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District Court of Appeal, Second District, Division 2, California.


Civ. 15583.

Decided: February 20, 1947

James W. Hickey, of Sacramento, and Donald A. Peck and Morton L. Barker, both of Los Angeles, for appellant. Boyle, Holmes, Fry & Garrett, of Los Angeles, for respondent. S. T. Hankey of Los Angeles, for British Charitable Fund.

John D. Barter, a resident of Los Angeles County, departed this life October 15, 1941. The residuary clause of his probated will was as follows:

‘The balance of my property I bequeath to the British Government to be administered and applied for the benefit of British refugee children or similar purpose.’

The superior court, sitting in probate, in response to executor's petition for instructions duly decreed that the quoted provision ‘constituted and created a valid charitable trust for the use and benefit of the class of persons therein described,’ and adjudged that upon application therefor at the time of distribution of the assets of the estate the court would appoint a trustee to receive and administer the assets of said charitable trust. That decree is final.

Thereafter the court by its order appointed Combined British Charitable Fund, a California corporation devoted solely to charitable work, to fill the vacancy in said trusteeship resulting from the incapacity of the British Government so to act. That order is likewise final.

In due course the inheritance tax appraiser filed his tax report in which it was declared that the residuary estate of decedent was taxed to the British Government and a tax assessed against such residue in the sum of $4,380.93. The executor filed objections to such report. Following a hearing upon its objections, the court concluded that the residue of the estate did not pass to the British Government, but was transferred to the California charitable corporation; that such transfer is not subject to tax under the law; that the tax of $4,380.93 was erroneously fixed in the inheritance tax appraiser's report and should not have been assessed, and ordered that the rest be modified by striking therefrom the portion which assessed the British Government in the sum of $4,380.93. The state's appeal is resisted by the Combined British Charity Fund as well as by the executor.

The ‘agreed statement on appeal’ concludes with the announcement that the ‘question involved on this appeal is whether or not an inheritance tax based upon the value of the residue of the estate was lawfully assessed by the inheritance tax appraiser against the British Government.’

The Inheritance Tax Act, Gen. Laws, Act 8495, provides that a tax shall be ‘imposed upon the transfer of any property * * * or of any interest therein or income therefrom, in trust or otherwise, to persons, institutions or corporations, not hereinafter exempted.’ § 2. The Act also defines transfer to include ‘the passing of property or any interest therein * * * by inheritance, descent, devise * * * or exempt property orders in probate * * *,’ § 1, and provides that transfers to corporations exclusively engaged in charitable work under the law of this state shall be exempt from the transfer tax. (Revenue and Taxation Code, §§ 13841, 13842; also, Stats.1935, p. 1266.) The justification for such exemption of domestic charitable corporations lies in the fact that the state is compensated for the loss of revenue by its relief from the burden of appropriating public funds for the relief of the needy. People v. O'Donnell, 327 Ill. 474, 158 N.E. 727. No such benefit inures to this state by the transfer of its wealth to a foreign country.

Appellant's thesis is that the transfer of the residue to the British Government was effected at the moment of decedent's death and of necessity the transfer tax thereupon became payable; that the right of the state to collect a tax on decedent's estate attached at the same time, and that the court's action in ‘diverting the bequest contrary to the will’ cannot deprive the state of its right to tax. But in making this contention appellant fails to observe that all of the property of a decedent is ‘subject * * * to the control of the superior court for the purposes of administration, sale or other disposition.’ (Probate Code, § 300.) It is the duty of a court so to interpret a will as to execute the intention of the testator. If it discloses a clear intention to impose a trust upon any portion of decedent's estate equity will not permit the trust to fail for want of a trustee but will appoint one. Estate of McDole, 215 Cal. 328, 332, 10 P.2d 75; Estate of McCray, 204 Cal. 399, 402, 268 P. 647. If a designated trustee rejects the trust, dies or is incapacitated for such office, chancery will execute the will by appointing a trustee. Smith v. Davis, 90 Cal. 25, 33, 27 P. 26, 25 Am.St.Rep. 92. Such power is inherent in courts of equity over all matters of trust and trustees, and they never allow a trust to fail for want of a trustee.' Fatjo v. Swasey, 111 Cal. 628, 635, 44 P. 225, 226.

The beneficiaries of the trust herein are an indefinite class, i. e. British refugee children. They are essentially the devisees under the will (Estate of Loring, 29 Cal.2d 423, ——, 175 P.2d 524), and the British Government was the designated trustee. But the British Government having been found to be incapacitated to act as such trustee it was incumbent upon the court to appoint a trustee that is qualified. Pursuant to such duty Combined British Charitable Fund, a California corporation, was so designated. If qualified and the transfer of the residuary estate was to such trustee. If did not for one moment pass to the British Government. That entity could not, and made no attempt to don the robes of such California office. Hence in no view of its rights or of its relation to the beneficiaries of the trust does it necessarily follow that decedent's estate was transferred to the British Government, but on the contrary it passed by due and proper orders of the court to a charitable corporation of this state qualified to execute a charitable trust. Such transfer exempted it from the transfer tax.

The state controller in assessing a transfer tax against a trust estate is not to be governed solely by the language of the will but also by such transactions as affect the beneficial succession of the estate. ‘The rate of taxation, as well as the amount of exemption, depends on relationship to the decedent.’ Estate of Rath, 10 Cal.2d 399, 405, 75 P.2d 509, 512, 115 A.L.R. 836. While the distribution must be made according to the will, yet ‘for purposes of fixing the inheritance tax beneficial succession is the measure.’ Ibidem. The court having established the California charitable corporation at the transferee of the trust estate, the controller became thereby obligated to exempt such estate from the transfer tax. The inheritance tax is not a tax on a decedent's estate but is an excise imposed on the right to succeed to the property passing to the distributee. Estate of Letchworth, 201 Cal. 1, 5, 255 P. 195; Estate of Watkinson, 191 Cal. 591, 598, 217 P. 1073.

If the rule contended for by appellant should prevail, that is that the court require the payment of a transfer tax, is it conceivable that a tax should be exacted from the California charitable corporation whose sole duty is to administer a charity fund? No other entity could be the object of such imposition, for surely it would not be suggested that the British Government, which received nothing and presumptively was not consulted prior to its designation as trustee by decedent, should pay the tax. If the British Government cannot become the transferee of the fund it cannot be taxed; and if the charitable corporation as trustee of a valid charitable trust is exempt, the tax was improperly assessed against the residue of the estate and the order appealed from is correct.

The soundness of the above conclusion will be perceived upon reflecting that testamentary trustees are not automatically qualified as such by virtue of their nomination by the testator. The naming of them by the testator amounts to nothing more than a recommendation by the author of the will. While the purpose of the trust and the beneficiaries determine the fact of the creation of a trust, the identity of the trustee is not determined prior to the moment the order appointing him is entered. In other words, while the transfer of the estate to the beneficiaries results at the instant of death, yet there is no official trustee, no transferee, until the court finally names him. Also, other events besides the appointment of a trustee subsequent to death may affect the amount of the tax. In Estate of Parrott, 199 Cal. 107, 248 P. 248, the creditor filed his claim for the total amount due on the note of decedent and her brother; but because decedent's brother as a joint obligor thereafter paid one half of the debt prior to the report of the inheritance tax appraiser, the latter deducted from the taxable estate only the balance remaining unpaid after the brother's payment. There had been an understanding from the inception of the indebtedness that the share owing by the joint obligor was not to be considered as Mrs. Parrott's debt notwithstanding the potential enforcibility of the entire debt against her. If the value of the taxable estate transferred by the will of Mrs. Parrott could be determined by the payment of one half of her debt after the creditor had filed his claim, by a party of reasoning the taxability of decedent's estate was properly determinable after the court had named the transferree of the residuary estate. It has been held also that a testator may in creating a trust direct the formation of a charitable corporation for the care of needy children, and that the residuary estate was properly considered as if it had been in the possession of an extant corporation formed by direction of the will or as if it were in the control of the probate court for the purpose of accomplishing the testator's charitable design. Le Fevre's Estate, 233 N.Y. 138, 135 N.E. 203. The cited case determined that the benevolent gift passed simultaneously with the death of the decedent and that the formation of the corporation was a detail of court administration. The appointment by the superior court of the California corporation as the conduit through which the objects of the testator herein could be realized was in pursuance of the constitutional and traditional exercise of its power. Such corporation is not only devoted to charitable objects but is subject to state control and to the jurisdiction of the probate court, and therefore it is not subject to a transfer tax.

Appellant argues that no reason for the incapacity of the British Government appears in the record. Indeed, the very phrases of the record gleam with nothing but its incapacity. Not only did the court find that the testamentary trustee was incapable of holding such office but it requires no citation of authority to convince an impartial mind that the British Government cannot qualify to hold any office under the laws of this state. Moreover, there is no authority for the transfer of property by the will of a California resident to a foreign government. (See sec. 27, Probate Code; the Bank Act, Stats.1909, p. 87; Deering's General Laws, Act 652; Alien Property Act, Act 261, Deering's General Laws.) The wisdom of the court's rejection of the British Government as trustee of the fund is emphasized by the knowledge that the superior court has no jurisdiction over that government. In event it should as such trustee disregard judicial orders with respect to the management of the fund the court would be helpless to enforce them. (See Rustomjee v. The Queen, 1 Q.B.D. 487, 495.)

Appellant suggests that it does not appear whether the California corporation will carry out the terms of the will. It must be presumed not only that the court below exacted a promise to that effect but also that a qualified trustee will do its duty as prescribed by law and directed by the court. Also, the declaration that the court below reasoned its way to the order appealed from by way of the doctrine of cy pres is not warranted by the record. From the foregoing recitals it is clear that the court in the exercise of its equity jurisdiction, after having found the testator's nominee to be incapacited for the trusteeship, appointed a capable trustee and thereby identified the transferee of the testamentary trust estate. Contrary to appellant's contention that a bequest for the benefit of British refugee children is not within the scope of the exemption, it is true that the refugee children of Great Britain or of any other power allied with the United States in the recent war or, for that matter, refugee children of former enemy states, might be the objects of the bounty of a California testator; and if the trustee of such trust as might be created for its administration were a California charitable corporation or if it were one or more persons subject to the jurisdiction of the courts of this state then the transfer of a charitable trust to them would be exempt from the transfer tax.

Judgment affirmed.

MOORE, Presiding Justice.

McCOMB and WILSON, JJ., concur.

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Docket No: Civ. 15583.

Decided: February 20, 1947

Court: District Court of Appeal, Second District, Division 2, California.

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