IN RE: the ESTATE of Giovanni VAI (1965)

District Court of Appeal, Fourth District, California.

IN RE: the ESTATE of Giovanni VAI, Deceased. Henry G. BODKIN and Bank of America National Trust & Savings Association, as Co-Executors of the Will of Giovanni Val, Deceased, Appellants, v. Alan CRANSTON, as State Controller, Respondent.

Civ. 7859.

Decided: October 29, 1965

Michael G. Luddy, Harry A. Olivar and Henry G. Bodkin, Jr., Los Angeles, for appellants. Charles J. Barry, Chief Inheritance Tax Atty., Walter H. Miller, Chief Asst. Inheritance Tax Atty., and James F. Rogers, Associate Inheritance Tax Atty., for respondent.

Appeal by the co-executors of the last will of Giovanni Vai, deceased, from an Order Overruling Objection to Report of Inheritance Tax Appraiser and Order Fixing Inheritance Tax.

Question Presented

Is a transfer of property by will to the decedent's adult incompetent daughter pursuant to a property settlement agreement between decedent and his wife subject to inheritance tax?

Record

Decedent was an Italian immigrant who enjoyed financial success in the winery business. (His estate was appraised at $1,834,358.88.) He was married in 1907. There was one child of the marriage, Madeline, who at the time of the property settlement agreement hereinafter mentioned was 27 years old. At the time of the father's death she was 31 years of age and had the life expectancy of a normal person. She was an incompetent person; guardian of her person and estate had been appointed. In January 1953 his wife filed suit for separate maintenance.

On March 16, 1953 decedent and his wife entered into the property settlement agreement which is the basis of this controversy. The suit was then abandoned and the parties remained married though separated. Their community interests at the time of the execution of the will exceeded $1,000,000 in value.

On April 3, 1953 decedent executed the will which was admitted to probate after his death which occurred in February, 1957.

The terms of decedent's will, pursuant to the agreement as will hereinafter appear, left the residue of the estate in trust with the income and principal, if necessary, payable to the daughter's guardians as her needs dictated.

The inheritance tax appraiser filed a report in the estate in which he computed the value of Madeline's interest, subject to inheritance tax at $715,650.73 and the tax thereon at $59,215.07. The executors filed objections to this report contending that a deduction of $515,341.56 should have been allowed as a liability of decedent to the daughter by virtue of the agreement, reducing the tax to $25,137.90. The amount of the claimed reduction was arrived at by capitalizing the monthly support with an annuity table. The probate court overruled the objections and confirmed the report of the appraiser.

For inheritance tax purposes, was there a transfer by will?

The agreement gave Mrs. Vai certain property outright, a guaranteed income, and provided that decedent have custody of and be obligated for the support of Madeline. About the year 1947 Giovanni built a large house for Madeline at Alta Loma and during his lifetime maintained her there.

Article IV of the agreement provides in pertinent part:

‘The Husband covenants and agrees to assume full responsibility for the support, maintenance and care of said Madeline Vai and represents that he has heretofore made a Will wherein and whereby a trust is created for the support, maintenance and care of said Madeline Vai after the death of Husband. The Husband hereby covenants and agrees and binds himself to maintain in full force and effect, a Last Will and Testament which shall provide for the distribution into a trust of which such trust said Madeline Vai or her duly appointed guardian shall be the beneficiary, an amount of money or property as will, upon the Husband's death, fairly and adequately pay for and discharge any and all expense for the care, support and maintenance of said Madeline Vai during the remainder of her lifetime.’

‘An inheritance tax is hereby imposed upon every transfer subject to this part.’ [Rev. & Tax.Code, § 13401.]

‘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.’ [Rev. & Tax.Code, § 13601.]

In Estate of Belknap (1944) 66 Cal.App.2d 644, 152 P.2d 657 the State Controller appealed from an order exempting payment of inheritance taxes on annuity bonds purchased for decedent's divorced wife. The decedent and his wife Helen, owners of community property, entered into a property settlement agreement in which he agreed to pay her stipulated monthly payments during the term of her life. This agreement was approved by the court in the divorce action and the property interests therein set forth were awarded to the respective parties as provided in the agreement. The agreement also provided that the husband would command in his will that his executor expend $20,000 to purchase for the wife the largest monthly annuity that that sum would buy. His will did so provide and on his death, the probate court ordered the executor of his will to purchase annuity bonds to comply with the will. This the executor did. The inheritance tax appraiser included in his appraisement of the estate, the annuity bonds, and demanded payment of inheritance tax thereon. The probate court held that the obligation to purchase the bonds was created by the property settlement agreement and not by the will; that the bonds were not transferred by the will and that the executor held the bonds in trust to carry out the purpose of the agreement, and hence they were not subject to inheritance tax. The probate court held further that the bonds were not transferred without valuable and adequate consideration and that ‘The provision of the will authorizing the executor to purchase the annuity bonds was merely the ‘conduit’ (Estate of Rath, 10 Cal.2d 399, 408, 75 P.2d 509, 115 A.L.R. 836), or the means by which the terms of the agreement were to be fulfilled.' The court then stated that the wife's interest in the property, being fixed by the terms of the agreement, was not changed or transferred by the will. ‘It was merely transferred from a cash fund to annuity bonds to secure the previously ascertained and agreed monthly sums. Title to those sums did not pass by the will, but by the specific terms of the property settlement agreement.’ [648–649, 152 P.2d 659.] (Emphasis added.)

The court pointed out that if the agreement ‘creates or conveys a present interest in the property, possession or enjoyment may not be postponed until death, and it is not testamentary in character. (Citations.)’ [651, 152 P.2d 660] and held that the agreement did create such interest. The court further stated: ‘In the case of Chambers v. Lamb, 186 Cal. 261, 99 P. 33, 34, it was determined that ‘It is the vesting in interest of the rights passing between the parties which constitutes the transfer taxed by the act. (Citing authorities.) The death of the transferor adds nothing to the transfer if full rights have passed to the grantee prior to that time.’' [651, 152 P.2d 660]

The court after quoting from several cases holding that a property settlement agreement of the type before it created a vested interest in the promisee and was not testamentary in character, stated: ‘The property settlement agreement created an irrevocable trust in favor of Helen Lathrop Belknap to pay to her the stipulated monthly sums until the time of her death. (Citations.) She was immediately invested with the equitable title to the property interest therein provided for.’ [651, 152 P.2d 661] The court referred to Chambers v. Lamb, 186 Cal. 261, 199 P. 33 and then said ‘[a]s the Lamb case says, ‘The death of the transferor adds nothing to the transfer.’' [66 Cal.App. 651, 152 P.2d 661]

Bank of California v. Superior Court, 16 Cal.2d 516, 106 P.2d 879, involved a Petition for Writ of Prohibition to restrain the superior court from proceeding with a trial without bringing in alleged ‘necessary and indispensable’ parties. Sara M. Boyd, widow of Colin M. Boyd died testate, leaving a will disposing of an estate valued at about $225,000, to a large number of legatees and devisees. Bertha M. Smedley, a niece not mentioned in the will, sued the executor and all the beneficiaries under the will, to enforce an alleged contract in which decedent agreed to leave her the entire estate. Only the executor and the residuary legatee were served. The executor and the residuary legatee made a motion to bring in the other defendants and to have them served with summons. The trial court denied the motion. The appeal followed.

The Supreme Court at some length discussed the question of who were necessary and indispensable parties, and concluded that the parties not served were not, as they would not be bound by any judgment rendered in their absence. The court pointed out that the action in these cases is against the distributee personally and not against the estate. It is independent of the will and the probate proceeding. ‘This relief is sometimes called ‘quasi-specific performance’, since it accomplishes the substantial result of enforcement of the contract.' [524, 106 P.2d 884]

The authorities hold that the situation is somewhat similar to contracts to make mutual wills. In contracts to make mutual wills in which the survivor takes all the property at the first spouse's death, as well as where the parties agree that on the survivor's death the property that is left shall go to a designated relative, the interest of the beneficiary vests immediately upon the making of the contract and the beneficiary takes from the contract and not from the will.

Brown v. Superior Court (1949) 34 Cal.2d 559, 212 P.2d 878 was a proceeding in mandamus to compel the superior court to order witnesses to testify. In a proceeding to perpetuate testimony under sections 2083–2089 of the Code of Civil Procedure, the witnesses refused to answer and the superior court denied the petitioner's request for an order compelling them to answer. The superior court held that the petitioner had failed to show that he had a cause of action.

The petition in the superior court alleged that the petitioner expected to be a party to an action against Abigail Simpson and her husband E. Ross Simpson to determine his rights under a written contract to make mutual wills entered into between Abigail and her former husband, George Brown, in which they agreed to devise his or her entire estate to the other, and that the survivor should bequeath and devise the entire combined estates one-half to designated kindred of Abigail and one-half to designated kindred of George, of whom petitioner was one. George died and his estate was distributed to Abigail, who later married E. Ross Simpson. She transferred substantially all her estate and that received from George to her new husband, allegedly without consideration and to evade her obligation under the contract. It was these three people whose testimony petitioner sought.

The court said:

‘It is well settled that a person may contract to make a particular disposition of his property by will, and in case of a breach the promisee has several available remedies. He may bring an action at law for damages. [Citations.] Equitable relief in the form of ‘quasi specific performance’ of the contract may be obtained where the remedy at law is inadequate and the promisor has failed to make the promised disposition in his will. [Citation.] It has also been recognized that the promisees of such a contract need not wait until the death of the promisor but may seek equitable relief against inter-vivos conveyances made by him in fraud of their rights.' [Citations.] (563–564, 212 P.2d 881)

‘Where two parties agree to make mutual wills, each promising to dispose of his property to the other or, if the other be dead, to certain third persons, and one of the parties performs by leaving his property to the other, the intended devisees and legatees are entitled to enforce their rights as beneficiaries under the agreement. The contracting party who survives becomes estopped from making any other or different disposition of the property, and his obligations under the agreement become absolutely irrevocable and enforceable against him, at least where he avails himself of the provisions of decedent's will in his favor and accepts substantial benefits thereunder.’ [Citations.] (564, 212 P.2d 881)

The court held that a cause of action was stated and that the witnesses should be required to answer relevant questions.

Estate of Rath (1937) 10 Cal.2d 399, 75 P.2d 509 was an appeal from an order fixing inheritance taxes. Mr. and Mrs. Rath entered into an agreement by which Mrs. Rath agreed to will four parcels of land owned by her as her separate property, and Mr. Rath agreed to make a will devising said property or such portion thereof as not consumed by him if he survived her, to her nephews. Mrs. Rath died first leaving a will in which she devised the property to Mr. Rath. Five months later he died leaving a will which, pursuant to the agreement devised the property to the wife's nephews. In the husband's estate an order was made fixing inheritance tax upon the devise to the nephews. In reversing the order and holding that no inheritance tax should be levied upon such devise, the Supreme Court held that the husband ‘was a trustee for his wife's nephews, for whose benefit the contract expressly was made.’ [404, 75 P.2d 511] and that had Mr. Rath ‘either died intestate or devised the property to other persons, such persons would have held the property as constructive trustees for said nephews, and could have been compelled in an equitable action to turn over the property to the nephews.’ [Citations.] (404, 75 P.2d 511) The court went on to say that an inheritance tax is one imposed upon succession and that for purposes of fixing the inheritance tax ‘we are of the view that the court may consider agreements extrinsic to the will which limit the absolute estate devised by will.’ [406, 75 P.2d 512]

In Newman v. Burwell (1932) 216 Cal. 608, 15 P.2d 511, the contention was made that the obligation of the decedent under a property settlement agreement entered into with his wife to support their minor child constituted a purely personal obligation which terminated upon his death precluding any claim against his estate. The court referred to certain authorities including California cases and said:

‘* * * they indubitably establish that a father's obligation to support his minor child, which obligation is fixed by a property settlement agreement and confirmed by a divorce decree, survives his death and becomes a charge against his estate for all sums accruing thereunder during the child's minority, and that an action * * * may be brought to establish the same as a valid and subsisting claim against the father's estate.’ (612, 15 P.2d 512)

To the contention that such obligation survived the father's death only where the agreement imposed a lien upon his estate to secure the performance of the agreement, the court said:

‘* * * the existence of security is neither a controlling circumstance nor an essential prerequisite to a determination of the continuing character of the decedent's obligation.’ (613, 15 P.2d 513)

See also Newhall v. Newhall (1964) 227 Cal.App.2d 800, 806, 39 Cal.Rptr. 144.

In Estate of Caldwell (1933) 129 Cal.App. 613, 19 P.2d 9, the property settlement agreement between the spouses provided for the payment of $100 per month for the support, during minority, of their child. The father died and the mother on behalf of the child presented to the probate court a claim for the child's support. In affirming the action of the probate court approving the claim the reviewing court said concerning the support provision: ‘[It] is to be construed according to the ordinary rules or contracts. In our opinion it continued to be a legal charge against the estate the same as any other unfilled contractual obligation of decedent's at the time of death.’ (614–615, 19 P.2d 10)

Respondent relies to a great extent on Estate of Grogan (1923) 63 Cal.App. 536, 219 P. 87. This was an appeal from an order fixing inheritance tax. Grogan and his wife entered into a property settlement agreement in which she renounced her right of inheritance as his wife in consideration of his agreement to pay her $3,000 per year. Grogan further agreed to create in his will a trust fund of one-half of his estate, the net income thereof to be paid the wife for life, the residue of the fund to be payable to their minor child, if living, if not, to a person designated by Grogan in his will. The parties were then divorced. On Grogan's death, the value of the property bequeathed to Mrs. Grogan pursuant to the agreement was taxed as if Mrs. Grogan was a stranger. The probate court upheld this tax.

On appeal, the reviewing court considered a number of authorities from other jurisdictions, and then rejected the contention that the interest of Mrs. Grogan did not grow out of the will, but out of the contract and held that the language of the then California Inheritance Tax Act (Stats.1921, p. 1500) to the effect that a tax was imposed upon the transfer of any property ‘[w]hen the transfer is by will’ meant that where a transfer is effected by means of a will the tax must be paid. ‘It matters not what the motive of a transfer by will may be, whether to pay a debt, discharge some moral obligation, or to benefit a relative for whom the testator entertains a strong affection, if the devise or bequest be accepted by the beneficiary, the transfer is made by will, and the state by the statute in question makes a tax to impinge upon that performance.’ (543, 219 P. 89) ‘Nothing is said [in the statute] about any transfer by will arising out of an agreement, or as compensation for services, or in consideration of anything whatsoever. * * * Everything in the nature of a change of ownership effected through a will is apparently included.’ (544, 219 P. 89) Estate of Grogan, supra, has not been followed by any subsequent authority, and in two cases the courts expressly refused to follow it.

In Estate of Rath, supra, 10 Cal.2d 399, 75 P.2d 509 the court distinguished Estate of Grogan, supra, as well as certain New York decisions, saying:

‘Said decisions are to the effect that a transfer made by will is taxable although in pursuance of a contract, in payment of a debt, or for services rendered. Said decisions had reference to a situation where the testator is disposing of his own property, not of property held by him in trust for others, as to which his will is a mere conduit of title.’ (10 Cal.2d 407, 75 P.2d 513)

In Estate of Belknap, supra, the court, after referring to the decision in Estate of Grogan, supra, said:

‘In the later case of Estate of Rath, supra, the Supreme Court, by specific reference to the Grogan case, disapproves or at least limits the effect of the unqualified language * * * above quoted to the effect that the Inheritance Tax Act imposes a tax on property ‘when a will is used as a means of conveyance,’ regardless of the vesting of rights by previous valid enforceable contracts or documents. The Supreme Court says: ‘By virtue of the contract the husband's beneficial interest was limited to his wife. He was a trustee for his wife's nephews, for whose benefit the contract expressly was made. * * *’' (66 Cal.App.2d 653, 152 P.2d 662)

The court in Estate of Belknap, supra, at page 655, 152 P.2d 657 distinguished In re Howell's Estate, 255 N.Y. 211, 174 N.E. 457, relied on by respondent here, by pointing out that under the particular property settlement agreement there, each spouse was entitled to consume ‘his entire substance in living expenses or by speculation.’ (66 Cal.App.2d 656, 152 P.2d 663) and that the interest the beneficiary would receive ‘depended entirely upon the terms of the will.’ (656, 152 P.2d 663)

It should be remembered that:

‘There are distinctions between the federal estate tax system and the inheritance tax system prevailing in most states—distinctions to which this court had occasion to refer in Estate of Miller, 184 Cal. 674, [677–678,] 195 P. 413, 16 A.L.R. 694, as follows: ‘The California tax is a succession tax, a tax on the beneficial interest of each beneficiary or heir. * * * The federal tax * * * on the other hand, is not a succession tax, but an estate tax, not a tax on what comes to the beneficiaries or heirs, but upon what is left by the decedent.’' (Estate of Madison (1945) 26 Cal.2d 453, 458, 159 P.2d 630, 633.)

As hereinbefore pointed out the court in Belknap held that the transfer under a property settlement agreement followed by a will comes through the agreement and not through the will.

United States v. Past, (1965) 347 F.2d 7 (U. S. Court of Appeal Ninth Circuit) cited by respondent is not in point. There the court was applying to the property received by the ex-wife pursuant to a property settlement agreement and a trust agreement based upon it, certain sections of the Internal Revenue Code which find no counterpart in the California Inheritance Tax Act. 26 U.S.C. § 2036 provides, in effect, that where a decedent has made a transfer of property (except in case of a bona fide sale for a full consideration in money or money's worth) by trust or otherwise and has retained a life interest therein, the property is subject to Federal Inheritance Tax. 26 U.S.C. § 2043 provides, in effect, that if such transfer is made for a consideration in money or money's worth, there shall be included in the decedent's gross estate only the excess of the fair market value of the property at the time of death over the value of the consideration received therefor by the decedent. The District Court had found that the value of the consideration was equal to that of the property the ex-wife would receive and hence no tax should be imposed. The reviewing court found to the contrary. All that was involved was the factual question of the value of the property to be received by the ex-wife at the respective times. As we have no similar statutes in this State the case does not assist us in the problem here.

Respondent refers to Section 13601, Revenue and Taxation Code which makes subject to the inheritance tax a transfer ‘by will or the laws of succession’; to Section 13641 which provides that if the property is transferred by deed, bargain, sale, assignment or gift, without a valuable and adequate consideration, it is a transfer subject to this part, and then to the Department's Regulations 13601–13603(a) which provide ‘a transfer by will is subject to the Inheritance Tax Law even though made pursuant to an agreement between the transferee and the decedent for an adequate and full consideration in money and money's worth which was received by decedent. In such case, the transferee takes from the decedent under the will and not by virtue of the agreement.’

Revenue and Taxation Code, section 13641 does not apply here because there was an adequate consideration for the agreement to provide support for Madeline, both that given by the wife in waiving further rights and those expressed in the agreement, and in the obligation of Giovanni to support his incompetent daughter even though she was an adult. (Civ.Code, § 206.)

As to the administrative regulations they, of course, are entitled to great weight in the interpretation of the statutes. (Estate of Barr (1951) 104 Cal.App.2d 506, 231 P.2d 876.) However, they do not have the force of law, nor can they disregard or overrule the law. These regulations appear to be an attempt by administrative interpretation to overrule the decisions which hold that under a property settlement agreement of the kind with which we are here concerned, the beneficiary does not take through the will, but through the agreement.

The interest which Madeline was to receive under the terms of the agreement in addition to support in her lifetime, was ‘an amount of money or property as will, upon Husband's death, fairly and adequately pay for and discharge any and all expenses for the care, support and maintenance of said Madeline Vai during the remainder of her lifetime.’ Respondent contends that thereby no transfer of property or interest to Madeline occurred and that it is a situation such as stated in In re Howell's Estate, supra, concerning the parties to the agreement ‘Neither recognized the existence of any specific debt.’ Here, however, there is a specific debt. It is such a sum as will fairly and adequately care for Madeline. The debt is the obligation of support. The specific amount, which is definitely determinable, is a part of that obligation. There can be no appreciable distinction between providing a specific sum for that support and in providing that she shall receive an adequate amount for that support. Both the will and the agreement provide for a reasonable monthly sum for support. Neither provides that the amount of support is to be in the sole discretion of the trustee. Whether the sum set by the executors which has been capitalized for Madeline's lifetime, is a correct sum is a matter to be determined by the probate court. But it is a fixed obligation which vested the right in Madeline to a reasonable sum.

Paragraph II of decedent's will states that during the entire term of this trust the whole title, both legal and equitable, in fee, to the trust estate is vested in the trustee ‘and no interest therein is vested in any beneficiary hereunder. The interest of the beneficiaries is personal property only, consisting of the right to enforce the due performance of the trust.’ This statement by the testator could not overcome the fact that by the agreement Madeline's equitable interest vested in her. As shown, her interest does not come from the will but from the agreement.

Respondent contends that the value of Madeline's interest is not an obligation of the estate and hence not a deduction provided for by Sections 13981–13982 which prescribe the only deductions permissible in computing inheritance taxes and if it were such obligation and deductible as such, a claim would have to be filed as provided by sections 707 and 929 of the Probate Code.

Her [Madeline's] property interest having vested by the agreement is not an obligation of the estate in the nature of a debt, it is simply property which does not become a part of the decedent's estate. Strictly speaking, her interest is not a ‘deduction’. It is more in the nature of an ‘exclusion’. As shown by the authorities hereinbefore cited it appears in the estate solely for the purpose of transferring record title from the decedent to the beneficiary. The estate is the conduit by which record title is transferred ‘for purposes of fixing the inheritance tax beneficial succession is the measure’ (Estate of Rath, supra, 10 Cal.2d 406, 75 P.2d 512). In Estate of Belknap, supra, the $20,000 used to purchase annuities was included in the inventory although held not to pass to the beneficiary by succession.

Respondent contends that there was no consideration for the transfer to Madeline because Mrs. Vai attempted to rescind¹ the agreement for alleged fraud and finally accepted $500,000 in lieu of her interests under the agreement. This is a non-sequitur; the estate settlement with Mrs. Vai had nothing to do with the rights of Madeline under the agreement. As to her the agreement still stands.

In Estate of Rath, supra, where the wife conveyed her separate property to her husband on condition that he make a will devising such portion of it as was not consumed by him for his support to her nephews, it was held that although the nephews' interest in Mr. Rath's estate was not subject to an inheritance tax as his estate was a mere conduit to transfer title to the nephews, their interests were taxable in Mrs. Rath's estate. Based upon that holding, respondent contends that, in any event, if it is determined that Mrs. Vai provided consideration for the transfer to Madeline then her interest is subject to the gift tax provided in 15105. In Rath the transfer to the nephews was a gift. In the case at bench the transfer to Madeline is for consideration. Hence, that section does not apply.

To sum up, the transfer to Madeline was by agreement which vested title in her and not by the will, which was only a conduit for the record transfer of title. The interest transferred to Madeline was definite. In decedent's lifetime she could have enforced the agreement had decedent attempted to breach it. Her interest never became a part of his estate for tax purposes.

Order reversed.

FOOTNOTES

FOOTNOTE.  

1.  Although not shown in the record, the briefs refer to the fact that the widow, after Vai's death brought an action to rescind the property settlement agreement on the ground of fraud. The trial court found against the widow but the Supreme Court (Vai v. Bank of America (1961) 56 Cal.2d 329, 15 Cal.Rptr. 71, 364 P.2d 247) reversed on the ground that a fiduciary relationship existed between husband and wife at the time he supplied her a schedule of community assets and liabilities. Following the reversal the estate made a settlement with the widow of $500,000 and her action to rescind the agreement was, by stipulation, decided against her. This settlement included the widow's relinquishment of benefits she would have enjoyed under the residuary trust in decedent's will.

BRAY, Justice.* FN* Assigned by the Chairman of the Judicial Counsel.

GERALD BROWN, P. J., and COUGHLIN, J., concur.