Opinion
Docket No. 35682.
1953-05-28
ESTATE OF LOUISE DEWITT RUXTON, DECEASED, BY GUARANTY TRUST COMPANY ET AL., EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Lawrence A. Baker, Esq., and Henry Ravenel, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent
1. ESTATE TAX— RECIPROCAL OR CROSSED TRUSTS.— Where the facts and circumstances surrounding the creation of trusts by the decedent and her husband on the same date show that they were not interdependent or in consideration of each other and lacked a quid pro quo of substantially the same degree of beneficial right or control, held, that the reciprocal or crossed trust doctrine is not applicable.
2. ID.— DEDUCTION.— Allowed in amount of reasonable estimate of fee for services of special guardian which will be paid prior to the executor's final accounting. Lawrence A. Baker, Esq., and Henry Ravenel, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent
The respondent has determined a deficiency of $121,698.37 in the estate tax liability of the estate of Louise DeWitt Ruxton, deceased. The petitioner claims an overpayment in such amount as may result from the redetermination in the instant proceeding.
The principal issue is whether the respondent erred in including in the decedent's gross estate the amount of $270,315.16 based upon his determination that certain trusts created by the decedent and her husband on August 19, 1935, constituted reciprocal trusts and that the corpora of the trusts created by the husband (with certain adjustments) are includible in the decedent's gross estate as representing a transfer made by decedent within the meaning of section 811(c) of the Internal Revenue Code.
A secondary issue is whether the petitioner is entitled to a deduction of not less than $2,500 as an administration expense representing a fee which will have to be paid to a special guardian to represent certain minors prior to the approval of the executor's final accounting before the Surrogate's Court.
The parties have entered into a stipulation with respect to certain assignments of error and also certain other adjustments. Effect thereto will be given in the recomputation under Rule 50.
FINDINGS OF FACT.
The facts which have been stipulated are so found and incorporated herein by reference.
Louise DeWitt Ruxton, hereinafter referred to as the decedent, was born December 1, 1868, and died testate on June 16, 1948, a citizen of the United States and a resident of the State of New York. Pursuant to an order of the Surrogate's Court in and for the County of New York, the Guaranty Trust Company of New York, A. Wallace Chauncey, and joseph S. Buhler are the qualified and acting executors of the decedent's estate.
A Federal estate tax return on Form 706 for the decedent's estate was duly filed by the executors within the time required by law with the collector of internal revenue for the third district of New York. In that return the executors elected to value the property constituting the estate as of the optional valuation date, June 16, 1949. The estate tax shown to be due on the return was paid in the sum of $192,067.70 on September 15, 1949, and on the same date an additional estate tax of $2,899 was paid.
Philip Ruxton was born January 9, 1866, and he and the decedent were married from January 9, 1891, until he died testate on January 8, 1945.
At the date of the decedent's death on June 16, 1948, she was survived by two daughters and three grandchildren, all of whom are still living. The two daughters are Louise Ruxton Chauncey born February 20, 1894, and Frances Ruxton Heppenheimer (now Frances Ruxton Philbin) born December 3, 1898. The three grandchildren are the children of Mrs. Heppenheimer.
Prior to 1934 Philip Ruxton was a member of the board of directors and audit committee of the Harriman National Bank of New York City. Early in 1934 Philip Ruxton was apprehensive as to the possibility of suits being filed against the directors and officers of that bank for alleged mismanagement thereof. On account of that situation and oon February 5, 1934, Philip Ruxton consulted his attorney, Joseph S. Buhler, as to the advisability of creating a trust for the benefit of each of his two daughters for the purpose of providing for their security and protecting them against deprivation from sharing in his estate in the event he should be wiped out financially as a result of the anticipated litigation. Also, on account of the bank situation and on February 23, 1934, the decedent, who was independently wealthy, had a separate consultation with Buhler as to her husband's possible financial difficulties. On March 14, 1934, the decedent told Buhler that she desired to create a trust to assure her husband of an independent income in the event he should lose his fortune as a result of the anticipated litigation. For many years prior to 1934 Buhler had been legal counsel to the decedent and her husband as to their respective separate financial affairs. From time to time during the period February 1934 until the creation of the trusts on August 19, 1935, as hereinafter set out, the decedent and her husband had numerous separate consultations with respect to the trusts. On occasions Buhler, as a friend of the family visited the decedent and her husband together in their home and each of them was aware of the other's plans with reference to the trusts.
On October 18, 1934, Philip Ruxton was served with a summons as a defendant in a suit filed in the Supreme Court of the State and County of New York by the receiver for the Harriman National Bank. The complaint therein was verified on February 15, 1935. The suit was against Philip Ruxton and others as directors and officers of the bank, jointly and severally, in the sum of $6,800,000 for alleged improper acts of the defendants. Philip Ruxton defended against such action which was served and discontinued against him on July 8, 1937, upon his payment of $58,572 to the receiver.
On or about July 31, 1935, Philip Ruxton advised Buhler that he had definitely decided to create a trust for the benefit of each of his daughters and on August 7, 1935, they discussed the matter of Buhler and the Irving Trust Company acting as co-trustees on the basis of dividing one trustee's commission. On August 7, 1935, Buhler and the decedent had a long telephone conversation in connection with the terms of the trust she desired to create and the character of property she would transfer to it, and further, she advised Buhler that she wanted the details of the matter discussed with her husband. From August 8 to August 19, 1935, Buhler was in fairly constant touch with Philip Ruxton in regard to the trusts and during that time the details of the proposed trusts were transmitted to the Irving Trust Company which actually prepared the respective trust agreements.
On August 19, 1935, the decedent as grantor and Joseph S. Buhler and the Irving Trust Company as trustees executed a trust agreement whereby in consideration of $1 the decedent assigned and transferred certain securities to the trustees with broad powers to hold, manage, sell, and reinvest the trust property, except that during the life of Philip Ruxton the trustees were required to consult with and follow the direction of Ruxton, if so consulted, prior to making any changes in investments or sale of any securities. The trust agreement provided, inter alia, that during the life of the grantor's husband, Philip Ruxton, the net income shall be paid to him and in addition that upon his written request the capital gains from sales of securities held in trust shall be paid to him. The trust agreement provided, upon the death of Philip Ruxton, for the division of the trust principal into two equal parts if either or both of the grantor's daughters then be living; for a life income interest from one part for each daughter if surviving; for an outright distribution of one part to the survivor of the two daughters; and further, for per capita remainder interests for the grantor's grandchildren and their issue in one part of the trust principal upon death of the survivor of the two daughters or in the entire trust principal upon the death of Philip Ruxton if both daughters predeceased him. The trust instrument contained a so-called spendthrift clause applicable to both principal and income and the respective beneficiaries.
The trust created by decedent on August 19, 1935, was not created in contemplation of death. The securities transferred on that date in trust by decedent had a then market value of $250,149.97 and were made out of her separate property, no part of which had been given to her by her husband. After such transfer the decedent was still possessed of property valued far in excess of the value of the property transferred in trust. The trustees assumed the trust and still continue to administer the same in accordance with its terms. Within the time required by law the decedent filed a Federal gift tax return for the year 1935, including therein the total value of the corpus of the above mentioned trust as a gift and paid a gift tax of $12,927.03 no part of which has been refunded and for which credit has been allowed in the deficiency notice. The estate tax return filed by the executors of the decedent's estate reported a gross estate of $917,384.79 without including therein any amount for the value of property transferred in trust on August 19, 1935, but did disclose such transfer.
On an established actuarial basis using an assumed rate of return of 4 per cent, the right of Philip Ruxton to receive during his life the income from the trust created by the decedent, had a value of $66,369. The value of the corpus of the trust created by decedent was $286,522.67 as of June 16, 1948, the date of her death, and $270,315.16 as of June 16, 1949.
On August 19, 1935, Philip Ruxton as grantor and Joseph S. Buhler and the Irving Trust Company as trustees executed two separate trust agreements. With respect to each trust Philip Ruxton in consideration of $1 assigned and transferred an identical number and kind of securities to the trustees with broad powers granted to the latter to hold, manage, sell, invest, and reinvest the trust property. The terms of the two trusts are substantially identical except for the necessary respective interchange of the names of the grantor's two daughters, Louise Ruxton Chauncey and Frances Ruxton Heppenheimer. Each trust instrument provided, inter alia, that the net income shall be paid to the daughter therein names as primary beneficiary during her life and, further, that upon such daughter's death if the grantor's wife (decedent herein) be living the net income shall be paid to the wife during her life, but if the wife be not living then the net income shall be paid to the other daughter during her life. Each trust instrument provided, after the primary and contingent life interests, for the distribution of the principal of the trust, in certain events, to the primary beneficiary's surviving issue, if any, or to her surviving sister or the latter's surviving issue. Each trust instrument contained a so-called spendthrift clause applicable to both principal and income and the respective beneficiaries.
The securities so transferred by Philip Ruxton to each trust, respectively, had a than market value of $249,272, or a total value of $498,544 for the two trusts, after which he still possessed property valued far in excess of the value of the property transferred in trust. The trustees assumed the respective trusts and still continue to administer each in accordance with its terms. Within the time required by law Philip Ruxton filed a Federal gift tax return for the year 1935, including therein the total value of the corpus of the two above mentioned trusts as gifts and paid a total gift tax of $43,107.91, no part of which has been refunded. After the death of Philip Ruxton on January 8, 1945, his executors filed a Federal estate tax return showing a gross estate of $1,298,909.37 without including therein the value of the corpus of either of the trusts created by him on August 19, 1935.
On an established actuarial basis using an assumed 4 per cent rate of return, the values as of August 19, 1935, and June 16, 1948, of the decedent's contingent life income interests in the Philip Ruxton trusts, if she should survive the daughters, Louise and Frances, named as the primary income beneficiaries, were as follows:
+------------------------------------------------------------------+ ¦Value of Decedent's Interest ¦ ¦ ¦ +----------------------------------+---------------+---------------¦ ¦Trust ¦Aug. 19, 1935 ¦June 16, 1948 ¦ +----------------------------------+---------------+---------------¦ ¦Trust in which Louise was primary ¦ ¦ ¦ +----------------------------------+---------------+---------------¦ ¦beneficiary ¦$6,336 ¦$3,567.37 ¦ +----------------------------------+---------------+---------------¦ ¦Trust in which Frances was primary¦ ¦ ¦ +----------------------------------+---------------+---------------¦ ¦beneficiary ¦5,245 ¦2,876.48 ¦ +----------------------------------+---------------+---------------¦ ¦Combined actuarial value ¦$11,581 ¦$6,443.85 ¦ +------------------------------------------------------------------+
The values of the corpus of each of the two trusts created by Philip Ruxton as of June 16, 1948, and June 16, 1949, were as follows:
+------------------------------------------------------------------+ ¦Trust ¦June 16, 1948 ¦June 16, 1949 ¦ +----------------------------------+---------------+---------------¦ ¦Trust in which Louise was primary ¦ ¦ ¦ +----------------------------------+---------------+---------------¦ ¦beneficiary ¦$280,454.12 ¦$266,993.03 ¦ +----------------------------------+---------------+---------------¦ ¦Trust in which Frances was primary¦ ¦ ¦ +----------------------------------+---------------+---------------¦ ¦beneficiary ¦278,878.61 ¦265,410.80 ¦ +----------------------------------+---------------+---------------¦ ¦Combined values ¦$559,332.73 ¦$532,403.83 ¦ +------------------------------------------------------------------+
There are set forth in the stipulation included herein by reference and, as established on an actuarial basis, the respective values of the primary life interests of the daughters, Louise and Frances, in the Philip Ruxton trusts as of August 19, 1935, June 16, 1948, and June 16, 1949, and also, the values of the remainder interests in those trusts as of June 16, 1948, and 1949.
In connection with the final accounting of the executors of decedent's estate and before approval thereof the Surrogate, in all probability, will appoint a special guardian to represent certain minors who are beneficiaries of a trust created by decedent's will. The compensation for the guardian's services, in all probability, will be fixed by the Surrogate in a minimum amount of at least $2,500 which the executors will be required to pay out of the decedent's estate.
In determining the deficiency involved herein the respondent made various adjustments, including an addition to the value of the net estate for ‘Transfers during the decedent's life— $270,315.16.‘ That amount is the value, as of June 16, 1949, of the corpus of the trust created by decedent and the amount determined by respondent as the value of the decedent's retained contingent life estate under reciprocal trusts and as such a transfer by decedent within the provisions of section 811(c) of the Internal Revenue Code.
OPINION.
TIETJENS, Judge:
The issue presented in this proceeding arises out of the respondent's determination whereby he has included in the decedent's gross estate a portion of the value of property separately owned by her husband and transferred by him to two irrevocable trusts on August 19, 1935, as to each of which a daughter was the primary life income beneficiary and the decedent was the contingent income beneficiary for life if she survived the daughter. The respondent valued the decedent's interest in the two trusts created by her husband (with each value as of June 16, 1949, the alternative date after the decedent's death) as being the total value of the corpora of the two trusts amounting to $532,403.83 less $252,892.23 representing the total value of the two primary life estates resulting in a value of $279,511.60, but he limited the amount includible in the decedent's estate to the sum of $270,315.16 representing the value of the property actually transferred by decedent to an irrevocable trust created by her on August 19, 1935. As to the latter trust the decedent's husband was the primary life income beneficiary and the two daughters were the secondary beneficiaries.
The question presented is whether the facts herein bring this case within the established ‘reciprocal‘ or ‘crossed‘ trust doctrine so that the decedent may be properly treated as the person who ‘at any time made a transfer‘ of property in two trusts (nominally created by her husband and granting her contingent life income estate) under which ‘the income from the property‘ has been ‘retained‘ by her for life or any period not ascertainable without reference to her death or which does in fact end before her death, within the meaning of section 811(c)(1)(B) of the Code.
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.—(1) GENERAL RULE.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise—(B) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) the right, either aloneDOPpossess or enjoy the property or the income therefrom; or
Respondent contends that it is wholly immaterial to the issue that the pending suit and possible loss of Philip Ruxton's personal fortune was a motivating cause of the husband creating two trusts with the daughters as primary income beneficiaries and the decedent creating a trust to provide her husband with an assured independent income for life and that in any event such circumstances do not detract from the reciprocity of the trusts. Respondent contends that the decedent and her husband conceived a plan and acted in concert for the purpose of forming an entity or combination of three trusts as to which either one without the other would have been ineffectual to accomplish the desired result. Further, respondent contends that the decedent's trust was made in consideration of the husband's two trusts, and vice versa, and having paid a quid pro quo she in substance made the transfer in two trusts with a retained interest in the income for a period which does not in fact end before her death. In support of the application of the ‘reciprocal‘ or ‘crossed‘ trust doctrine in the instant case respondent relies on Lehman v. Commissioner, 109 F.2d 99, certiorari denied 310 U.S. 637; Cole's Estate v. Commissioner, 140 F.2d 636; Hanauer's Estate v. Commissioner, 149 F.2d 857, certiorari denied 326 U.S. 770; and Orvis v. Higgins, 180 F.2d 537, certiorari denied 340 U.S. 810. He says that the Hanauer and Orvis cases, supra, are controlling.
The petitioner recognizes the doctrine of ‘reciprocal‘ or ‘crossed‘ trusts, but argues that that doctrine as applied in the above cited cases encompasses only a reciprocity of the same beneficial rights and/or powers. It is noted, for instance, that in each of those cases the cross consideration or quid pro quo of the nominal grantors was a primary life estate. Further, where property of unequal value was transferred to the respective crossed trusts (as in the Cole's Estate and Hanauer cases) they were held to be reciprocal only to the extent of the value of the lesser corpus transferred. The petitioner contends that the ‘reciprocal‘ trust doctrine is not applicable to the instant case for the reasons that in fact there was no concert of action and no consideration between decedent and her husband and that there was no reciprocity or equivalence of rights. The trust created by decedent granted to her husband the primary life income estate having an actuarial value of $66,369. Each of the two trusts created by decedent's husband granted only a contingent life income estate to the decedent if she survived the daughter named as primary beneficiary. The decedent's contingent interests in both of those trusts had a combined actuarial value of $11,581 on the date the trusts were created and $6,443.85 on the date of her death. Also, apart from the different degree of rights granted to the decedent and her husband, respectively, the substantive terms of the decedent's trust as to the interests of the named beneficiaries and designated remaindermen varied greatly from those of the husband's trusts, and, further, neither the decedent nor her husband had any power to alter, amend, terminate, or revoke the trusts.
The very nature of the issue involved herein is such as to raise doubts in reaching an ultimate conclusion. However, in addressing ourselves to the question we are not unmindful that the doctrine of ‘reciprocal‘ or ‘crossed‘ trusts which respondent seeks to apply is not a statutory provision made operative by the specific terms of a trust instrument of the decent, but instead is a concept of the courts. That concept is based on reason and analysis where the facts and circumstances of a particular case warrant going outside the formal terms of a trust instrument and looking to the reality of the situation, namely, that a person other than the nominal grantor is the actual transferor of property with retained economic interests in or control of the property, thus obtaining the same resultant tax consequences as if such person had done directly what he tried to do by indirection. In our opinion, that doctrine should be applied only when clearly warranted by the particular facts of a case considered in the light of the decided cases.
In the instant case we have before us the trust instruments, evidence of the circumstances which motivated the execution thereof, and the testimony of the lawyer who advised both the decedent and her husband. We think the motives of the parties certainly have a bearing on their intentions with respect to unity of purpose, interdependence, and consideration or the lack thereof. On this record we strongly infer and therefore conclude that the decedent acted independently in dictating the substantive terms she desired to impose on her transfer in trust for the primary and immediate benefit of her husband during his lifetime and thereafter for her daughters and grandchildren; that the decedent determined to make the character of transfer she made without regard to any action on the part of her husband; and that the decedent's transfer in trust was not in consideration of the transfers in trust made by her husband. The only concert of action by them was in the final stages when decedent advised the attorney that she wanted the details of her trust discussed with her husband and the fact that the instruments were executed on the same date. Such limited concert of action does not place the decedent and her husband in proper juxtaposition to have reciprocated on the trusts. Cf. Estate of Samuel S. Lindsay, 2 T.C. 174; and Lueders' Estate v. Commissioner, 164 F.2d 128, reversing 6 T.C. 587.
In reaching the conclusion that the decedent's trust and her husband's trusts were not executed in consideration of each other, we are further influenced by the apparent lack of a quid pro quo as evidenced by the trust instruments. In the Lehman, Cole's Estate, Hanauer's Estate, and Orvis cases, supra, the uncrossing of the trusts and the transposition of the respective grantors left each with substantially the same degree of beneficial right in or power of control over the respective properties transferred, limited in value for tax purposes by the value of the lesser corpus transferred. In the instant case the uncrossing of the trusts and the transposition of the decedent and her husband as the grantor of the other's trusts would place each of them in a position entirely untenable with the giving of a quid pro quo to induce the action of the other and also untenable with the materially different expressed desire or purpose of each as evidenced by their respective trusts.
In our opinion, the ‘reciprocal‘ or ‘crossed‘ trust doctrine is not applicable to the instant case. On this issue the respondent erred.
On brief the respondent does not oppose the allowance of the claimed deduction of $2,500 as an administration expense of decedent's estate under section 812(b)(2) of the Code. The record establishes the reasonableness of the amount and the necessity for payment thereof as a fee for a special guardian's services, prior to the final accounting by the executors. The claimed deduction should be allowed. Estate of Alice K. Larkin, 13 T.C. 173.
Reviewed by the Court.
Decision will be entered under Rule 50.