Crocker-Citizens Nat'l Bank v. Comm'r of Internal Revenue (In re Estate of Budd), Docket No. 5254-65.

• Decision Date: 07 February 1968
• Docket Number: Docket No. 5254-65.
• Citation: 49 T.C. 468
• Parties: ESTATE OF RALPH BUDD, DECEASED, CROCKER-CITIZENS NATIONAL BANK, EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

49 T.C. 468

ESTATE OF RALPH BUDD, DECEASED, CROCKER-CITIZENS NATIONAL BANK, EXECUTOR, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5254-65.

Tax Court of the United States.

Filed February 7, 1968.

Robert L. Thornburgh, for the petitioner.

Richard G. Daly, for the respondent.

1. Held, limitation of trustees' power to invade corpus for the benefit of income beneficiary to ‘the event of sickness, accident, misfortune or other emergency,‘ or to cases in which income available to the income beneficiary from all sources is ‘insufficient to provide for the proper care, support and medical attention of such beneficiary during the period of any illness or other incapacity * * * or * * * for the suitable support, education and maintenance of any such beneficiary’ places a determinable external standard on the ‘sole’ or ‘uncontrolled’ discretion granted the trustees; therefore, possession of such powers by decedent, settlor of two trusts, did not require inclusion of those trusts in his gross estate under sec. 2036 or 2038, I.R.C. 1954.

2. Held, further, various administrative powers held by decedent, including power to invest in ‘non-legals,‘ power to allocate between income and principal, and power to sell or purchase securities at a profit in dealings with the trust as long as the sale ‘be made in good faith and for a consideration that is fair and reasonable,‘ were not, either considered alone or in conjunction with discretionary powers above, sufficient to warrant inclusion of two trusts in decedent's gross estate under sec. 2036 or 2038. State Street Trust Co. v. United States, 263 F.2d 635 (C.A. 1), distinguished.

OPINION

RAUM, Judge:

Respondent determined a deficiency in estate tax of $191,842. The question presented is whether certain powers retained by decedent over two trusts created by him required inclusion of the value of the trust property in his gross estate.¹ The facts have been stipulated.

Ralph Budd, the decedent, died testate on February 2, 1962, a resident of California.

On March 21, 1932, decedent, then a resident of Minnesota, created a revocable trust, transferring certain securities and cash to himself and his wife, Georgia Budd, as trustee. Under the terms of the trust agreement, the net income was to be paid to decedent's daughter, Margaret Budd Osborne, during her life. Upon her death, the income was to be paid to her daughter, Georgiana Campbell, until she reached the age of 30, at which time Georgiana was to receive all the principal of the trust. Provision was made for other disposition in the event that Margaret left surviving issue other than Georgiana or in the event that she left no surviving issue.

In addition to requiring the trustees to pay the income to Margaret during her life, the trust agreement also gave the trustees limited authority to make distributions of corpus to her, as follows:

In the event of sickness, accident, misfortune or other emergency, the trustees then in office shall have authority, in their sole discretion, to advance to said Margaret Budd Osborne, or to use for her benefit, any portion of the principal necessary to take care of any expense arising out of the conditions here set forth.

The trust agreement also gave the trustees the following administrative powers:

First: The trustees shall have full power and authority, in their discretion, to hold and retain any of the property coming into their hands hereunder in the same form of investment as that in which it is received by them, although it may not be of the character of investment permitted by law to be made by trustees.

The trustees shall have full power and authority, in their discretion, to sell and assign, or to exchange the whole or any part of any property, at any time held by them, upon such terms and conditions as may to the trustees seem advisable, and to invest and reinvest any of the trust funds hereunder in such amounts as they may see fit, in such stocks, bonds or other personal property as they may, in their discretion, deem advisable, although the same may not be of the character permitted for trustees' investments by the ordinary rules of law, or by the statutes of the State of Minnesota.

Ninth: Investments made by the trustees at a time when Ralph Budd is not one of the trustees, shall be limited to securities authorized by the then laws of the State of Minnesota for investment of funds of savings banks, and successor trustees may hold and retain as part of said trust fund any property coming to them from predecessor trustees, whether the same be savings bank investments or not, and they shall not be held liable for any failure on their part to change such investments.

Rights to subscribe for new and additional stock pertaining to stock held by the trustees may be exercised in the discretion of the trustees, and funds belonging to the trust may be used in payment for such new stock.

Finally, the trust instrument stated that it was to be ‘construed and interpreted under and by the laws of the State of Minnesota.’

On May 22, 1936, the Mercantile National Bank of Chicago was appointed by the trustees, decedent and Georgia, to act as fiscal agent of the trustees and custodian of the trust assets, in the management and administration of the trust.

On December 14, 1936, by an agreement made between decedent and Margaret, decedent agreed to release his power to revoke the trust of March 21, 1932, and on the same date executed a ‘Surrender of Power of Revocation’ whereby he relinquished his power to revoke or terminate this trust.

On or about April 28, 1959, decedent's wife Georgia resigned as a trustee, whereupon decedent, as surviving trustee, appointed the County National Bank & Trust Co. of Santa Barbara, predecessor in interest to Crocker-Citizens National Bank, as successor cotrustee of the trust. Decedent remained the other cotrustee until his death.

From May 22, 1936, until February 2, 1962, the date of decedent's death, no invasions of principal were made for the benefit of the life beneficiary, Margaret. In 1964, the then trustees invoked their discretionary power to apply $10,000 of the corpus for Margaret's benefit. That $10,000 was given to her to use as a downpayment on a house having a sale price of $36,000. Her husband had become mentally incompetent and was unable to produce income as a result of a recent illness. The couple had no savings as a consequence of their usual mode of living, ‘which was to spend rather than to save.’ Prior to that time, Margaret ‘had always rented, rather than bought, her home.’

On November 14, 1932, decedent, then a resident of Illinois, created the second of the trusts here in controversy, transferring certain securities to himself as sole trustee. The entire net income was payable in equal portions to Helen U. Budd and Beulah A. Budd, sisters of the decedent, as long as they both lived, the survivor to receive the entire net income until her death. Upon the death of the survivor of the two sisters, the entire net income was payable to Georgiana Campbell, decedent's granddaughter, for her life. If Georgiana predeceased either of the sisters, then upon the death of the survivor of the sisters, the trustee was directed to distribute the entire trust estate to decedent, if living, and if not living to decedent's ‘heirs at law * * * in the proportions in which they would take under the laws of descent of the State of Illinois then in force.’ If Georgiana survived both sisters, then upon her death the entire trust estate was to be distributed to decedent, if living, but if he was not then living to others in accordance with various specified contingencies. Helen U. Budd and Beulah A. Budd were still alive at the date of decedent's death.

The trust agreement of November 14, 1932, provided, in part, as follows:

EIGHTH. If at any time or from time to time, in the judgment of the Trustee, the aggregate of the income payable hereunder and accruing from all other sources to any beneficiary then entitled to income hereunder, shall be insufficient to provide for the proper care, support and medical attention of such beneficiary during the period of any illness or other incapacity, or in case such income shall be insufficient to provide for the suitable support, education and maintenance of any such beneficiary, the Trustee may, in his uncontrolled discretion, apply thereto or pay to such beneficiary for such purpose a portion of the principal of the Trust Estate; * * *

TENTH. Said Trustee shall have and is hereby given full power:

(2) To sell at public or private sale, to invest and reinvest the property at any time comprising the Trust Estate hereunder, and from time to time to change any such investments in such manner as the Trustee shall deem best, and to invest any or all of said property in stocks, bonds, mortgages or other securities and property which said Trustee may deem safe and proper, regardless of any restrictions imposed upon the investment of trust funds by the statutes of the State of Illinois or any other state.

(4) In his uncontrolled judgment and discretion to retain and hold as long as he may see fit, as investments of trust funds under this trust, any and all stocks, bonds or other securities at any time forming a part of the Trust Estate.

(9) To determine what is ‘income’ and what is ‘principal’ hereunder, and his decision thereon shall be final; provided, however, that (1) in the case of bonds, notes or debentures purchased at a discount the entire subsequent sale price or maturity value shall be credited to principal; (2) in the case of bonds, notes or debentures purchased at a premium the Trustee shall charge the premium immediately against income without amortizing the same; and (3) any stock dividend or subscription right which may be declared upon or issued in connection with any stock constituting a portion of the Trust Estate shall be considered as principal and not as income.

(10) So...