IN RE: ESTATE of Lottie G. COHEN, Deceased. Houston I. FLOURNOY, Controller of the State of California, Petitioner and Appellant, v. Philip COHEN and Union Bank, Respondents.
In 1944 Philip Cohen and Lottie Cohen, husband and wife, made two declarations of trust (referred to as trusts P–9020 and P–9021), and they transferred community property to the Union Bank, as trustee. (For convenience, the trustors will be referred to by their first names.) Lottie died in 1967 and the herein estate proceedings were instituted. An inheritance tax appraiser filed his report asserting that the transfers in trust were made without consideration and were subject to inheritance tax under ‘Sections 13641–13648’ of the Revenue and Taxation Code. Philip and the bank filed objections to the report. The court found that upon the death of Lottie the assets of trust P–9021 vested in Philip free of any limitation and were exempt from taxation; and that the assets of trust P–9020 were subject to taxation in the manner and amounts set forth in the report. The State Controller appeals from the judgment.
Appellant contends that upon Lottie's death Philip received the sole power to revoke, alter or amend said trust, and that such power was a power of appointment which was subject to inheritance tax.1 Appellant also contends that there was no consideration for the transfers in trust, and that the court erred in receiving extrinsic evidence relating to the intention of the trustors in creation the trusts.
Philip and Lottie were married in Illinois in 1904. They came to California in 1917 and Philip practiced law here until 1940, when he (at the age of 65 years) retired as an active member of the bar. (He was 94 years of age at the time of the hearing in the superior court.) There were no children, and all of the assets which they had, in trust or otherwise, at the time of Lottie's death derived from Philip's earnings (and the profits from such earnings).
In April 1944, when he was 69 years of age and she was 64 years of age, they had a conversation2 wherein Philip said that he had considered establishing a living trust with the Union Bank so that he might eliminate all the work of keeping their stocks and keeping books. He explained to Lottie that the bank would take care of their property, collect the revenues, and distribute income to them at fixed intervals. He also said that it would be beneficial to establish a collateral trust with community property so that she might ‘do with it as she saw fit during her lifetime.’ and that if she preceded him in death, then anything that was left in that trust would ‘go over to the combined trust.’ He asked for her opinion of those suggestions, and she said: ‘I approve it in every respect.’ Philip testified that neither he nor Lottie intended to create a life estate in any respect for her or for himself.
On May 4, 1964, they signed two declarations of trust (No. P–9020 and No. P–9021),3 and they transferred substantially all of their community property to the trustee (Union Bank).
The declaration of trust with reference to trust P–9020 has not been included in the record on appeal. Apparently Lottie was trustor of that trust, and it was in effect for her benefit during her lifetime, and upon her death the assets thereof were to vest in several persons, including Philip. As previously stated, the court found that the assets of said trust P–9020 were subject to taxation in the amounts and manner set forth in the inheritance tax appraiser's report. Neither party herein contests that finding.
The declaration of trust with reference to trust P–9021 provides in part that the trustee shall distribute the net income of the trust to Philip and Sottie ‘during their joint lifetimes, and to the survivor thereafter’; in the event Philip predeceases Lottie, the trustee shall make distribution of a portion of the principal to certain persons (designated in declaration); in the event Lottie predeceases Philip, ‘no distribution of the corpus shall be made’; and in the event of the death of Philip after the death of Lottie, distribution shall be made to various persons in variors amounts. The declaration further provides as follows:
‘The Trustors, or the survivors [sic]4 of them, by written instrument filed with the Trustee, may revoke this trust, in whole or in part * * *.
‘The Trustors, or the survivors [sic]4 of them, by writtem instrument filed with the Trustee may alter or divest the interest of, or change beneficiaries and with the Trustee's written consent, amend this trust without limitation in any other respect. Amendments may be cancelled or amended in like manner.’
From 1944 to 1963, the declaration of trust was amended in several respects. There was evidence to the effect that for several years preceding her death (in 1967) Lottie was incompetent.
Some of the findings were in substance as follows: At all times from the creation of trust P –9021, and at the time to Lottie's death, the assets of that trust were the community property of Philip and Lottie; neither Philip nor Lottie intended to or did create either a life estate or power of appointment in the survivor of them as to any part of the trust assets; they both intended that upon the death of one, the survivor would own, absolutely, all assets of said trust, free of any limitation whatsoever; by reason of the provisions of said declaration of trust, all of the assets of said trust belong to and are owned, absolutely, by Philip free of any limitation whatsoever; upon the death of Lottie, the ownership of all of the assets of said trust vested in Philip free of any limitation whatsoever and are exempt from any inheritance tax; and other than the agreements of Philip and Lottie contained in said declaration of trust, there was no consideration passing from Philip to Lottie or from Lottie to Philip.
Appellant contends, as above stated, that the assets of trust P–9021 did not vest in Philip (upon Lottie's death) free of any limitation because Philip received the sole power, as surviving trustor, to revoke, alter or amend the trust, and such power was a power of appointment subject to inheritance tax. Appellant argues that upon Lottie's death Philip in effect received a life estate, and that even if he did not receive a life estate, he received the sole right to the income and the sole power to revoke the trust; and that a life estate was ‘not necessary for the existence of a power of appointment.’ (It is to be noted that the inheritance tax appraiser's report sought to impose tax under ‘Sections 13641–13648’ of the Revenue and Taxation Code. Those sections relate to bad faith transfers for inadequate consideration and to transfers made in contemplation of death. The principal contention of the controller on appeal is that tax should be imposed under sections 13554 and 13694 of said code on the alleged power of appointment received by Philip.)
Respondent asserts that the facts in the present case are similar to the facts in Estate of Gould, 199 Cal.App.2d 372, 18 Cal.Rptr. 607. In that case Mr. and Mrs. Gould made a joint and mutual will wherein they gave their community property to the survivor of them during his or her life, and upon the survivor's death to eight other persons. Mrs. Gould died, and the inheritance tax appraiser made a report that Mr. Gould received a life estate, that the life estate was exempt from taxation, and that each of the remainder interests was subject to taxation. Mr. Gould objected to the report. The court found, among other things, that when the will was executed Mr. and Mrs. Gould entered into an oral agreement in which they provided that either of them had the absolute power and right to revoke the will after the death of the other, that neither of them intended to create a life estate or trust in any of their property, and that upon the failure of the survivor to revoke or modify the will, then any property which remained ‘in the hands' of the survivor upon his or her death would go to the persons named in the will. The controller argued therein that under the will the right of Mr. Gould as to the property was limited to a life estate, and that the remainder (for inheritance tax purposes) vested immediately upon the death of Mrs. Gould in the eight other persons named in the will, and that the interests of the remaindermen were then taxable. The trial court's order that no inheritance tax was payable was affirmed.
In the present case, there was evidence to the effect that all of the property in trust P–9021 was community property; the intention of Philip and Lottie in creating that trust (and trust P–9020 created for Lottie's benefit) was to relieve Philip of the burden of managing the property; Philip was 69 years of age when the trusts were created, and the property which was placed in the trusts consisted of shares of stock in many corporations (at Lottie's death, the property in trust P–9021 for their joint benefit included shares of stock in 63 corporations, valued at $1,270,680.76, and the property in trust P–9020 for Lottie's benefit included shares of stock in 34 corporations, valued at $171,346.33); and upon creation of trust P–9021 Philip and Lottie did not intend to create a life estate ‘in any respect’ for Lottie or for Philip. With reference to trust P–9021, the court found that Philip and Lottie did not intend to create a life estate or a porwr of appointment in the survivor of them.
It is to be noted that both trusts were created with community property. In the trust (P–9020) for Lottie's benefit, Philip in effect gave his half of that community property to Lottie; and the trial court held that the assets thereof were subject to tax. As to the trust (P–9021) for their joint benefit, there was no gift by Philip o by Lottie of their community property—the court found that the property in that trust remained community property after the trust was created. (See Katz v. United States, 9 Cir., 382 F.2d 723 729, citing California cases wherein it was held that the trust property was community property.)
It may be stated, as a general principle, that none of the community property transferred to a spouse is subject to inheritance tax, whether the transfer is by will (Rev. & Tax. Code § 13551), or other than by will (Rev. & Tax. Code § 13554), except where a spouse is given a power of appointment over the donor's interest in the community property (Rev. & Tax. Code § 13694). The inheritance tax on transfers of community property is to be compared with federal estate tax which is imposed on one-half of the community property upon the death of a spouse (with allowable marital deduction).
With reference to inter vivos transfers of community property to a spouse, section 13554 of the Revenue and Taxation Code provided, prior to amendment of said code section in 1965, that such transfers were not subject to tax, provided however that if the wife was given a life estate in the community property transferred to her, or was given a power of appointment in conjunction with such transfer, a portion of the property was subject to tax. (Said section did not provide for inheritance tax where the husband was given a life estate or power of appointment.)
Section 13554, as amended in 1965, provides as follows: ‘Where community property is transferred * * * other than by will or the laws of succession from one spouse to the other, the property transferred is not subject to this part except as provided in Section 13694.’ (Thus, section 13554 now applies to transfers by either spouse.)
Section 13694 provides that a gift of a general or limited power of appointment made in conjunction with a disposition of property otherwise subject to this part is a transfer subject to this part from the donor to the donee at the date of the donor's death, except that if a power of appointment over any portion or all of the donor's half interest in community property is given to the donor's spouse, the value of any interest, other than the power itself, given the donee in such property subject to such power, up to but not exceeding the value of a life estate therein of the donee, is not subject to this part. (In comments on the 1965 amendments of those sections it was said, in ‘Review of Selected 1965 Code Legislation’ [Con. Ed. of Bar, pp. 241–242]; ‘Before passage of AB2450 most community property passing to a surviving spouse was eccluded from inheritance tax. However, when the decedent husband gave his wife a power of appointment or a life interest in his half of the community property, this half was subject to inheritance tax. §§ 13551–13552, 13554. The same transfer, if made from the wife to the husband, was not taxed * * *. The 1965 legislation increases the portion of community property excluded from inheritance tax by also excepting a life estate given the wife in the decedent's half of the community property. Under new § 13694 only the value of any community property over which the surviving spouser is given a power of appointment is subject to inheritance tax unless the wife [surviving spouse] is given an interest in the property in addition to the power of appointment.’)
Appellant argues that since Philip received the sole power, upon Lottie's death, to revoke, alter or amend the trust, such power was a power of appointment subject to tax.
As previously indicated, the intention of the parties in creating the trust was to relieve Philip of the burden of managing the community property, which was very substantial in amount—and to transfer the property to the bank, so that the bank might manage the property and pay income to Philip and Lottie at regular intervals during their lifetimes; their intention was not to create a life estate in the survivor of them; and Philip and Lottie retained the power (to be exercised jointly only) to revoke, alter or amend the trust. It thus appears that in effect the property in trust retained its character as community property—the only change being that Philip, as manager of the community property, transferred management thereof to the bank. (The court found that the property remained community property after the trust was created.) If the trust had not been created, the transfer to Philip of Lottie's share of the community property upon Lottie's death would not have been subject to inheritance tax (Rev. & Tax. Code §§ 13551, 13554). In summary, the trust provided that Philip and Lottie, or the survivor of them, retained the power to revoke the trust in whole or in part and the power to alter of divest the interest of the beneficiaries; and that upon the death of Lottie, no distribution of the corpus would be made. As previously stated, the property in trust remained community property of Philip and Lottie. It thus appears that the incidents of ownership of the property held by Philip and Lottie jointly during their lifetimes (and by Philip after Lottie's death) were, in practical effect, equivalent to ownership of the property in fee. The succession by Philip to such incidents of ownership held by them jointly prior to Lottie's death was not a transfer to Philip of a power of appointment subject to inheritance tax.5
Appellant further argues to the effect that upon Lottie's death Philip did not receive absolute ownership of the trust property free of any limitation—that Philip had to revoke the trust before he obtained absolute ownership of the property; and that, since the inheritance tax was assessed as of the date of Lottie's death, Philip, as of that date, in effect had a life estate with the power to consume the principal thereof, that such interest of Philip was still a life estate and was not a fee, and that the contingent remaindermen or beneficiaries had, as of the date of Lottie's death, a vested interest in the property subject to divestment if Philip revoked the trust.6 As previously stated, the trial court herein found that the trust was created with community property, that Philip and Lottie did not intend to create a life estate or power of appointment in the survivor of them, and they intended that upon the death of one of them the survivor would own the assets of the trust ‘absolutely’ and ‘free of any limitation.’ As above shown, the trustors' intention in creating the trust was to relieve Philip of the burden of managing their extensive community property. Their intention (as the court found) was not to create a life estate, a power of appointment, or any limitation on the survivor; their interest in the trust assets remained community property until Lottie's death; and upon Lottie's death there was to be no distribution of the corpus. Under the circumstances, it was not inconsistent to include in the declaration of trust the designation of contingent beneficiaries in the event that the trust was not revoked by Philip and Lottie (or by the survivor of them).
Appellant argues further that the transfer in trust (P–9021) was not a bona fide transfer for consideration in money or money's worth, and that the value of Lottie's share of the property transferred in trust was therefore subject to tax under section 13641 of the Revenue and Taxation Code.7 (As previously stated, the report of the inheritance tax appraiser sought to impose tax on that basis.) Appellant argues, among other things, that mutual or reciprocal promises are insufficient consideration for inheritance tax purposes. In the cases cited by appellant in support of its argument (Estate of Craycroft, 191 Cal.App.2d 436, 12 Cal.Rptr. 552; Estate of Stevens, 163 Cal.App.2d 255, 329 P.2d 337; Estate of Hyde, 92 Cal.App.2d 6, 206 P.2d 420), there were no transfers of community property between spouses. In the present case, as above shown, Philip and Lottie transferred their community property to the trustee for management there by the trustee, and the property remained community property. Such transfer of community property in trust was not subject to tax (Rev. & Tax. Code § 13554) and the transfer of Lottie's interest therein upon her death was not subject to tax (Rev. & Tax. Code § 13551). Furthermore, even if it were assumed that such transfer in trust was a transfer to which section 13641 applied, the transfer was a bona fide transfer to relieve Philip of the substantial burden of managing the property. Also, there was evidence that Philip and Lottie discussed the creation of the two trusts (in one of which Lottie in effect received Philip's interest in the community property), and they agreed to the creation of the trusts as a means of managing their community property. Appellant's contention that the transfers in trust were not bona fide for adequate consideration is without merit.
Appellant further contends that the court erred in receiving extrinsic evidence of the intention of Philip and Lottie in creating the trusts. Appellant argues that there was no ambiguity in the declaration of trust (P–9021)—that ‘the trustors did, by language deliberately and consciously used, create a life estate and/or power to amend, alter or revoke, thus creating a life estate and/or power of appointment for inheritance tax purposes.’
In Delta Dynamics, Inc. v. Arioto, 69 Cal.2d 525, 528, 72 Cal.Rptr. 785, 787, 446 P.2d 785, 787, quoting from Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., 69 Cal.2d 33, 40, 69 Cal.Rptr. 561, 442 P.2d 641, it was said: “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.' To determine whether offered evidence is relevant to prove such a meaning the court must consider all credible evidence offered to prove the intention of the parties. ‘If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, ‘is fairly susceptible of either one of the two interpretations contended for * * *.’ [citations], extrinsic evidence to prove either of such meanings is admissible.” As said further in Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., supra, p. 40, 69 Cal.Rptr. p. 565, 442 P.2d p. 645: ‘Such evidence includes testimony as to the ‘circumstances surrounding the making of the agreement * * * including the object, nature and subject matter of the writing * * *’ so that the court can ‘place itself in the same situation in which the parties found themselves at the time of contracting.’'
In the present case, there was a question as to whether Philip and Lottie, in the declaration of trust (P–9021) deliberately and consciously used words which created ‘a life estate and/or power of appointment.’ The court did not err in receiving extrinsic evidence as to their intention in creating the trusts.
The judgment is affirmed.
I reluctantly dissent.
When Philip and Lottie created the trust in question in 1944, there was no taxable transfer of property. While legal title vested in Union Bank, the property retained its character as community property, equitable title to which was in Philip and Lottie. Had the trust provided that upon Lottie's death her half of the property would go outright to Philip, the Controller concedes that the transfer would have been nontaxable. This court now affirms the judgment of the trial court that by the provisions of the trust instrument ‘upon the death of Lottie * * * her half of the community property * * * vested absolutely in Philip Cohen, free of any limitation whatsoever’ and therefore there was no taxable transfer. I find no support for that judgment although, as I point out later, the same result might have been reached by a different judgment.
The trial court admitted evidence in the form of testimony by Philip of the circumstances under which the trust was created. I think the court erred. Extrinsic evedence is admissible only when the language of the instrument is fairly susceptible of the construction contended for by the party offering the evidence. (Delta Dynamics, Inc. v. Arioto (1968) 69 Cal.2d 525, 72 Cal.Rptr. 785, 446 P.2d 785; Estate of Russell (1968) 69 Cal.2d 200, 70 Cal.Rptr. 561, 444 P.2d 353; Pacific Gas & Electric Company v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 69 Cal.Rptr. 561, 442 P.2d 641.) Here Philip contended that the language of the trust can be construed as giving Lottie's property outright to him free of trust. I think that the language is not fairly susceptible of that construction. The language carefully provides for continuation of the trust upon Lottie's death, distribution of the income to Philip alone after the death of Lottie and distribution of the principal to certain named beneficiaries upon Philip's death.
The error, however, is acadenic because Philip's testimony did not support the construction for which he contended. He testified that he explained to Lottie that ‘in that trust we could make bequests to the parties that we want. * * * I told her I thought it would be much better to administer the trust than to have it probated. Probate takes time * * *.’ He acknowledged that the insrument was drafted under his direction and that he was fully aware of the trust provisions. While he did testify that neither he nor Lottie intended to create a life estate for the survivor in the decedent's half of the frust estate, that testimony was worthless. Philip's testimony as to Lottie's intention was an inadmissible conclusion. Moreover, whatever may have been intended, the provision that ‘net income shall be distributed in quarterly or other convenient installments to or for the benefit of [Philip and Lottie] during their lifetimes and to the survivor of them thereafter’ is susceptible of no construction other than that Philip received a life estate in Lottie's half of the community property upon her death. Nothing in Philip's testimony supports the contention that the trust instrument is fairly susceptible of the construction that Lottie's half of the trust assets was to go out-right to Philip upon her death.
This court relies upon Estate of Gould (1962) 199 Cal.App.2d 372, 18 Cal.Rptr. 607, in affirming the judgment. Gould, in my opinion, is of no help in the problem at bench. In Gould the joint will of husband and wife was revocable by the survivor. It provided that the survivor would own all of the property ‘with full power to use and enjoy the same as his or her own property without being responsible or accountable therefor to any person or persons whomsoever for any part or portion thereof.’ Whatever was left after the survivor died would go to certain named beneficiaries. The Controller was unsuccessful in his attempt to tax the named beneficiaries as the recipients of property under the will when the wife died. This was so because the named beneficiaries received nothing since the surviving spouse received everything outright. The named beneficiaries were in the same position as named beneficiaries under the will of a living person, i. e., the testator may change his will. The languagr of the will was clearly susceptible of the construction that the survivor was to receive outright title and the extrinsic evidence supported that construction.
In the case at bench, Philip during Lottie's life could not, without the consent of Lottie, revoke, alter or amend the trust. Upon her death, Philip alone was vested with these powers. He also received upon her death the right to receive all of the income from the trust. Although these powers and rights were derived from the trust instrument of 1944, and not by will, they are subject to inheritance taxes if Philip did not acquire them in ‘a bona fide sale for an adequate and full consideration in money, or money's worth.’ (Rev. & Tax. Code, § 13641.)1 The trial court expressly concluded that ‘there was no consideration passing from Philip Cohen to Lottie G. Cohen * * * and said agreements [by Philip and Lottie in the trust instrument] did not constitute a full consideration in money or moneys [sic] worth under Section 13641 of the Revenue and Taxation Code.’ This conclusion in turn was based upon a similar finding of fact. The finding and the conclusion were adverse to Philip who has not appealed. We have no power to change the finding and conclusion to favor a nonappealing party. Believing that we are bound by the trial court's determination on this issue, I think this court errs in stating that the Controller's ‘contention that the transfers in trust were not bona fide for adequate consideration is without merit’.
The only significance of the lack of consideration is that a transfer ‘made with the intention that it take effect in possession or enjoyment at or after the death of the transferor’ (Rev. & Tax.Code, § 13643) is subject to inheritance taxes at the death of the transferor rather than to gift taxes at the time the instrument is executed. Here (1) Philip's right to receive all of the income from the trust, (2) his powers to govern the distribution of Lottie's share of the principal by revoking, altering or amending the trust and (3) the named beneficiaries' right to receive the corpus (subject to Philip's life estate and power to divest the gifts) were expressly made to take effect upon the death of Lottie.
Section 13694 of the Revenue and Taxation Code provides that ‘a gift of a general * * * power of appointment [from Lottie to Philip] made in conjunction with a disposition of property otherwise subject to [inheritance tax, namely, each gift from Lottie to a named beneficiary] * * * is a transfer subject to [inheritance tax] from [Lottie] to [Philip] at the date of [Lottie's] death, except that if a power of appointment over * * * all of [Lottie's] half interest in community property is given to [Philip], the value of any interest [Philip's right to receive the income from Lottie's half interest for life], other than the power itself, given [Philip] in such property subject to such power, up to but not exceeding the value of a life estate therein of [Philip], is not subject to [inheritance tax].’
The Controller did not attempt to invoke section 13694 of the Revenue and Taxation Code on the basis of the gifts to the beneficiaries which were subject to being divested by exercise of the power of appointment. Instead he claimed that the transfer which invoked section 13694 was Philip's right for life to enjoy the income from Lottie's half of the community property. That transfer, had it not been accompanied by a power of appointment, would clearly not have been subject to inheritance tax. (Rev. & Tax. Code, §§ 13551 and 13554.) But even the transfer of community property from one spouse to the other is subject to inheritance tax ‘as provided in Section 13694.’ (Rev. & Tax. Code, §§ 13551 and 13554.) The question then becomes whether section 13694 provides that such a transfer is taxable. It is arguable that it does not since section 13694 taxes the gift of a power of appointment only if it is ‘made in conjunction with a disposition of property otherwise subject to’ inheritance tax and the disposition of an interest in community property from one spouse to the other is not otherwise subject to inheritance tax. On the other hand, that portion of section 13694 limiting the value of property exempt from inheritance tax provides that ‘the value of any interest, other than the power [of appointment] itself, given the donee [of the power] in [community property given to the donee by his spouse] subject to such power, up to but not exceeding the value of a life estate therein * * * is not subject to [inheritance tax].’ (Rev. & Tax. Code, § 13694.) If the Legislature had intended that a disposition of community property from one spouse to the other is not ‘otherwise subject to’ inheritance tax, the portion of section 13694 limiting the value of property exempt from inheritance tax is unnecessary.
In any event, Philip's objections in the trial court did not raise the issue of inapplicability of section 13694 and the parties assumed, in stipulating to a limited number of issues in the trial court, that if there was a gift of a power of appointment, it was made in conjunction with the disposition of property otherwise subject to inheritance tax.
Whatever may constitute a power of appointment for the purposes of property law, it is beyond dispute that for purposes of inheritance tax law Philip's right (effective upon the death of Lottie) to alter, amend or revoke the trust with respect to Lottie's half of the trust estate was a general power of appointment. (Rev. & Tax. Code, § 13692.) The definition of a power of appointment in California is substantially the same as that used for federal estate tax purposes (26 U.S.C. § 2041(b)(1)) and the cases applying the federal law leave no doubt that Philip received a general power of appointment.
The court says: ‘It thus appears that the incidents of ownership of the property held by Philip and Lottie jointly during their lifetimes (and by Philip after Lottie's death) were, in practical effect, equivalent to ownership of the property in fee.’ I agree completely with the statement, but not with the conclusion that there ‘was not a transfer to Philip of a power of appointment subject to inheritance tax.’ There was a trust and it provided that certain named beneficiaries would receive Lottie's share of the community property unless Philip, after her death, exercised his power of appointment in favor of himself (as he did in fact) or of someone else.2 But for this power of appointment, Philip would not have had with respect to Lottie's share of the community property after her death the ‘equivalent to ownership of the property in fee.’
We would have a different problem if the judgment we are reviewing had decreed that for inheritance tax purposes Lottie's share of the community property will be treated as though it had gone outright to Philip. The contention that the power of a life beneficiary of the trust to appropriate the principal to himself converts his interest into outright ownership ‘has been made frequently and rejected by California courts.’ (Estate of Legatos (1969) 1 Cal.App.3d 657, 81 Cal.Rptr. 910.) But while the technical property interests must be recognized for other purposes, substance rather than form should govern the application of inheritance taxes. (Estate of Stevens (1958) 163 Cal.App.2d 255, 329 P.2d 337; Estate of Craycroft (1961) 191 Cal.App.2d 436, 12 Cal.Rptr. 552.) If Philip had died without exercising the power of appointment, the property subject to the power would have been taxed even though he had never enjoyed the principal. (Rev. & Tax. Code, § 13696.) And since he has in fact exercised the power in favor of himself, the property will be taxed when he dies. It seems unfair to tax it at Lottie's death when it would not have been taxed had she given him the property outright and when for all practical purposes that is what she did.
However, the trial court did not take that tack. Instead, the judgment which this court affirms is that ‘upon the death of Lottie G. Cohen her half of the Community property in Trust P–9021, wherein Union Bank is Trustee, vested absolutely in Philip Cohen, free of any limitation whatsoever.’ Suppose Philip had died one week after Lottie died. If the trial court's judgment is correct, Lottie's half of the community property would have gone by intestate succession to Philip's heirs. Not only would Philip not have avoided probate which he sought to avoid by use of a living trust, but the beneficiaries named in the trust to whom he intended that the poperty should go would not have received the property.
I shudder to think of the impact of this decision in other cases. A person dies thinking that the living trust of community property which he created, as provided by its terms, will continue on and provide for disposition of the principal as set forth in the instrument. His surviving spouse also believes that. But upon the death of the surviving spouse, the heirs of the surviving spouse claim half of the property to the exclusion of the named beneficiaries on the ground that the powers of the surviving spouse under the trust instrument were so broad that upon the death of the spouse first to die, the surviving spouse had out-right title to the property ‘free of any limitation whatsoever’, including, of course, the trust.
I would reverse the judgment.
On Petition for Rehearing
Petition for rehearing is denied.
I would grant the petition for rehearing.
1. It appears that in the trial court petitioner also contended that Philip received (upon Lottie's death) a life estate in the trust proceeds. On appeal, petitioner-appellant argues that Philip received ‘the sole right to the income’ of the trust and the sole power to revoke the trust; and that ‘a life estate is not necessary for a power of appointment.’
2. Petitioner (controller) objected to Philip's testimony regarding the conversation on the ground that it violated the parol evidence rule—that there was no ambiguity in the declarations of trust. The objection was overruled.
3. The trusts are referred to in the inheritance tax appraiser's report as No. P–9020 and No. P–9021. Trust P–9020 was formerly designated P–1293, and trust P–9021 was formerly designated P–1295. The parties in the present case have used the numbers P–9020 and P–9021 in referring to the trusts.
4. It was agreed by the parties berein that the word ‘survivors' should be ‘survivor.’
5. Cf. Katz v. United States, supra, 382 F.2d 723, wherein Mr. Katz as trustor executed a declaration of trust pertaining to community property (assumed, for purpose of decision, to be community property), which declaration was approved by Mrs. Katz who was a beneficiary of the trust; and the declaration reserved to Mr. Katz the power to revoke or amend the trust. Upon the death of Mr. Katz, the federal government sought to impose estate tax on such powers on the ground that they constituted a general power of appointment. The court rejected the contention and said (p. 732): ‘It is no more a general power of appointment than the powers that he had over the community property before the trust was created. It has never been held that those powers amount to a general power of appointment over the wife's interest.’It is to be noted further that the 1965 amendments to sections 13551 and 13554 of the Revenue and Taxation Code (and the addition of section 13694 to said code in 1965) increased the portion of community property excluded from inheritance tax by excepting a life estate given to the surviving spouse and taxing only a power of appointment given to the surviving spouse (Review of Selected 1965 Code Legislation, supra, pp. 241–242); and that the value of the property over which the surviving spouse is given such power is subject to tax unless the surviving spouse is given an interest in the property in addition to the power of appointment (id.). In the present case, even if it were assumed that Philip received a power of appointment over Lottie's half of the community property he received an interest in such property in addition to the power of appointment.
6. The court excluded evidence that Philip revoked the trust about a month after Lottie's death—on the ground that acts occurring after Lottie's death were irrelevant to the assessment of inheritance tax, which was assessed as of the date of her death.
7. Section 13641 of the Revenue and Taxation Code provides, as follows:‘If a transfer specified in this article was made durin lifetime by a decedent, for a consideration in money or money's worth, but the transfer was not a bona fide sale for an adequate and full consideration in money, or money's worth, the amount of the transfer subject to this part shall be the excess of‘(a) The value, at the date of the transferor's death, of the property transferred, over‘(b) An amount equal to the same proportion of the value, at the time of the transferor's death, of the property transferred which the consideration received in money or money's worth for the property transferred bears to the value, at the date of transfer, of the property transferred.’
1. This court erroneously characterizes sections 13641 through 13648 of the Revenue and Taxation Code as relating to ‘bad faith transfers for inadequate consideration and to transfers made in contemplation of death’. Every transfer described in those sections, including a transfer in contemplation of death, is taxable if it is ‘not a bona fide sale for an adequate and full consideration in money, or money's worth * * *.’ (Rev. & Tax.Code, § 13641.) Even a transfer in a bona fide sale is taxable if it is not for adequate and full consideration. Similarly, a revocable transfer in trust is taxable upon the transferor's death not because it is a ‘bad faith transfer’, but because it is not made for full consideration.
2. Katz v. United States (9th Cir. 1967) 382 F.2d 723, cited by the court in footnote 5, held only that the husband's power to revoke or amend a trust of community property while both husband and wife were living was not a general power of appointment because it was clear from the instrument that the power was ‘held by him as manager of or agent for the community property and subject to his obligation as such manager,’ i. e., he could not dispose of his wife's share without her consent.
WOOD, Presiding Justice.
LILLIE, J., concurs.