Heffernan v. Freedman

• Decision Date: 08 May 1979
• Citation: 418 A.2d 895,177 Conn. 476
• Court: Connecticut Supreme Court
• Parties: Gerald J. HEFFERNAN, Tax Commissioner v. Frederick A. FREEDMAN, Executor (ESTATE of Harry C. FREEDMAN).

Page 895

418 A.2d 895

177 Conn. 476

Gerald J. HEFFERNAN, Tax Commissioner v. Frederick A. FREEDMAN, Executor (ESTATE of Harry C. FREEDMAN).

Supreme Court of Connecticut.

Argued March 16, 1979.

Decided May 8, 1979.

James F. Dawson, Inheritance Tax Atty., Hartford, with whom, on the brief, were Carl R. Ajello, Atty. Gen., and Seymour M. Alpert, First Asst. Tax Com'r, Hartford, for plaintiff.

Susan M. Alexander, Bridgeport, for defendant.

Before COTTER, C. J., and LOISELLE, BOGDANSKI, LONGO and PETERS, JJ.

PETERS, Associate Justice.

This case is a reservation from the Superior Court on stipulated facts. We are asked to determine whether a certain irrevocable inter vivos trust is taxable as a transfer intended to take effect in possession or enjoyment at or after the death of the transferor under § 12-341b(d) of the General Statutes.

The stipulation for reservation contains the following facts: Harry C. Freedman, the decedent, died testate on October 16, 1975, domiciled in Monroe, Connecticut. The decedent's son, Frederick A. Freedman, qualified as executor of the decedent's estate under the decedent's will, which was, on October 31, 1975, admitted to probate by the Probate Court for the district of Trumbull. The decedent had created the irrevocable inter vivos trust that is the subject of this litigation on January 2, 1965. The trust agreement designated the settlor's wife Doris and son Frederick as trustees, and the son as primary beneficiary. The trust assets consisted primarily of real estate. The trustees were given sole and uncontrolled discretion to invade the principal of the trust fund for the benefit of the income beneficiary, the settlor's son. The trust agreement provided that the trust would in any case terminate upon the death of the survivor of the settlor and his wife; upon termination, the principal of the trust was to be distributed to the son or his surviving children. When the decedent died, he was survived by his wife, his son, and his son's three daughters. During the settlor's lifetime, the trustees had not exercised their discretion to invade the principal of the trust fund. Thus at the time of the decedent's death, the trust corpus was still intact and the trust had not yet terminated.

The defendant as executor of the decedent's estate reported the transfer in trust made pursuant to the trust agreement of January 2, 1965. His claim that this transfer was not taxable under the Connecticut succession tax was contested by the plaintiff tax commissioner but sustained by the Probate Court. The plaintiff appealed from the probate decree to the Superior Court, and from that appeal the present reservation arises. The question that has been reserved to us concerns the taxability at the date of the settlor's death of the 1965 trust under General Statutes § 12-341b(d). ¹

Section 12-340 of the General Statutes imposes a tax on transfers, in trust or otherwise, from a resident of this state, of real property situated in the state, tangible personal property not having an actual situs outside the state, and all intangible personal property. Section 12-341b provides that "(t)he transfers enumerated in section 12-340 shall be taxable if made: . . . (d) by gift or grant intended to take effect in possession or enjoyment at or after the death of the transferor." The language of subsection (d) has been an integral part of the Connecticut succession tax law since 1915. Pape v. Sullivan, 151 Conn. 39, 42-43, 193 A.2d 480 (1963); Miller v. Connelly, 142 Conn. 144, 147, 112 A.2d 202 (1955). This language has regularly been construed to encompass taxation of the privilege of succeeding to the possession and enjoyment of property regardless of whether a right to the property has earlier vested. Pape v. Sullivan, supra, 151 Conn. 43, 193 A.2d 480. The underlying principle was first stated in Blodgett v. Guaranty Trust Co., 114 Conn. 207, 219, 158 A. 245, 249 (1932), aff'd, 287 U.S. 509, 53 S.Ct. 244, 77 L.Ed. 463 (1933). Blodgett held: " 'Apparently the Legislature intended to reach for the purpose of taxation the shifting of the enjoyment of property-the "economic benefits" thereof or "economic interest" therein (citations omitted)-from a former owner at his death, even though such shifting of enjoyment followed necessarily from a prior transfer of title inter vivos.' " Blodgett has become the foundation stone of the subsequent cases interpreting and applying the succession tax. See Heffernan v. New Britain Bank & Trust Co., 175 Conn. 8, 11, 392 A.2d 481 (1978); Pape v. Sullivan, 151 Conn. 39, 193 A.2d 480 (1963); Miller v. Connelly, 142 Conn. 144, 148, 112 A.2d 202 (1955); Borchard v. Connelly, 140 Conn. 491, 494, 101 A.2d 497 (1953); Cochran v. McLaughlin, 129 Conn. 176, 179, 27 A.2d 120 (1942); Hackett v. Bankers Trust Co., 122 Conn. 107, 122, 187 A. 653 (1936). See generally Selvin, "The Possession or Enjoyment Clause of the Connecticut Succession Tax," 23 Conn.B.J. 11 (1949).

It is clear from these cases, as the Probate Court recognized, that a transfer is not shielded from the succession tax merely because the settlor retained no rights or control whatsoever over the trust. Bryant v. Hackett, 118 Conn. 233, 244, 171 A. 664 (1934). Nor is it material that none of the net income generated by the trust was distributable to the settlor. Hackett v. Bankers Trust Co., supra, 122 Conn. 116, 187 A. 653. The test that determines whether a transfer was intended to take effect in possession or enjoyment at or after the death of the transferor is whether his or her death becomes "a factor in the devolution of the use or enjoyment of the property." Pape v. Sullivan, supra, 151 Conn. 44, 193 A.2d 482; Hackett v. Bankers Trust Co., supra, 122 Conn. 117, 187 A. 653.

The Probate Court concluded that the Freedman trust was not taxable because the death of the settlor neither caused a shift in the enjoyment of the property nor determined the rights of any beneficiaries to come into immediate possession or enjoyment of the property. Since the settlor was survived by his wife, the trust is not yet terminated. Until the death of the settlor's wife, the trust can still be invaded for the benefit of the son. In the opinion of the Probate Court, only the subsequent death of Doris Freedman will finally shift economic benefits and determine those entitled to beneficial interests in the trust property. The plaintiff tax commissioner appealed, claiming the trust to be taxable because it will not terminate until the death of the survivor of the settlor and his wife. In the Superior Court the parties then united in the request for reservation upon stipulation, which brings this case here.

On this appeal, the parties have argued two issues: (1) Did the settlor intend to delay possession or enjoyment of the trust until at or after his death? and (2) Was the settlor's death a factor in the devolution of the possession or enjoyment of the trust estate?

Although the issue of intent per se was not directly discussed by the Probate Court, under § 12-341b(d), "(t)he transferor must intend for his or her death to be 'the necessary factor to effectuate the transfer' of possession and enjoyment." Heffernan v. New Britain Bank & Trust Co., 175 Conn. 8, 12, 392 A.2d 481, 483 (1978). See Pape v. Sullivan, 151 Conn. 39, 44, 193 A.2d 480 (1963); Fabian v. Walsh, 134 Conn. 456, 459, 58 A.2d 384 (1948). The issue of intent as it relates to the interpretation of a trust instrument, however, is to be determined by examination of the language of the trust instrument itself and not by extrinsic evidence of actual intent. Fabian v. Walsh, supra, 461, 58 A.2d 384. The Freedman trust is consistent with an intent to delay possession and enjoyment under the rule of Blodgett v. Guaranty Trust Co., supra, despite the settlor's complete divestiture of interest in and power over the trust corpus and its income. Such an intent is not negated by the trustees' power...