United States Trust Co. of New York v. Comm'r of Internal Revenue (In re Estate of Jordahl)

• Citation: 65 T.C. 92
• Decision Date: 15 October 1975
• Docket Number: Docket No. 5651-73.
• Parties: ESTATE OF ANDERS JORDAHL, DECEASED, UNITED STATES TRUST COMPANY OF NEW YORK, AND WENDALL W. FORBES, CO EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

65 T.C. 92

ESTATE OF ANDERS JORDAHL, DECEASED, UNITED STATES TRUST COMPANY OF NEW YORK, AND WENDALL W. FORBES, CO EXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5651-73.

United States Tax Court

Filed October 15, 1975.

Robert D. Whoriskey and Alfred Grotell, for the petitioners.

On Jan. 31, 1931, decedent created a trust and named himself one of three trustees. The corpus of the trust included insurance policies on the decedent's life and other income-producing assets. The trustees were instructed to pay the premiums out of the assets of the trust and to pay over any remaining income to the decedent. At no time was income insufficient to pay the premiums. On his death his daughter was to receive the income until she reached age 50 at which time she was to receive the principal. The decedent retained the power to substitute securities, property, and policies ‘of equal value’ for those transferred to the trust. Held: Decedent did not have the power to alter, amend, or revoke the trust as defined under sec. 2038(a)(2), I.R.C. 1954, because his power of substitution was no greater than a settlor's power to direct investments. Nor were the insurance proceeds includable under sec. 2042(2), I.R.C. 1954, because the right to substitute other policies ‘of equal value’ did not give him a right to the ‘economic benefits' of the policies and because his powers as trustee were strictly limited.

OPINION

TIETJENS, Judge:

The Commissioner determined a deficiency of $310,891.80 in the Federal estate tax of Anders Jordahl (hereinafter decedent).

The issue for decision is whether any of the assets, including the proceeds of insurance policies on decedent's life, held in a trust established by decedent are includable in decedent's gross estate under section 2038 or section 2042. ¹

This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The facts which we deem necessary for decision will be referred to below.

Petitioners are the executors under the will of decedent, who died a resident of Franklin Township, Somerset County, N. J. On the date of filing of the petition in this case, the legal residence of petitioner Wendell W. Forbes was Somerset, N. J. On that date, petitioner United States Trust Co. of New York maintained its principal address and place of business in New York, N. Y.

By agreement dated January 8, 1931, decedent, as donor, created a trust. The trust agreement designated decedent, Mary Dyas Jordahl (decedent's wife), and Guaranty Trust Co. of New York (now doing business as Morgan Guaranty Trust Co. of New York and hereafter referred to as Guaranty) as original trustees. Mary Dyas Jordahl died on June 25, 1967, and no successor trustee was appointed in her place. The first article of the agreement provided as follows:

FIRST: During the lifetime of the Donor, the Trustees shall pay the premiums which may become due and payable on the policies or any of them from the income of the trust or from cash seasonably furnished from time to time for that particular purpose by the Donor. In order to afford the Donor an opportunity to furnish cash seasonably for the payment of premiums should the income of the trust be insufficient for that purpose, the Trustees, if, in their opinion they will or may not have on hand sufficient income to pay a premium about to fall due, shall give to the Donor notice in writing to that effect; to effect the continued payment of the premiums on the policies, the Trustees are authorized in their discretion to retain in their hands an undistributed balance of cash income in such amount as may seem to them necessary. Should the income of the trust be insufficient or should the Donor fail to furnish cash seasonably to pay the premiums of all the policies, then the Trustees at their sole and unrestricted option and for the purpose of obtaining funds with which to pay premiums on any policy, may sell, at public or private sale, without notice to the Donor or to any other person, property and securities other than the policies constituting the principal of the trust, may borrow upon the policies or any of them or as the assignee of any policy, may exercise options for the automatic application of loan provisions to the payment of future premiums, it being understood that said methods of obtaining funds are permissible only and not mandatory upon the Trustees and the Donor hereby expressly releases the Trustees from all liability for failure to avail themselves of said methods or any of them and from the consequences of such failure. The Trustees are authorized in their sold discretion to select from time to time the policies for the payment of premiums on which money actually available shall be applied in the event that premiums of all the policies may not be provided for. Unless the income of the trust or unless cash seasonably furnished by the Donor shall be sufficient to enable the Trustees to pay such premiums, the Trustees shall be under no obligation to pay them nor to see that payment is made by the Donor or otherwise and the Trustees shall be under no liability to anyone in case such premiums are not paid nor for any result of the failure to make such payments. The Trustees shall be responsible for the proceeds of the policies only when, as and if collected by or paid to them and the Trustees shall not be liable to any one if for any reason whatsoever the policies or any of them shall lapse or be otherwise uncollectible unless such lapse or uncollectibility results from the negligence of the Trustees in failure to pay premiums out of the income of the trust actually in hand or out of cash actually in hand and seasonably furnished for that particular purpose by the Donor. In the event that after the payment of premiums on the policies and the retention of the balance of income in suitable amount there shall be a further balance of income remaining, the Trustees shall distribute such balance remaining to the Donor.

The second article vested the trustees with all right, title, and interest in the policies and authorized them to ‘exercise and enjoy all options, rights and privileges therein and beneficial interests thereunder as fully and effectually as the Donor might have done.’ Decedent reserved any disability benefits under the policies. There were no provisions for disability benefits under the life insurance policies owned by the trust.

The fourth article of the trust provided, in part:

FOURTH: The Trustee shall receive and hold the proceeds of the policies as well as the proceeds of any other policies which may hereafter be made subject to the terms hereof upon the uses and trusts and for the purposes herein set forth * * *

Under the sixth article of the agreement ‘Upon the death of the Donor, the Trustees * * * (were to) hold, manage, invest and reinvest the proceeds of any insurance policies which come into their hands and the securities and other property constituting the trust fund’ to pay income to Helen Jordahl Prescott until she should have attained the age of 50, at which time the trustees were to ‘transfer, assign and pay over the principal of said trust’ to her. If she were to die before she reached 50, the remainder was to go to her issue or, if none, to the donor's residuary estate or heirs.

The ninth article provided:

NINTH: The Donor hereby expressly reserves the privilege of depositing with or making payable to the Trustees under this agreement additional policies of insurance on Donor's life and of substituting other policies of equal value for those at any time on deposit with the Trustees hereunder, and such additional or substituted policies shall be subject in all respects to the terms of this agreement.

The Donor further expressly reserves the privileges of depositing with the Trustees under this agreement any additional securities or property and the right to substitute other securities or property for those at any time on deposit with the Trustees hereunder, provided that the securities or property so substituted shall be of equal value to the securities and/or property so replaced and such additional securities and/or property shall be subject in all respects to the terms of this agreement.

Other relevant articles provided as follows:

NINETEENTH: The trust hereby created shall be deemed to be a New York trust and shall in all respects be governed by the laws of the State of New York.

TWENTY-SECOND: The Donor hereby declares this trust to be irrevocable.

Pursuant to the agreement, decedent transferred to the trust securities which had an aggregate inventory value of $82,353.75 and four life insurance policies on decedent's life. The four policies consisted of the following:

Northwestern Mutual Life Insurance Company, Policy No. 2117951, for $50,000, issued on November 5, 1928, maturing at death, annual premium $2,420.50.

Northwestern Mutual Life Insurance Company, Policy No. 2117952, for $50,000, issued on November 5, 1928, maturing at death, annual premium $2,420.50.

Equitable Life Assurance Society of the United States, Policy No. 1596861, for $5,000, 20-year payment issued on May 10, 1909, fully paid up.

Northwestern Mutual Life Insurance Company, Policy No. 1394342, for $50000, 20-year endowment issued on February 4, 1920, maturing February 4, 1940, annual premium $266.45.

The terms of the policies held in trust on the date of decedent's death provided that the owner had the right to charge beneficiaries, to determine the application of dividends, to assign the policies, to borrow against them, to elect certain options on surrender or lapse, and to determine and change the manner in which proceeds were to be paid.

During decedent's lifetime no additional policies were deposited with the trustees nor were any substitutions of policies made. On February 28, 1940, the trustees surrendered the 20-year endowment policy, issued by Northwestern Mutual, which had matured on...