Opinion
Docket No. 3507.
1945-02-27
ESTATE OF MARGARET P. GALLOIS, DECEASED, JOHN E. GALLOIS, EXECUTOR, AND JEANNE G. HILL, EXECUTRIX, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John V. Lewis, Esq., Clyde C. Sherwood, Esq., and Jerome Politzer, Esq., for the petitioners. T. M. Mather, Esq., for the respondent.
Where decedent created a trust naming herself as one of three trustees, reserving a life estate in the income and providing that in case of any deficiency in such income, the trustees should apply to her maintenance and support any part of the trust corpus which, in their opinion, might be necessary for such purpose, held, the value of the trust corpus is includible in the decedent's gross estate under section 811(c), I.R.C., as a transfer intended to take effect in possession or enjoyment at or after death. Blunt v. Kelly, 131 Fed.(2d) 632, followed. John V. Lewis, Esq., Clyde C. Sherwood, Esq., and Jerome Politzer, Esq., for the petitioners. T. M. Mather, Esq., for the respondent.
The respondent determined a deficiency in estate tax against the estate of Margaret P. Gallois in the amount of $19,323.36.
The single issue in controversy is whether the entire value at the date of death of the corpus of a trust created by her on August 9, 1924, is includible in the decedent's gross estate under the provisions of section 811(c) of the Internal Revenue Code. Another issue raised by the pleadings has been abandoned by the petitioners.
FINDINGS OF FACT.
Margaret P. Gallois, hereinafter called the decedent, was born March 17, 1856, and died testate on August 8, 1940, a resident of the city and county of San Francisco, California. The petitioners, John E. Gallois, and Jeanne G. Hill, are the duly qualified and acting executor and executrix, respectively, of her last will and testament. The estate tax return was filed with the collector of internal revenue for the first district of California.
Prior to August 1924, the decedent had loaned to her son, John E. Gallois, the sum of $251,000, with no evidence of the indebtedness being executed in writing. In order to make this loan she had heavily encumbered her own property. Because she had advanced to her son such a large part of his portion of the estate, the decedent desired to protect the interest of her other child, Jeanne G. Hill. Therefore, on August 9, 1924, she executed a trust, naming herself, Emile M. Pissis and William H. Cook as trustees.
The trustees were directed to apply the income of the trust, (a) to the payment of interest due or to become due on the obligations of the decedent secured by liens on the trust property; (b) to the payment of taxes, assessments, insurance, repairs, etc.; and (c) after payment of the above charges, to pay the remainder of the net income to the decedent.
Other material provisions of the trust are as follows:
SECOND: The Trustees are likewise authorized and directed to apply to the maintenance and support of said Margaret P. Gallois any portion of the principal of said trust fund which may at any time be in their opinion necessary for her maintenance and support by reason of or in the event of any deficiency in the income of said trust fund.
THIRD: Upon the death of said Margaret P. Gallois the said trust and the powers and duties of the surviving Trustees shall continue during the life of Jeanne G. Hill, and during her life the net income from said property, as hereinbefore defined, shall be paid by said surviving Trustees to said Jeanne G. Hill.
FIFTH: Upon the death of Jeanne G. Hill the said trust shall cease and determine and all of said trust property then remaining in the hands of said surviving Trustees shall go to and vest absolutely in equal shares in the children of said Jeanne G. Hill. If, at the time of the death of said Jeanne G. Hill, any of her children shall have died leaving issue, such issue shall receive the share of said trust property to which such deceased child would have been entitled if living. If all of the children of said Jeanne G. Hill should predecease her, then upon her death said trust fund and the whole thereof shall go to and vest in John Gallois, if living, and if he be then dead, then it shall vest in the next of kin of said Jeanne G. Hill, in accordance with the succession laws of the State of California then in effect. In the event of the death of said Jeanne G. Hill prior to the death of said Margaret P. Gallois, said trust shall cease and determine upon the death of said Margaret P. Gallois, and said trust fund and the whole thereof shall go to and vest in the children of Jeanne G. Hill and their issue, as hereinbefore provided. If said Jeanne G. Hill and all her children die without issue prior to the death of said Margaret P. Gallois, then this trust shall terminate and the trust funds shall vest in said Margaret P. Gallois.
NINTH: Whereas said Margaret P. Gallois heretofore laid out and expended for the account and benefit of John Gallois the sum of $251,000., or thereabouts, exclusive of interest, and this agreement is made in part for the purpose of insuring to Jeanne G. Hill and her children a benefit which may to some extent correct the discrepancy between the moneys received by said Jeanne G. Hill from said Margaret P. Gallois and the outlays of said Margaret P. Gallois on behalf of said John Gallois.
Now, therefore, notwithstanding anything which may be hereinbefore contained, it is provided that at the time of the death of said Margaret P. Gallois, if there has been paid to her by John Gallois or on his account sums of money sufficient so that the said Margaret P. Gallois shall have been reimbursed to such extent that the amount unpaid is less than the value of the assets in the annexed schedule, exclusive of any claim against John Gallois, as appraised at the time of her death, then fifty (50 percent) percent of the excess of the value of said property over and above the amount of such outlays remaining unpaid shall go to and vest in said John Gallois and the balance of said property shall vest as hereinbefore provided. If, at the time of the death of said Margaret P. Gallois, the amount of such unpaid outlays made by her on behalf of John Gallois still exceeds the then value of the trust fund in the hands of said Trustees, exclusive of any claim against John Gallois, the whole of said fund shall go to and vest in the children of Jeanne G. Hill, after her death as hereinbefore provided, but said John Gallois shall not at any time be deemed indebted to said Trustee or to the estate of Margaret P. Gallois, nor shall any attempt be made by the Trustees or any successors of Margaret P. Gallois to collect any part of said outlays from said John Gallois, and if the same shall at the death of Margaret P. Gallois apparently exist as an indebtedness, such indebtedness shall be deemed forgiven and cancelled, together with any instruments, documents or writings of any kind constituting evidence of any such indebtedness, so that the same cannot go to or vest in any successor of Margaret P. Gallois under the terms of this instrument or otherwise.
The decedent retained no power to alter, amend or revoke the trust.
At the time the trust was created, the decedent was 68 years of age and in good health for a woman of that age. She had 2 children, John, aged 38, and Jeanne, aged 36, and 3 grandchildren, of the ages of 7, 5, and 1, respectively, all being the children of Jeanne. She left surviving her at her death her 2 children, 3 grandchildren, and 3 great grandchildren, Harry Poett III, aged 1 year and 8 months, Carolan Poett, aged 5 months, and Louise Haley, aged 5 months.
The decedent's son was unaware of the trust at the time of its creation and did not learn of its existence until about two years later.
Decedent's daughter, Jeanne, was married to Horace Hill, Jr., who had been well off, but who, in the period from 1924 to 1928, was in very straitened circumstances. It was to protect her daughter from further loss that the decedent had created the trust. The trust had an indebtedness greater than the market value of the property in the trust and John was constantly being pressed by Hill and others to pay the amount he owed his mother. He was unable to make any payments on his indebtedness until 1927. Between December 19, 1927, and September 13, 1928, he made payments aggregating about $42,000.
By October 1928, John was financially able to pay the balance of the money he had borrowed from his mother. At that time he and the decedent agreed orally that he would pay back the sums he had borrowed upon condition that he was made a trustee and that the corpus of the trust would not be invaded again. She agreed to these conditions and John then executed his promissory note, dated October 30, 1928, in the sum of $251,000, to the trustees.
Following this, and on November 7, 1928, two of the original trustees, Emile Pissis and William H. Cook, resigned, and John E. Gallois and Jeanne G. Hill were appointed trustees in their place. Following his appointment as trustee, John paid the balance of his indebtedness.
On June 19, 1942, the Superior Court of the State of California in and for the City and County of San Francisco, entered a ‘Decree Terminating Life Estate, etc.‘ in which it was adjudged that ‘upon and by reason of the death of said Margaret P. Gallois, an undivided one-half interest in the real and personal property hereinabove mentioned and described as constituting the property of said trust estate, vested in said John Gallois personally, and the interest of said trust and the Trustees thereof, in said one-half of said trust estate terminated.‘
OPINION.
VAN FOSSAN, Judge:
The issue for our determination is whether or not the corpus of the trust created by the decedent on August 9, 1924, is includible in her gross estate under the provisions of section 811(c) of the Internal Revenue Code. The section is set forth in the margin.
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—(c) TRANSFERS IN CONTEMPLATION OF, OR TAKING EFFECT AT DEATH.— 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 and 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 bona 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 subchapter.
The petitioners contend that no part of the trust is includible in the decedent's gross estate under section 811(c), but that it is squarely within the provisions of that section excepting ‘a bona fide sale for an adequate and full consideration in money or money's worth.‘ They premise their argument on the following:
By December 1927 the statute of limitations had run on John Gallois' indebtedness to the decedent and he was under no legal obligation to pay any part thereof; furthermore, prior to the payments by him, the trust properties had no value, since they were encumbered to an extent in excess of their fair market value. Therefore, conclude the petitioners, the payment by John Gallois, which he was not legally obligated to make, and which gave value to the trust properties, constituted the payment of a full and adequate consideration for a one-half interest in the trust, and brings the case within the exception provided in section 811(c).
We are not impressed by this contention. Although the statute of limitations may have run on the indebtedness so as effectively to bar an action by the decedent for its payment, there can be no doubt that the obligation itself remained. The statute of limitations merely bars the remedy of the creditor, but does not totally discharge the right. Williston on Contracts, vol. 6, sec. 2002. The fact that a debt is barred by the statute of limitations in no way releases the debtor from his moral obligation to pay it. Booth v. Hoskins, 75 Cal. 271; 17 Pac. 225. John Gallois admitted that he recognized his moral obligation to his mother and the testimony indicates that both he and the decedent considered his payments as a discharge of this obligation. It is clear, we think, that the payments constituted the satisfaction of this debt and not a sale and that the petitioners' contention can not be sustained.
We turn, therefore, to a consideration of the other provisions of section 811(c). It should be noted at the outset that, since the trust was created prior to the joint resolution of March 3, 1931, the corpus is not taxable solely because of the fact that the decedent reserved to herself the trust income during her life, Hassett v. Welch, 303 U.S. 303; May v. Heiner, 281 U.S. 238; Estate of Edward E. Bradley, 1 T.C. 518, and the respondent does not contend otherwise.
The respondent contends that the corpus of the trust must be included in the decedent's gross estate as a transfer intended to take effect in possession or enjoyment at or after death, since the trust instrument provided that the corpus might be invaded for the benefit of the settlor, and hence it could not be determined until that time whether any of the trust would pass to the named remaindermen.
We think this contention must be sustained. Under the terms of the trust, the trustees were authorized and directed to apply to the maintenance and support of the decedent any part of the trust corpus which, at any time, might be necessary, in their opinion, for her maintenance and support, because of any deficiency in the trust income.
The case at bar in this respect is substantially the same as that of Blunt v. Kelly, 131 Fed.(2d) 632. There the decedent created a trust providing in part that should, in their opinion, the necessity arise, the trustees were empowered to use such portion of the principal of the trust fund as might seem proper for the support, care, or benefit of the settlor. The decedent was not a trustee, but one of the trustees was her son, who was also a remainderman under the trust.
It was argued that, since one of the trustees was a remainderman and therefore had an interest adverse to that of the settlor with respect to the principal, she thereby effectively terminated her interest therein. In answer, the court said:
* * * It is true that under this provision the trustees, one of whom held an adverse interest, were required to form an opinion as to the existence of any such necessity, but in so doing the trustees were not making a free and uncontrolled decision. They were of course bound to form their opinion on the existence of any such necessity in good faith and were subject to the control of the equity courts if they failed to do so. (Citations). Under these circumstances, * * * the transfer * * * did not take effect in possession and enjoyment until the death of the settlor since, until then, it might have become necessary under the terms of the trust to apply the principal to her support, care or benefit.
We can see no substantial difference between that case and the one before us. In fact, the instant case is stronger for the Government in this respect, since the decedent, the grantor of the trust, was also one of the trustees.
The petitioners contend, however, that the decedent relinquished this right by the oral agreement she made with her son in 1928; and that, after that time, she had no power to invade the corpus for her own benefit.
The only evidence of this agreement is found in the testimony of John Gallois. He testified that at the time he repaid his mother he insisted upon being made a trustee and on having his mother agree that the corpus would not be touched again, since he felt that, inasmuch as his mother had aided him, she might at a future date assist her daughter, who was then in straitened circumstances, or some other person. He stated that he realized that his sister's financial condition was growing worse and worse and that he wanted to have control of the trust in order to protect his sister and himself.
It does not appear from the above that the decedent and her son had more than an oral agreement that she would not again encumber the trust property in order to render financial assistance to her daughter, or some other person, as she had previously aided her son. Assuming full faith and effect be given to this agreement, there is nothing to show that the decedent relinquished the right to have the principal of the trust applied to her own use and benefit, if the necessity should arise, or that her son would object to such a use of the trust corpus. Moreover, there is no evidence as to the amount of the trust income or the financial status of the grantor. Nor is there evidence that the other trustee was ever informed of the agreement.
We are impressed by the fact that, although the trust indenture was in writing, the petitioner is relying on an alleged oral amendment to vary its terms. The normal way to effect an amendment thereof would have been by a similar written instrument.
We are of the opinion that at the date of her death the decedent, under the terms of the trust, had the right to have the trust principal applied for her support and maintenance and therefore the value of the trust is includible in her gross estate as a transfer intended to take effect in possession or enjoyment at or after death.
In view of our decision it is not necessary to consider the applicability of the other parts of section 811(c).
Decision will be entered for the respondent.