Cory v. Ward

• Decision Date: 23 May 1980
• Citation: 165 Cal.Rptr. 330,106 Cal.App.3d 631
• Court: California Court of Appeals Court of Appeals
• Parties: ESTATE of Thurlyne B. WAITE, Deceased. Nancy Waite WARD et al., Petitioners and Appellants, v. Kenneth CORY, as Controller etc., Respondent. Civ. 56271.

Page 330

165 Cal.Rptr. 330

106 Cal.App.3d 631

ESTATE of Thurlyne B. WAITE, Deceased.

Nancy Waite WARD et al., Petitioners and Appellants, v. Kenneth CORY, as Controller etc., Respondent.

Civ. 56271.

Court of Appeal, Second District, Division 1, California.

May 23, 1980.

Taubman, Simpson, Young & Eckert and William J. Sulentor, Long Beach, for petitioners and appellants

Myron Siedorf, Chief Inheritance Tax Atty., San Francisco, Margaret Groscup, Asst. Chief Inheritance Tax Atty., and James R. Birnberg, Asst. Inheritance Tax Atty., Los Angeles, for respondent.

HANSON, Associate Justice.

This is an appeal by the surviving daughter and the children of a predeceased daughter of Thurlyne Buffum Waite, deceased, from an order of the court fixing inheritance tax (Code Civ. Proc., § 904.1, subd, k).

FACTS

Thurlyne Buffum Waite was at the time of her death on September 2, 1975, the beneficiary under a testamentary trust created by her mother, Fern Smith Buffum. The several trusts created by Fern Smith Buffum were established by the decree of preliminary distribution in the probate of her estate which was entered May 8, 1958, by the Los Angeles superior court.

Pursuant to that decree three trusts were established: Trust # 1 for the benefit of the issue of the testatrix' son, Harry Austin Buffum; Trust # 2 for the benefit of her daughter Thurlyne Buffum Waite; and Trust # 3 for the benefit of another daughter Dorothy Buffum Chandler. The order herein appealed fixed the inheritance tax which the State of California seeks to impose on the balance of the principal remaining in Trust # 2 at the time of the death of the primary beneficiary, Thurlyne Buffum Waite.

Trust # 2 provided that the principal beneficiary, Thurlyne Buffum Waite, should be trustee of her own trust, while her sister Dorothy Buffum Chandler was appointed alternate and successor trustee. The Bank of America National Trust and Savings Association (hereinafter referred to as the Bank) was appointed a second alternate and successor trustee in the event both Thurlyne Buffum Waite and Dorothy Buffum Chandler should fail or cease to serve.

Pursuant to the terms of Trust # 2 the net income was to be distributed to the decedent's daughter, Thurlyne Buffum Waite, during her lifetime and at her death the income was made payable to Thurlyne's daughters, Dorothy Waite Still and Nancy Waite Ward, in amounts subject to the trustee's discretion and not necessarily equally. The stated purpose was to provide for the "support, maintenance, education and/or comfort of said grandchildren and their respective dependents; giving due consideration to their other income and resources . . ." ¹ It was provided further Article VI of the decree establishing the trusts authorized the trustee in its sole discretion to determine and make distributions from corpus to any beneficiary entitled to participate in trust income. The trustee was entitled to invade trust corpus "up to and including the whole thereof" to supply the needs of any beneficiary or his or her dependents for "support, maintenance, education and/or comfort." ² A spendthrift provision was included in article VII to protect the corpus from creditors of the beneficiaries. ³

that the trust should terminate at Thurlyne's death, if her younger daughter was then 35, and the entire remaining corpus should then be distributed in equal shares to her children or their descendents.

At the time of the death of the original trustor, Fern Smith Buffum, in 1958 an inheritance tax appraiser filed a report appraising the value of the interest in Trust # 2 passing to Thurlyne Buffum Waite as a life estate and the inheritance tax was computed on that basis. The interests in Trust # 2 which went equally to Nancy Waite Ward and Dorothy Waite Still, or their issue, were appraised and taxed as remainders. The court on February 25, 1958, made and entered its order fixing tax in accordance with the inheritance tax appraiser's report and that order became final without appeal.

Thurlyne Buffum Waite became trustee at the time Trust # 2 was established and continued to serve in that capacity even after she suffered a severe stroke in the spring of 1970. In February of 1974, the Buffums stock which constituted the principal asset of the trust having been sold, the trust corpus came to be represented by a United States treasury bill with a face value of $519,927.08. On May 24, 1975, the superior court accepted the resignation of Thurlyne Waite as trustee. Dorothy Buffum Chandler having declined to act as successor trustee, the Bank was qualified to assume that function and it continued to act in this capacity until the death of Thurlyne Waite.

The final condition for termination of Trust # 2 was activated by the death of Thurlyne Waite and pursuant to the terms of the trust instrument the corpus was distributed to her descendants. Because there was no probate estate, her surviving daughter, Nancy Waite Ward, instituted the present action against the Controller of the State of California to determine the inheritance tax consequences attendant upon the distribution of the corpus of Trust # 2. The inheritance tax referee filed a report imposing a tax of $67,960 based on the value of the entire corpus on the ground that the decedent had possessed a life estate coupled with a general power of appointment which rendered the transfer of the full amount taxable at her death. Nancy Waite Ward and the children of Dorothy Waite Still, predeceased daughter of the The trial court after hearing found that the decedent had continued to receive all of the net income from Trust # 2 until her death, but that no principal was received by her. The trial court concluded that under the testamentary trust Thurlyne Waite had a power to invade the principal of Trust # 2, up to and including the whole thereof, for her own benefit; that this power was not limited by an ascertainable standard relating to the health, education, support or maintenance of the decedent because it could be exercised by Thurlyne Waite for her own "comfort" in her own behalf; that this was true despite the fact that she possessed that power as a trustee; and that this conclusion was not affected by the fact that the decedent was required in invading corpus to give consideration to her other income and resources and to the relative needs of the other beneficiaries of the trust. The court held that this power constituted a general power of appointment and that when decedent resigned as trustee of Trust # 2 the release during her lifetime of that power was of such a nature that if it were a transfer of property owned by the decedent, such transfer would be subject to inheritance tax.

decedent, filed objections to that report on the basis that they held remainder interests upon which inheritance taxes were collected at the time of the probate of Fern Smith Buffum's estate.

The court further observed that if decedent had owned the principal of Trust # 2 and transferred it during her lifetime but continued to receive all income therefrom until her death, such a transfer would be subject to inheritance tax and, therefore, the resignation of Thurlyne Waite as trustee constituted a release of a general power of appointment which was a transfer subject to inheritance tax. Finally, the court determined that the taxation of the estate at the time of the death of Fern Smith Buffum did not constitute either res judicata or collateral estoppel to a different taxation of the release of the power created by the same trust in Thurlyne Buffum Waite and it overruled objections to the report of the inheritance tax referee. The court accordingly determined the respective tax liabilities of the surviving daughter and grandchildren of the decedent Thurlyne Waite pursuant to the report of the inheritance tax referee and the objectors, Nancy Waite Ward and the children of Dorothy Waite Still, have appealed that order.

ISSUES

Appellants contend (1) that the decedent Thurlyne Waite held a limited or special, rather than a general, power of appointment; (2) even if she held a general power of appointment her resignation due to ill health did not constitute a taxable release within the meaning of Revenue and Taxation Code section 13697 ⁴ or otherwise; and (3) that the determination at the time Trust # 2 was established by the 1958 decree that Thurlyne Waite had only a life estate therein while her daughters Dorothy Waite Still and Nancy Waite Ward or their issue received vested remainders was res judicata and any redefinition and taxation of those interests now would violate the due process clauses of the United States and California Constitutions.

DISCUSSION

I

A general power of appointment for inheritance tax purposes is defined in California as "a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate . . . ." (§ 13692.) A limited power of appointment is "a power which does not qualify . . . as a general power of appointment." (§ 13693.)

Powers of appointment have been taxed by various methods in California over the years. ⁵ From 1935 to the present under the Code a tax is imposed on the value of the property transferred by the donor to the donee of the power. (§ 13694.) With the exception of a pre-1935 power, the state may not tax again the donee's exercise of a limited power of appointment.

"However, the power given to the donee may be so broad that he is virtually the outright owner of the property. Where, for example, D wills property to T in trust to pay the income to L for life with power in L to appoint the property either during his lifetime or by his last will to any person in the world including himself, L has all the rights of a complete owner. He receives the income and can do what he wishes with the corpus, even to the extent of appointing it immediately to himself. In such a case, the Inheritance Tax Department taxes the...