Opinion
No. 23384
Decided June 1, 1932.
Inheritance tax — Estates transferred by trust instrument, postponing enjoyment until donor's death, taxable — Gifts in contemplation of death — Presumption removed where instrument executed two years before donor's death — Burden sustained by tax commission where enjoyment of estate postponed — Constitutional law — Sections 2 and 7, Article XII, Ohio Constitution — Article XIV, Amendments to U.S. Constitution.
1. Estates transferred through the medium of a trust instrument, which by its terms postpones the enjoyment of the trust estate until after the death of the donor, are taxable under the inheritance tax laws of Ohio.
2. The fact that the trust instrument was executed more than two years prior to the death of the donor has the effect only to remove the presumption that the gifts were made in contemplation of death and to cast the burden upon the Tax Commission of showing that the estates transferred are taxable under our inheritance tax laws, and when the instrument transferring the estates provides that their enjoyment is postponed until after the death of the donor the Tax Commission has sustained its burden.
3. The inheritance tax laws of the state of Ohio, providing for the taxing of such estates, do not contravene Article XII, Section 7, nor Article XII, Section 2, of the Constitution of Ohio, nor do they contravene the Fourteenth Amendment to the Federal Constitution.
ERROR to the Court of Appeals of Cuyahoga county.
The parties occupying the same relative positions here as they did in the trial court will be referred to as plaintiff and defendant.
This cause comes before this court on error proceedings following a judgment of the Court of Appeals of Cuyahoga county, which reversed judgments of the probate and common pleas courts sustaining the exceptions of plaintiffs in error to the determination of the inheritance tax on the estate of Harriette B. Sherman, deceased. The case was submitted, argued and decided on an agreed statement of facts, a resume of which is as follows:
On May 12, 1927, Harriette B. Sherman by deed revoked a trust agreement entered into by her on August 20, 1924, and transferred all of the real and personal property comprising said trust to the Union Trust Company of Cleveland, as trustee, and the parties executed a new deed of trust in which it was provided:
(1) That the Union Trust Company was to pay the income arising from the trust property to Harriette B. Sherman during her life, and that should she need for her support more than the income from the trust, the Union Trust Company should pay her, at its discretion, such additional sums from the corpus as it should deem necessary for that purpose.
(2) That the Union Trust Company was to consult with her and receive her consent before making investments. Should, however, Harriette B. Sherman, after request by the Union Trust Company, have refused for fifteen days to approve or disapprove of any investment, then the Union Trust Company had uncontrolled discretion to act.
(3) That on the death of Harriette B. Sherman the corpus, less trustee's fees, was to be "transferred and delivered," share and share alike, to Henry S. Sherman and Sarah Sherman Carter.
(4) That should they predecease the settlor, Henry S. Sherman and Sarah Sherman Carter were to have power of appointment in their wills as to their respective shares of the corpus of the trust.
(5) That Harriette B. Sherman was to have no further power over the trust, except the right to terminate it by directing immediate distribution to the remaindermen.
During the life of the trust, Harriette B. Sherman approved in writing twelve changes in investments of the corpus of the trust, and on July 21, 1927, with the written consent of Henry S. Sherman and Sarah Sherman Carter, the Union Trust Company distributed to Harriette B. Sherman a portion of the corpus of said trust.
On October 26, 1929, Harriette B. Sherman, while in good health, died intestate, as the result of injuries received in an automobile accident, leaving Henry S. Sherman and Sarah Sherman Carter as her sole heirs at law. The probate court of Cuyahoga county determined the distribution of the corpus of the trust to be taxable under the inheritance tax laws of Ohio. Exceptions to this determination were filed by Henry S. Sherman and Sarah Sherman Carter, and were sustained, both in the probate court and in the court of common pleas. These decisions were reversed by the Court of Appeals of Cuyahoga county.
Mr. John D. Fackler, for plaintiffs in error.
Mr. Gilbert Bettman, attorney general, Mr. Arthur Krause, Mr. Raymond D. Metzner, Mr. Lewis F. Laylin and Mr. William J. Ford, for defendant in error.
Plaintiffs contend: (1) On the creation of the trust of 1927, Henry S. Sherman and Sarah Sherman Carter acquired by gift present vested interests in the corpus of the trust; (2) the interests of Henry S. Sherman and Sarah Sherman Carter are not subject to tax under the Ohio inheritance tax laws; (3) an interpretation of the Ohio inheritance tax laws which will tax the interests of Henry S. Sherman and Sarah Sherman Carter as inheritances is contrary to the provisions of Article XII, Section 2, of the Ohio Constitution, as in force prior to December 31, 1931; (4) an interpretation of the Ohio inheritance tax laws which will tax the interests of Henry S. Sherman and Sarah Sherman Carter as inheritances is contrary to the provisions of the Fourteenth Amendment to the Constitution of the United States.
All these contentions are disposed of when we determine whether the trust agreement of May 12, 1927, carried to Sarah Sherman Carter and Henry S. Sherman gifts inter vivos or gifts causa mortis. Harriette B. Sherman died as the result of an automobile accident on October 26, 1929, more than two years after the trust agreement was executed. There is no question of consideration in this case. It is agreed that the estates transmitted by this instrument are gifts pure and simple.
The fact that the trust instrument was executed more than two years prior to the death of the donor removes the legal presumption that it was made in contemplation of death, and casts the burden upon the tax commission of showing that these estates are taxable under our inheritance tax laws.
Section 5332, General Code, as interpreted in the case of Tax Commission v. Parker, 117 Ohio St. 215, 158 N.E. 89.
Taking the converse of the proposition as stated in the first paragraph of the syllabus in that case, when a transfer is made without a valuable consideration in money, more than two years prior to the death of the transferor, supports the contention that the tax commission carried the burden in this case of showing by the greater weight of the evidence that these gifts were made by the donor in contemplation of death, or that they were intended to take effect in possession or enjoyment at or after death.
Has the tax commission successfully carried this burden?
The trust instrument furnishes all the evidence necessary for the determination of all questions involved.
Plaintiff in error insists that the trust is irrevocable. True, it recites that "it is mutually agreed between the parties hereto that this trust is irrevocable," and in the next breath a provision is injected into the instrument whereby it may be revoked.
This court fails to see wherein it would in any wise change the application of the inheritance tax law whether the trust was revocable or irrevocable, or whether the estates or interests transferred were vested or contingent remainders. Sections 5342 and 5342-1, General Code, provide rules for the evaluation of both vested and contingent interests, thereby revealing the legislative intent to tax the right to succeed to either and both. Plaintiff in error very properly distinguishes between these interests, but we fail to see wherein this is important.
The donor, by the fixed terms of the trust instrument, retained the full enjoyment of the trust estate by the use of the following language:
"The entire net income derived from the trust estate shall be paid to the donor in quarterly installments, or oftener, as and when received, for and during the life of the donor, and the trustee shall pay and deliver to the donor in addition thereto such further amounts from the principal of the trust as it shall deem necessary or proper for the donor's maintenance, support, comfort or enjoyment.
"Upon the death of the donor, the property constituting the trust estate at that time in the hands of the trustees shall be transferred and delivered by the trustee, share and share alike, to Sarah Sherman Carter, daughter of the donor, and Henry S. Sherman, son of the donor, to be theirs absolutely."
The enjoyment of these estates was the income. By the terms of the trust instrument, the trustee was directed to so manage the estates as to make them income producers, and the donees were not permitted to enjoy one cent of this income until donor's death, except in case of revocation, and suffice it to say it was not revoked.
The fourth paragraph of the syllabus of the well-reasoned case of Tax Commission v. Parker, supra, reads as follows:
"The controlling fact in determining whether a transferor made the transfer of property in contemplation of death is whether the purpose of the transferor was to distribute or partially distribute his estate, or was simply to do an act of generosity or kindness."
The donees were the children and the only children of the donor, so far as the record discloses. They had the natural claim upon her bounty. The Ohio law of descent would have carried these estates to these donees. They would have obtained everything under the law that they received under the trust instrument, under the circumstances as they exist. True, there was a provision in the trust instrument to the effect that should either or both donees predecease the donor their estates would pass in accordance with their wills, and, in the absence of wills, under the laws of descent. But the legatees or heirs of such predeceased donee or donees could not enjoy their estates until the death of the donor, as she had retained the enjoyment to herself during her life.
The inheritance tax laws of the state of Minnesota and the state of Ohio are substantially the same. The Supreme Court of Minnesota, on April 22, 1932, in the case of In re Estate of Rising v. State, ex rel. Benson, Atty. Genl., ___ Minn., ___, 242 N.W. 459, held that where a transfer in trust or otherwise is made, if the transferor reserves to himself or herself a life interest in the income or interest from the property transferred, it is subject to the state inheritance tax as a transfer intended to take effect in possession or enjoyment at the death of grantor or donor. Inheritance taxes on this type of transfer do not violate the Fourteenth Amendment of the Federal Constitution.
That case is well reasoned and disposes of the question involved in the instant case, and we follow it.
These estates are not gifts inter vivos. It is fundamental that in order to make a gift inter vivos the donor must relinquish all control over the gift and deliver it to the donee. The donor in this case retained substantial control over the corpus of the trust by force of the terms of the trust instrument so long as she lived.
Section 5332 of the inheritance tax law of Ohio does not contravene Article XII, Section 7, of the Constitution of Ohio, nor does it run counter to Article XII, Section 2, of that instrument.
Having held that the estates herein are not gifts inter vivos, the taxing of the interests herein involved does not run counter to the Fourteenth Amendment of the Federal Constitution.
We find that these successions come squarely within the purview of Section 5332, General Code, in that the donor did not intend that her donations should be enjoyed until after her death, and are taxable under the laws of Ohio, and the judgment of the Court of Appeals is hereby affirmed.
Judgment affirmed.
MARSHALL, C.J., JONES, MATTHIAS, DAY, ALLEN and KINKADE, JJ., concur.