Vai's Estate, In re

• Decision Date: 25 August 1966
• Court: California Supreme Court
• Parties: , 417 P.2d 161 In re ESTATE of Giovanni VAI, Deceased. Alan CRANSTON, as State Controller, etc., Petitioner and Respondent, v. Henry G. BODKIN, as Executor, etc., et al., Objectors and Appellants. L.A. 28168. In Bank

Page 705

52 Cal.Rptr. 705

65 Cal.2d 144, 417 P.2d 161

In re ESTATE of Giovanni VAI, Deceased.

Alan CRANSTON, as State Controller, etc., Petitioner and Respondent, v. Henry G. BODKIN, as Executor, etc., et al., Objectors and Appellants.

L.A. 28168.

Supreme Court of California,

In Bank.

Aug. 25, 1966.

Rehearing Denied Sept. 28, 1966.

Charles J. Barry, San Francisco, Walter H. Miller and James F. Rogers, Los Angeles, for petitioner and respondent.

Michael G. Luddy, Harry A. Olivar, George R. Phillips and Henry G. Bodkin Jr., Los Angeles, for objectors and appellants.

MOSK, Justice.

This is an appeal by the executors of the will of Giovanni [John] Vai from an order fixing an inheritance tax and overruling objections to a report of the inheritance tax appraiser imposing a tax on property placed in trust for John's daughter under the terms of his will. The question for determination is whether an inheritance tax may be levied on property which a testator leaves to a daughter by will pursuant to a valid contract entered into during his lifetime. We hold, for reasons which shall hereinafter appear, that such a bequest is not subject to an inheritance tax if the testator has received full consideration in money or money's worth, within the meaning of the inheritance tax law, for the promised bequest.

John and Tranquilla Vai were married in 1907. They had one daughter, Madeline (now 40 years old) who is mentally arrested and requires constant care and attention. After a period of marital discord, Tranquilla filed an action for separate maintenance against John. In March 1953 they entered into a property settlement agreement through which Tranquilla was to receive less than half the community property but John undertook to support Madeline during his lifetime, to hold his wife harmless for Madeline's support, and to provide in his will that a sufficient amount of property be left in trust for Madeline to support her as long as she lived. ¹ Subsequently, Tranquilla's action for separate maintenance was abandoned, but she left the family home and moved to another residence.

In April 1953 John executed a will in which he carried out the obligations imposed upon him by the agreement and left the residue of his estate in a trust under the terms of which the income would be paid to Madeline's guardian for her support and maintenance. He died on February 14, 1957.

It is estimated that the cost of supporting Madeline is $2,500 a month and, when this amount is capitalized, it represents a liability of $515,341.56 as of the date of John's death. The value of the residue considerably exceeded the amount necessary for Madeline's support, but the issue in controversy here is confined to the taxability of the $515,341.56. The inheritance tax appraiser representing the Controller, petitioner in this proceeding, imposed a tax on the entire residue, and the executors objected to his report, claiming that $515,341.56 should be allowed as a deduction for the purpose of calculating the inheritance tax due because assertedly this sum was left by John in satisfaction of a valid obligation, supported by adequate consideration. The probate court overruled the objections, and the executors appeal from the court's order.

Shortly after John's death, Tranquilla brought an action to rescind the property settlement agreement on the ground that John had fraudulently concealed community assets from her. We held, in Vai v. Bank of America Nat. Trust & Savings Ass'n (1961) 56 Cal.2d 329, 15 Cal.Rptr. 71, 364 P.2d 247, that John had committed constructive fraud as a matter of law and that Tranquilla was entitled to rescind the agreement. ² This decision and its consequences will be discussed in the portion of this opinion concerned with the question of consideration.

Section 13601 of the Revenue and Taxation Code provides, 'A transfer by will or the laws of succession of this State from a person who dies seized or possessed of the property transferred while a resident of this State is a transfer subject to this part.' (Italics added.) The executors, in contending that the money left for Madeline's support is not taxable, assert that it was transferred to her pursuant to the property settlement agreement between John and Tranquilla rather than 'by will,' that as soon as the agreement was signed Madeline had a vested right to support from her father which she could have enforced as a third party beneficiary in an action for damages or quasi specific performance without regard to the will, and that the will was merely the instrument by which John's obligation under the agreement was performed. They place reliance primarily upon Estate of Belknap (1944), 66 Cal.App.2d 644, 152 P.2d 657. In discussing this contention, we shall first assume arguendo that John received adequate consideration within the meaning of the inheritance tax law for his bequest to Madeline and that the property settlement agreement is valid and sufficiently certain in all respects.

In Estate of Belknap (1944) supra, 66 Cal.App.2d 644, 152 P.2d 657, a husband and wife entered into a property settlement agreement which provided that the wife was to receive a stipulated monthly sum during the husband's lifetime and that he would authorize his executor by the terms of his will to purchase a $20,000 annuity for her, from which she would receive the income. It was held that the value of the annuity bonds was not subject to inheritance tax because the transfer was effected by virtue of the property settlement agreement rather than by means of the will. The court found that the will was merely the conduit through which the husband's obligations under the agreement were fulfilled, that the amount of the wife's interest in the husband's property was fixed by the agreement and was not changed by the will, that the provision in the will for the purchase of the bonds merely secured the vested interests transferred by the agreement, and that the agreement was enforceable by the wife without regard to the will.

The rationale of Belknap is apposite here. If John had failed to carry out his obligations under the property settlement Madeline could have enforced her rights as a third party beneficiary by an action at law for damages or by an equitable action for quasi specific performance. (Brown v. Superior Court (1949), 34 Cal.2d 559, 563--564, 212 P.2d 878.) The will could neither add to nor subtract from the benefits to which she was entitled by the agreement and, as in Belknap, the will was merely the conduit through which John's obligations under the agreement were performed. While the enjoyment of the benefits Madeline was to receive under the will and the actual transfer of the property to her were postponed until John's death, her right to receive such benefits upon his death arose immediately upon the signing of the agreement, and the will was merely the instrumentality through which he fulfilled his obligations. Madeline's interest cannot be rendered taxable by the mere fact that John performed, by a provision in his will, an obligation for which his estate would have been liable in any event.

The Controller argues that Belknap is distinguishable because there the amounts the husband agreed to pay were specified in the agreement, whereas in the present case the sums which John was to provide for Madeline's support during her lifetime and at his death were not specified and could vary, depending upon the size of John's estate and Madeline's needs. ³ This argument goes to the question whether the property settlement agreement in the present case is enforceable and sufficiently certain, but does not relate to whether, assuming the enforceability of the agreement, the life estate must nevertheless be deemed taxable as a transfer by will. ⁴ Moreover, the amount which Madeline needed for her support readily could have been made certain by being reduced to a monetary sum, as was done in the present proceeding, and John's promise in the agreement to leave her an amount of money in his will which would be necessary for her support was not made contingent upon the size of his estate.

In re Howell's Estate (1931) 255 N.Y. 211, 174 N.E. 457, cited by the Controller, is distinguishable. There, the separation agreement provided that the wife would receive under her husband's will one-third of the net income from his estate. The court held that the agreement did not recognize the existence of a specific debt and that the husband agreed only to devise a portion of his estate if he had one. In the present case, John agreed to provide sufficient funds in his will for Madeline's support, regardless of the size or character of his estate.

The Controller relies principally on the case of Estate of Grogan (1923), 63 Cal.App. 536, 219 P. 87, in support of his claim that Madeline's interest is subject to a tax. In Grogan a husband and wife entered into a property settlement agreement which provided that the husband would pay his wife $3,000 a year during his lifetime and that, after his death, she would receive the income from a trust fund created by his will, which would consist of one-half of his estate, but not exceeding $50,000. The parties were subsequently divorced, and the husband made a will in conformity with the agreement. A tax was imposed on the value of the life estate created in the will and the wife claimed as do the executors in the present case, that the will merely operated as the fulfillment of the obligation of the husband under the agreement and did not constitute a bequest or transfer within the meaning of the statutes governing inheritance taxes. Section 2 of the inheritance tax act provided at the time, 'A tax shall be and is hereby imposed upon the transfer of any property * * * (1) When the transfer is by will.' The court after reviewing authorities from a number of jurisdictions, held that every transfer in the nature of a change of ownership effected...