Unkovich v. Comm'r of Internal Revenue (In re Estate of Sulovich)

• Decision Date: 17 May 1976
• Docket Number: Docket No. 8153-73.
• Parties: ESTATE OF SEMO A. SULOVICH, DECEASED, HELEN UNKOVICH, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

66 T.C. 250

ESTATE OF SEMO A. SULOVICH, DECEASED, HELEN UNKOVICH, EXECUTRIX, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 8153-73.

United States Tax Court

Filed May 17, 1976.

In 1959 decedent created five separate savings accounts in his name as trustee for his niece and each of her four children. Decedent never withdrew any money from the accounts and in 1965 he transferred the passbooks representing the trust accounts to his niece. Held, decedent intended to and did make valid inter vivos gifts of the trust accounts at the time he delivered the passbooks and they are, therefore, not includable in decedent's gross estate under either sec. 2038 or sec. 2036. Estate of Michael A. Doyle, 32 T.C. 1209 (1959), distinguished. D. Alden Newland and Joseph H. Clancy, for the petitioner.

James C. Lynch, for the respondent.

WILBUR, Judge:

Respondent determined a deficiency in Federal estate tax due from the Estate of Semo A. Sulovich in the amount of $27,145.16. The sole issue for decision is whether the value of five separate savings accounts established by the decedent in his name as trustee for others is includable in his estate under either section 2038 or 2036.¹

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

The petitioner is the Estate of Semo A. Sulovich, deceased, Helen Unkovich, executrix. The residence of the executrix at the time the petition was filed was Glennie, Mich. Semo A. Sulovich (decedent) resided in Dallas, Tex., at the time of his death on June 8, 1969.

On March 2, 1959, the decedent, an immigrant with a limited knowledge of English, established five separate savings accounts with the Dallas Federal Savings & Loan Association (Dallas Federal) in Dallas, Tex. The accounts were opened in decedent's name as trustee for his niece, Helen Unkovich, and each of her four children.

In connection with each of the savings accounts the decedent executed signature cards which contained on the reverse thereof the following language:

It is expressly understood that Semo Sulovich shall have the exclusive right during his lifetime, to assign, transfer, and sell the Share Account to be issued under the application on the reverse side hereof, and to withdraw the repurchase value of the said share account. In the event of death or incapacity to act of Semo Sulovich then and in that event the beneficiary, whether a minor or an adult, shall have the right to withdraw the repurchase value of said account to be so issued.

This reservation of rights was signed by decedent and accepted by Dallas Federal through its representative, Mr. William C. H. Jackson. The account cards also authorized the bank to act without further inquiry in accordance with writings bearing decedent's signature. It was, however, the general practice of Dallas Federal not to permit withdrawals without a passbook but some exceptions were permitted.

Decedent intended the funds exclusively for his niece and her children. He never intended to withdraw any money from the accounts, did not at any time need the money, and in fact no money was ever withdrawn prior to his death. At the end of 1965, decedent wrote the following letter indicating he intended to transfer the trust account passbooks:

DEAR HELEN & SARA:

Today I received your card and letter in it. What in the H- you going to borrow money when you got in Bank & Savings & Loan, what's wrong with you and Mike? I give you that money for that purpose and here you borrow money and pay interest, what kind of monkey business is that? I am going to send you after New Year's all the books of the Trust fund for the children. You mentioned to send me some kind of book. What the H- I want with them here. I have another account in one of the banks here, is nearly $11,000.00 thousand dollars, that I'm going to withdraw after January 1st, because I don't get any business from them, they moved 3 blocks further. Keep you book and write checks when you need it, for Ann and rest of the family. I am going to sleep little.

Your Uncle, SEMO

The following month, in accordance with decedent's letter, the passbooks were delivered to his niece.

In 1967 a robbery occurred at the restaurant which decedent owned. Since decedent mistakenly assumed the original trust account passbooks were still in his safe, he obtained duplicate passbooks and forwarded them to his niece. ²

Decedent never asked that any of the passbooks be returned to him for any reason. Neither the original nor the duplicate passbooks were returned to decedent at any time and were still in his niece's possession at the date of his death.

The bank, through Mr. Jackson, asked for and received the social security numbers of decedent's niece and her four children for the trust accounts. Decedent's niece received annual statements from the bank indicating the interest attributable to each trust account. She reported the interest attributable to the account held as trustee for her on her Federal income tax return. The interest attributable to the other trust accounts was not reported by the children because they had insufficient income and did not file income tax returns.

In addition to the trust accounts, decedent also established several joint accounts with his niece at Dallas Federal. He periodically withdrew various amounts from these accounts, and in some cases interest was automatically sent to him. He often forwarded the interest to his niece. However, he never attempted to make a withdrawal without a passbook. At the time of his death, the total balance of joint accounts at all savings institutions was $191,145.70.

OPINION

Respondent contends that the savings accounts here in issue were, at most, revocable trusts and must, therefore, be included in decedent's gross estate under section 2038. Section 2038(a)(1)³ requires that the value of all property transferred during the decedent's life and subject at the date of death to a power by decedent to revoke the transfer be included in the gross estate. Thus, we must determine whether, at the time of his death, decedent possessed the power to revoke the transfer.

When one person deposits money in his own name as trustee for another the legal implications of that transaction are determined by both the depositor's intent and the effect of that intent under the law of the relevant jurisdiction. Generally, the savings account trust has been recognized as an effective means of transferring to the beneficiary the balance of the account at the depositor's death.

In order to avoid collision with the Statute of Wills the courts have characterized the savings account trust as either a revocable trust in which the beneficiary has a present but defeasible interest or a tentative trust in which the beneficiary's interest in the account is tentative until the depositor's death. Thus, although the depositor retains the unrestricted right to the account and the beneficiary has an interest only in the balance remaining at the depositor's death, failure to comply with the Statute of Wills has only infrequently resulted in an invalid testamentary transfer. Bogert, Trusts & Trustees, sec. 47 (2d ed. 1965); 1 Scott, Trusts, sec. 58 (3d ed. 1967). See ‘Savings Account Trusts: A Critical Examination,‘ 49 Notre Dame Law. 686 (1974); ‘Bank Account Trusts,‘ 49 Va.L.Rev. 1189 (1963); 1 Restatement, Trusts, sec. 58 (2d ed. 1959).

In Texas,⁴ however, the savings account trust was declared invalid as a testamentary transfer not executed in compliance with the Statute of Wills. Fleck v. Baldwin, 141 Tex. 340, 172 S.W.2d 975 (1943). In order to establish a valid inter vivos trust, Fleck required compliance with the common law essentials for making a completed inter vivos gift. Thus, Fleck foreclosed the possibility of a valid trust in which the settlor retained either a power of revocation or a lifetime beneficial interest.

Recent Texas decisions as well as the enactment of the Texas Trust Act have circumscribed the holding in Fleck. In Land v. Marshall, 426 S.W.2d 841 (Tex. 1968), the settlor reserved plenary powers, including ‘the power to require the trustee to sell, dispose of, or encumber the stock and to pay to him the proceeds even though it would extinguish the trust.’ Nevertheless, the Supreme Court of Texas indicated that the Texas Trust Act specifically sanctions that which Fleck prohibited, i.e., an inter vivos trust with retained powers of control.⁵ Furthermore, the court held that a valid inter vivos trust need not meet all the requirements of an inter vivos gift. Rather, if the existence of the trust is not contingent on the death of the creator, a valid inter vivos trust has been created and a power of revocation will not delay or invalidate its existence.

Relying on Land v. Marshall, supra, a Texas appellate court has held that a trust over which the settlor-trustee retained the power of revocation, the power to modify, and a lifetime beneficial interest, was a valid trust at its inception and not an invalid testamentary transfer. Westerfield v. Huckaby, 462 S.W.2d 324 (Tex. Civ. App. 1970), affd. 474 S.W.2d 189 (Tex. 1971). There, the settlor-trustee retained a power of revocation as well as the right to deal with the trust property for her own benefit during her lifetime. The interest retained by the settlor-trustee in Westerfield was quite similar to that retained by the depositor in a savings account trust, and the language of Supreme Court of Texas in validating these trusts was very broad. Thus, while Texas law is not clear on this issue, we must conclude that the savings account trusts in the case at bar were valid revocable trusts at their inception.

Differing appellations and theoretical underpinnings are ascribed to savings account trusts, sometimes producing varying legal results. But whether they are called tentative trusts or revocable trusts, the depositor can deal with a savings account trust in essentially the same manner as a...