrument to fail the requirement of providing a reasonable standard for determining the extent to which charitable remainders might be depleted by power of invasion
Summary of this case from Estate of Chancellor v. CommissionerOpinion
Docket No. 89846.
1963-03-19
ESTATE OF MARY COTTON WOOD, MORGAN GUARANTY TRUST COMPANY OF NEW YORK (FORMERLY GUARANTY TRUST COMPANY OF NEW YORK), EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frank H. Detweiler, Esq., for the petitioner. Philip Shurman, Esq., and Lionel Savadove, Esq., for the respondent.
Frank H. Detweiler, Esq., for the petitioner. Philip Shurman, Esq., and Lionel Savadove, Esq., for the respondent.
Decedent provided for establishment of a testamentary trust out of the residue of her estate with assets approximating $300,000 to pay the income to a 69-year old brother-in-law for life and, upon the death of the brother-in-law, to distribute one-sixth of the corpus to each of two named charities. By the terms of the trust instrument the trustee was authorized to pay to the brother-in-law so much of the principal as the trustee should ‘in its absolute discretion deem necessary or advisable in order to provide * * * (his) support, maintenance, welfare and comfort’. Held, the trust instrument provided measurable standards limiting the power of invasion and the possibility of invasion of the corpus was so remote as to be negligible. Therefore the charitable bequests are deductible under section 2055 of the Internal Revenue Code of 1954.
The Commissioner determined a $32,827.07 deficiency in estate tax in respect of the estate of Mary Cotton Wood. The only remaining issue relates to the disallowance of a deduction for charitable gifts of remainder interests in a testamentary trust where the trustee was authorized to pay to the income beneficiary so much of the principal as the trustee should ‘in its absolute discretion deem necessary or advisable in order to provide for the support, maintenance, welfare and comfort’ of the income beneficiary.
FINDINGS OF FACT.
The facts stipulated by the parties are incorporated herein by reference.
Mary Cotton Wood, a resident of Pelham, N.Y., died December 6, 1956, at about 84 years of age. She was the widow of Frederic T. Wood, who had died about a year earlier. They had executed reciprocal wills in which each was the principal beneficiary of the will of the other; and in each will, in the event of the prior death of the other spouse, the principal beneficiary was to be Ernest H. Wood, Frederic's brother.
By reason of Mrs. Wood's death, Ernest received life insurance proceeds in the amount of $10,000, and under her will, personal property valued at $4,035, together with real property in Pelham, N.Y., valued at $23,250. The real property consisted of the residence which had been occupied for many years by the decedent and her husband. Under ‘article FIFTEENTH’ of her will, the residuary estate, amounting to approximately $300,000, was bequeathed in trust ‘to pay the net income therefrom, together with so much, if any, of the principal thereof as my Trustee shall from time to time in its absolute discretion deem necessary or advisable * * * for the support, maintenance, welfare and comfort of my said brother-in-law, to my said brother-in-law during his life.’ Guaranty Trust Co. of New York was named as executor and trustee; Morgan Guaranty Trust Co. of New York is its successor. Upon Ernest's death the trustee was directed in substance to distribute one-sixth of the then principal amount of the trust to each of two charitable institutions.
At the date of Mrs. Wood's death, Ernest was 69 years old. That portion of the principal allocable to the two foregoing one-sixth interests was reported in the estate tax return as $106,413.31, and a deduction was claimed in the amount of $76,030.18, representing the remainder interests in respect thereof after Ernest's life estate, actuarially computed. The Commissioner disallowed the deduction on the ground that ‘such remainder interests are incapable of valuation.’
Ernest was born in 1887. He was graduated from Williams College in 1909. After a year on a ranch, he taught school for a year. In 1911 he broke down with tuberculosis and went to live in a private nursing home at Saranac Lake. Virtually his entire adult life thereafter has been spent at Saranac Lake. He remained at the nursing home for 25 years. Until 1924, Ernest's brother paid all his expenses, and made small gifts to him such as a few shares of securities from time to time. In 1924 Ernest became executive secretary of the local tuberculosis society in Saranac Lake and continued in that position until October 1936. His salary during this period was at first $150 a month, later increased to $200 a month. As a result of this employment, Ernest became self-supporting and did not receive any further living expenses from his brother; however, his brother did continue to make modest gifts of money to him at Christmas and birthdays and would also make minor gifts of securities to him from time to time. The largest single cash gift was approximately $1,000.
In 1936 Ernest became assistant superintendent, and later superintendent (i.e., business manager) of Trudeau Sanitorium, on the outskirts of Saranac Lake, a tuberculosis sanitorium for patients of limited means. His salary at the sanitorium was originally $150 a month plus board and room, and it was gradually increased to $300 a month plus board and lodging. Meanwhile, he had married in 1937, and board and accommodations were also provided for his wife. He retired as superintendent at the end of 1951, but continued on at the same salary as statistician. He took an apartment at that time in Saranac, which has continued to be his legal residence until the present time. The rent was $100 a month at first, and it is now $110 a month. His wife died in 1954. He continued his job as statistician until his brother's death in September 1955, and did not do more than 2 or 3 months' work after that. He has since been fully retired.
After his brother's death, he went to Pelham to stay with his sister-in-law, and assumed the responsibility for her welfare; she was not in good mental health and was in fact adjudicated incompetent shortly before her death.
At the time of his brother's death in 1955 Ernest received a $25,000 legacy as well as certain insurance policies. He has never sold any of the securities given to him by his brother. At the date of his sister-in-law's death Ernest's assets, including property to be received outright from her estate, amounted to approximately $90,000. His assets at the time of the hearing were substantially the same assets but were then worth approximately $142,000. Ernest's net income for 1956 amounted to $4,853.20 consisting of taxable income of $3,671.20, primarily from dividends and interest, and $1,182 in social security payments. His living expenses at the time of his sister-in-law's death were between $3,000 and $4,000 a year. He carries health and accident insurance and is covered by a group hospitalization plan.
His income after his sister-in-law's death has been augmented by the income of the testamentary trust that has been distributed to him. After receiving initial payments aggregating $4,000 in 1957 he has received the following total amounts of income from the trust:
+------------------+ ¦Year ¦Amount ¦ +------+-----------¦ ¦1958 ¦$14,596.63 ¦ +------+-----------¦ ¦1959 ¦15,661.53 ¦ +------+-----------¦ ¦1960 ¦12,189.41 ¦ +------+-----------¦ ¦1961 ¦11,996.62 ¦ +------+-----------¦ ¦1962 ¦14,455.50 ¦ +------------------+
To the date of trial, the trustee has not made any distribution of principal of the trust to Ernest, nor has Ernest requested any such distribution.
Ernest's expenditures have increased about $4,000 to $4,500 a year since his sister-in-law's death. Such increase is due in substantial part of the fact that he has been living in the Pelham residence part of the year, paying for the maintenance therefor, while at the same time continuing to pay rent on his Saranac apartment as well as certain amounts for custodial services in connection with the apartment during his absence therefrom. Ernest has been ‘cleaning out the possessions' of the Pelham house gradually and intends ultimately to dispose of that property. The only other category of expenditures that has increased significantly consists of charitable contributions and gifts. Such gifts have been primarily during a period of limited duration to a cousin to contribute toward the education expenses of two sons of the cousin. He also makes an annual contribution of $600 to a charity in memory of his wife.
Prior to his brother's death, Ernest's charitable contributions averaged about $100 a year. His charitable contributions in 1956 were $640. After the death of Ernest's wife, who left him a legacy of approximately $5,000, he on at least two occasions gave $1,000 to her sister, who was in need.
The possibility that the trustee will disburse any principal of the testamentary trust to Ernest is so remote as to be negligible.
OPINION.
RAUM, Judge:
The basic criteria to be taken into account in determining whether the bequest of the charitable remainder interests is deductible were set forth in Ithaca Trust Co. v. United States, 279 U.S. 151. There, the testamentary trust provided for charitable remainders after a life estate for the decedent's wife with authority to withdraw from principal any sum ‘that may be necessary to suitably maintain her in as much comfort as she now enjoys.’ The court held that the power to invade principal could be exercised only in accordance with a standard that was ‘fixed in fact and capable of being stated in definite terms of money’ and ‘not left to the widow's discretion’ (279 U.S.at 154); and that since the income was more than sufficient to maintain the widow as required, the gift of the charitable remainders was not so uncertain as to preclude the deduction. We think that the same result must be reached here.
This case is to be sharply distinguished from Merchants Bank v. Commissioner, 320 U.S. 256, and Henslee v. Union Planters Bank, 335 U.S. 595, where the standards for invasion of the principal were so loose as to be virtually nonexistent, or, in the very least, incapable of being translated in terms of money. In Merchants Bank, one of the conditions on which the trustee could distribute corpus to the life beneficiary was her ‘happiness,‘ and the trustee was directed to ‘exercise its discretion with liberality to my said wife, and consider her welfare, comfort and happiness prior to claims of residuary beneficiaries.’ 320 U.S.at 258. In Henslee v. Union Planters Bank, the trustees were directed to pay a fixed monthly sum to the decedent's mother for life and in addition the trustees were authorized to expend any portion of the trust property for her ‘pleasure, comfort and welfare,‘ with the admonition that ‘The first object to be accomplished * * * is to take care of and provide for my mother in such manner as she may desire and my * * * trustees are fully authorized and likewise directed to manage my estate primarily for this purpose.’ 355 U.S.at 596. Thus, in both Merchants Bank and Henslee v. Union Planters Bank, the powers of invasion were couched in terms that were subjective in character and were so broad as to be incapable of being reasonably confined within any ascertainable standard. And it was for that reason that the charitable bequests of the remainders were held to be without any presently ascertainable value that could furnish the basis for a deduction.
In our judgment the present case is on the same side of the line as Ithaca Trust, and not on the other side occupied by Merchants Bank and Henslee v. Union Planters Bank. Here the power of invasion was limited by the words ‘support, maintenance, welfare and comfort.’ We think that these four somewhat overlapping nouns were intended in the aggregate to describe the life beneficiary's standard of living in all its aspects and were not intended to incorporate such subjective and elusive concepts as ‘happiness,’ ‘pleasure,’ and ‘desire’ which characterized Merchants Bank and Henslee v. Union Planters Bank, particularly in the light of the admonitions to the trustees in those cases to construe the powers of invasion liberally in favor of the income beneficiaries.
Admittedly, the words ‘support,‘ and ‘maintenance’ are regarded as referable to a standard of living, and the addition of the naked words ‘comfort’ and ‘welfare’ in the context of the instrument before us merely rounds out the standard of living concept. Cf. Mercantile-Safe Deposit & Trust Co. v. United States, 172 F.Supp. 72 (D. Md.) (‘reasonable living expenses, comfort, maintenance and general welfare’); Lincoln Rochester Trust Co. v. Commissioner, 181 F.2d 424 (C.A. 2) (‘proper care, support and maintenance’); Blodget v. Delaney, 201 F.2d 589 (C.A. 1) (‘comfort and welfare’); Hartford-Connecticut Trust Co. v. Eaton, 36 F.2d 710 (C.A. 2) (‘necessary or advisable for her comfortable maintenance and support’).
See particularly In re Buell's Estate, 66 N.Y.Supp.2d 180, interpreting ‘welfare’ under applicable New York law.
Rev.Rul. 54-285, 1954-2 C.B. 302:‘Where the power of invasion is limited by such words as ‘comfort and support’ with no express standard or limitation in the will or instrument, such words should be interpreted as meaning the comfort and support according to the standard of living enjoyed by the beneficiary prior to the decedent's death, if such interpretation is consistent with applicable local law, and other terminology in the will or instrument does not require some different interpretation. * * * ‘
To be sure there are a variety of cases on both sides of the line,
some of them close to the line. But the problem in each case is to construe the words of the particular instrument in the light of the instrument as a whole, and we think it would serve no useful purpose to embark upon an analysis of these cases. Suffice it to say we are satisfied that the instrument before us does provide a reasonable standard for determining the extent to which the charitable remainders might be depleted by the power of invasion.
A number of the cases are summarized in Kline v. United States, 202 F.Supp. 849 (N.D. W. Va.), affirmed 313 F.2d 633 (C.A. 4). See also State Street Bank and Trust Co. v. United States, 313 F.2d 29 (C.A. 1), affirming 207 F.Supp. 955.
There remains therefore the factual inquiry as to whether there was any likelihood or possibility of invasion. Cf. Estate of Oliver Lee, 28 T.C. 1259, 1261, 1262; Berry v. Kuhl, 174 F.2d 565, 567 (C.A. 7). At the time of the decedent's death in 1956, Ernest's living expenses were between $3,000 and $4,000 a year. His income from sources outside the testamentary trust was then only slightly less than $5,000. The trust itself could reasonably have been expected to produce at least $10,000 additional income, and it in fact yielded more than that. While it is true that there was an increase in Ernest's expenditures after the decedent's death, his total expenditures were nevertheless well below his income, and indeed there were special circumstances explaining such increases that made it likely that the bulk of the increases would continue for only a temporary period. We are satisfied on the record before us that the possibility of invasion as of the date of the decedent's death was so remote as to be negligible, and have so found as a fact. The Commissioner's determination in this respect must therefore be disapproved.
Decision will be entered under Rule 50.