IN RE: ESTATE of W. S. ROSECRANS (1970)

This is an appeal by the executor of the last will and testament of W. S. Rosecrans from an order of the superior court, sitting in probate, overruling the executor's objections to the report of the inheritance tax appraiser and fixing the inheritance tax in accordance with that report. For the reasons set forth below, we reverse the order.

On May 31, 1938, decedent's mother, Lillian T. Rosecrans, executed an instrument which created a revocable, inter vivos trust (known as the ‘Lillian T. Rosecrans Trust’). So far as is here material, the declaration of trust provided as follows:

‘SECOND. The Trustees of ‘The Lillian T. Rosecrans Trust’ shall be Lillian T. Rosecrans and W. S. Rosecrans, and after the death of either of these trustees, the survivor and Carmelita E. Rosecrans shall be the trustees of ‘The Lillian T. Rosecrans Trust’, and after the death of either of these trustees the survivor and Elisabeth H. Rosecrans shall be the trustees of ‘The Lillian T.Rosecrans Trust’, and after the death of Elisabeth H. Rosecrans the survivor and Lynn Helm, Jr. shall be the trustees of ‘The Lillian T. Rosecrans Trust’, and after the death of Lynn Helm, Jr. the survivor of W. S. Rosecrans and Carmelita E. Rosecrans shall appoint an additional trustee so that there shall be two trustees of ‘The Lillian T. Rosecrans Trust’, and any successor or successors to said trustee or trustees shall have the same power and be subject to the same obligations and administer the said trust upon the same conditions and for the same purposes as are now provided in this Deed of Trust.'

‘SEVENTH. The trustees of ‘The Lillian T. Rosecrans Trust’ shall pay all of the net income of the trust to the trustor during her life, and after the death of the trustor all income of the trust shall be added to and become principal.

‘The trustees of ‘The Lillian T. Rosecrans Trust’ shall pay from principal so augmented whatever sums they may determine and at whatever time or times that they may determine, in equal amounts, to W. S. Rosecrans and Carmelita E. Rosecrans, or, if either be deceased, to the heirs, devisees and legatees of such deceased person, subject to the administration of his or her estate.'

‘EIGHTH. On the termination of this trust all the property thereof, including principal, rent, income, issues, and profits, shall be divided into two equal parts; one part shall be distributed to the heirs, devisees and legatees of W. S. Rosecrans, subject to the administration of his estate; the other part shall be distributed to the heirs, devisees and legatees of Carmelita E. Rosecrans, subject to the administration of her estate.’

Lillian T. Rosecrans predeceased decedent; as of the time of the order herein involved, Carmelita Rosecrans (then Carmelita Rosecrans Ewing) was still alive and the trust had not yet terminated.

On March 2, 1960, decedent had created a trust, of which he was the sole trustee, known as the W. S. Rosecrans Trust. Under the terms of that trust, he was to receive the income from the trust property during his lifetime; upon his death, the trust asserts were to be divided as follows:

‘(a) All estate, inheritance and succession taxes imposed by the Federal Government, or by any state or other governmental body, and occasioned or payable by reason of the death of the Trustor, whether attribuable to properties subject to probate administration or to properties included in this trust or to outside transfers, shall be paid by the Trustee of this trust out of this trust estate. Said payment may be made either directly to the taxing authority involved or to the Executor of the Trustor's estate for forwarding to said tax authority. Furthermore, upon said death the Trustee shall pay, or shall pay to the Executor of the Trustor's estate sufficient sums for the payment of, the just debts and funeral expenses of the Trustor and the expenses of administration of the Trustor's estate. Written statements by the Executor of the Trustor's estate of the sums to be paid said Executor under the provisions of this paragraph shall be sufficient evidence of the amount and propriety thereof for the protection of the Trustee and the Trustee shall be under no duty to see to the application of any such payment. Any payments from this trust estate under the first sentence of this sub-paragraph (a) shall be charged to and reduce the residuary gift provided for under sub-paragraph (d) of this Paragraph (2), and any payments from this trust estate under the third sentence of this subparagraph (a) shall be charged to and shall reduce equally the gift provided in subparagraph (b) (as provided in said subparagraph) and the residuary gift provided in sub-paragraph (d) of this Paragraph (2).

‘(b) If, and only if, Trustor's wife, Elisabeth Helm Rosecrans, is then living, the Trustee shall distribute to that certain trust created by Elisabeth Helm Rosecrans, Trustor's wife, under instrument of even date, of which she is the original Trustee, to be held, managed and distributed in accordance with the provisions of said trust as presently constituted, or as hereafter amended in accordance with its terms, or if the distribution to said trust is ineffective, then to the said Elisabeth Helm Rosecrans, Trustor's wife, or her order, such assets from this trust estate as are selected by the Trustee, subject to the limitations hereinafter set forth, which at their value as finally appraised for California inheritance tax purposes in the estate of the Trustor equals the ultimate figure computed as follows: (In such computation all pertinent interests and assets shall be valued on the basis of their value as finally determined in the computations of California inheritance taxes in the estate of Trustor.)

‘(i) Compute the combined value as of the date of Trustor's death of all assets then held in this trust, the gross probate estate of Trustor, and one-half of all assets then held in the Lillian T. Rosecrans trust, a trust created under instrument dated May 31, 1938.

‘(ii) Subtract from the figure computed under sentence (i) above all debts owing by the Trustor at the time of his death or for the payment of which property of the Trustor is primarily liable, all funeral expenses of the Trustor, and all expenses of administration of the Trustor's estate. No death taxes, estate or inheritance, Federal, state or otherwise, shall be deduted under this sentence (ii).

‘(iii) Compute one-half of the resulting figure.

‘(iv) Deduct from the figure computed under sentence (iii) above the value of any property passing to Trustor's wife through his probate estate.

‘(v) The resulting figure is the ultimate figure.

‘In selecting the assets to satisfy this gift to the trust created by Elisabeth Helm Rosecrans or to Elisabeth Helm Rosecrans, the Trustee shall allocate to said gift any and all of the following property which is held in this trust at the time of Trustor's death: (i) any real estate located in Santa Paula or Fontana, California; (ii) any real estate theretofore used on a part or full time basis as a residence by Trustor or any immediate member of his family; and (iii) any interest in producing oil or mineral rights. (In the event the trust then holds fee title to the surface under which oil or minerals are being produced, the Trustee shall have the option of including or not including said surface rights in the allocation under this subparagraph (iii).) The balance of said gift shall be satisfied by such trust assets as the Trustee chooses.

‘(c) The Trustee shall pay in cash from the corpus of the trust, reducing to cash said corpus to the extent necessary, the amounts specified on Schedule ‘B’ attached hereto and in effect at the time of Trustor's death to the persons set forth on said Schedule. Except where specifically provided otherwise on said Schedule ‘B’ such payment to such person shall be made only if said person is living at the time of Trustor's death.

‘(d) The balance of the trust estate shall be distributed to The Rosecrans Foundation, a trust for religious, charitable, scientific, and educational purposes, created by a trust agreement dated the 1st day of August, 1955.’

By his will, decedent, after disposing of his household and personal effects, and giving certain corporate stock not part of the W. S. Rosecrans Trust assets, to his widow, provided as follows:

‘Sixth: I give, devise and bequeath all the rest, residue and remainder of my estate, including all failed and lapsed gifts, and including the entire interest of myself and my estate—the interest of my estate as used herein means the interest distributable to my heirs, devisees and legatees, subject to administration of my estate—in that certain trust called ‘The Lillian T. Rosecrans Trust’ created by instrument dated May 31, 1938, to the Rosecrans Foundation above described.'

The effect of these various transactions is: (a) that decedent's interest in the Lillian T. Rosecrans Trust passes to the Rosecrans Foundation and, since that entity is a charitable corporation, no inheritance tax is due on the transfer to it; (b) that, because of the nature of the W. S. Rosecrans Trust, the widow's distributive share from that trust is taxable to the same extent as though it had been transferred to her as a devisee or legatee under decedent's will. In computing the inheritance due because of the transfer to the widow, she is entitled to the so-called ‘marital exemption’ provided for in section 13805 of the Revenue and Taxation Code,¹ which reads as follows:

‘Property equal in amount to the clear market value of one-half of the decedent's separate property shall, if transferred to the spouse of the deceased, be exempt from the tax imposed by this part. A transfer, for the purpose of this exemption, shall include a transfer of property in trust with a general or limited power of appointment in the surviving spouse. This exemption shall be in addition to all other exemptions under this part.’

The present litigation is concerned with the amount of the exemption so granted. If decedent's interest in the Lillian T. Rosecrans Trust (valued at $879,303.83) is included in the asset to be divided in calculating the marital exemption, the inheritance tax payable on account of the gift to the widow will be about $40,000 less than that imposed by the order appealed from. It follows that the basic issue before us is whether or not that interest should be so included in the calculation; we conclude that it should be included.

The theory advocated by the Controller, and accepted by the trial court, is as follows: (1) Only separate property that is ‘transfered’ by a transfer subject to taxation under the inheritance tax law is included in the base on which the section 13805 exemption is computed; (2) property transferred by the donee of a power of appointment is not a transfer subject to the inheritance tax law; (3) decedent's interest in the Lillian T. Rosecrans Trust at the moment of his death was a power of appointment; (4) therefore, the section 13805 exemption is computed without regard to the interest in the Lillian T. Rosecrans Trust.

We accept, at least for the purposes of this opinion,² the first two steps in the Controller's reasoning; for the reasons set forth below, we reject the third step and, therefore, also reject his conclusion.

I

The Controller argues that the nature of decedent's interest in the Lillian T. Rosecrans Trust has previously been determined, adversely to the executor, by an earlier order in the probate proceedings and that that determination is binding here. We reject that contention.

On January 13, 1967, the executor filed in the probate proceedings a document entitled: ‘Executor's First Account Current and Report; Petition for: (1) Allowance on Account of Statutory Attorneys' Fees and Statutory Executor's Commissions; (2) Approval of Abandonment of Worthless Assets; (3) Approval of Exercise of Power of Appointment in Favor of Rosecrans Foundation; and (4) For Preliminary Distribution.’ After reciting the facts with reference to the Lillian T. Rosecrans Trust and the disposition by decedent of his interest therein, substantially as above set forth, the petition alleged:

‘Said Article Sixth validly appoints the entire interest of decedent in the Lillian T. Rosecrans Trust to the Rosecrans Foundation, and it would be appropriate for this court to confirm said appointment by decree herein.’

and prayed (insofar as the trust interest is concerned):

‘that this court approve and confirm the effectiveness of the exercise of the aforesaid power of appointment under the Lillian T. Rosecrans Trust in favor of the Rosecrans Foundation and order that as a result thereof decedent's entire interest in the Lillian T. Rosecrans Trust, including the interest, if any, of decedent's estate therein, is now vested in the Rosecrans Foundation; thus 1/2 of any amount distributed by the Trustee of the Lillian T. Rosecrans Trust between the date of decedent's death and the termination of said trust on the date of death of Carmelita Rosecrans Ewing shall be distributed to Rosecrans Foundation, and upon the termination of said Lillian T. Rosecrans Trust, the decedent's share thereof, being all of the one of the two equal parts of the trust which are to be distributed, shall be distributed to Rosecrans Foundation;’

To that petition, the Controller filed his consent, expressed in the following terms:

‘CONSENT IS HEREBY GIVEN to the granting of the petition for preliminary distribution dated January 6, 1967, now on file herein, without first having the inheritance tax determined and paid.

‘This consent shall not be deemed to be an acquiescence by the State Controller with respect to any matter in said petition which may be an issue in the determination of the inheritance tax in this estate.’

No opposition was filed to the petition and, on February 7, 1967, the court made its order which, insofar as is herein concerned, read as follows:

‘* * * that by virtue of the terms of the last will of said deceased, and said decedent having possessed a power of appointment under the Lillian T. Rosecrans Trust, under which trust said decedent herein and Carmelita Rosecrans Ewing, his sister, are named as principal beneficiaries, which provides for termina tion of said trust at the death of the last survivor of the principal beneficiaries, and the power of appointment being exercised under Article Sixth of the last will of said deceased in favor of the Rosecrans Foundation, and the effectiveness of the exercise of such power of appointment under the Lillian T. Rosecrans Trust in favor of the Rosecrans Foundation, being hereby approved, and that decedent's entire interest in the Lillian T. Rosecrans Trust, including the interest, if any, of decedent's estate therein, is now vested in the Rosecrans Foundation, and that one-half of any amount distributed by the Trustee of the Lillian T. Rosecrans Trust between the date of decedent's death and the termination of said trust on the date of death of Carmelita Rosecrans Ewing shall be distributed to the Rosecrans Foundation, and upon the termination of said Lillian T. Rosecrans Trust, said decedent's share thereof, being all of the one of the two equal parts of the trust which are to be distributed, shall be distributed to Rosecrans Foundation;’

We do not regard those proceedings as foreclosing an examination, on this appeal, of the true nature of W. S. Rosecrans' interest in his mother's trust, for two reasons:

(1) The only issues lawfully before the probate court on the petition for distribution were those described in sections 1000 and 1001 of the Probate Code. In addition to a time limitation (herein admittedly met), those are: (1) May the distribution be made without prejudice to creditors and other potential distributees; and (2) Is the proposed distributee the person lawfully entitled to the property proposed to be distributed? Neither of those matters was actually at issue in the Rosecrans estate—the assets of the W. S. Rosecrans Trust, chargeable under the terms of that trust, were more than ample to satisfy any obligations of the probate estate and the identity of the proposed distributee was never questioned. Whether the distributee took the interest in the Lillian T. Rosecrans Trust as the appointee under a power of appointment or as a legatee under the will was, thus, entirely immaterial to any issue lawfully before the probate court; in either capacity, a confirmation of the distributee's rights was not only proper but statutorily required. The characterization of the interest held by W. S. Rosecrans as being a ‘power of appointment’ was, thus, a characterization on a matter not in issue and, under well settled principals, is not a binding determination of that legal conclusion.

(2) As we have pointed out above, the Controller expressly stipulated, in his consent to the distribution, that the order to be made should not bind him in the present proceeding. As was held in Estate of Bloom (1931) 213 Cal. 575, 2 P.2d 753, and in Estate of Clarke (1967) 66 Cal.2d 142, 56 Cal.Rptr. 897, 424 P.2d 337, a determination in a preliminary probate proceeding that does not bind one party does not bind the other.

The Controller relies on Estate of Radovich (1957) 48 Cal.2d 116, 308 P.2d 14; Estate of Caswell (1957) 152 Cal.App.2d 195, 312 P.2d 703, and Estate of Adams (1958) 164 Cal.App.2d 698, 331 P.2d 149. But in those cases the earlier order determined a matter that was squarely in issue in that proceeding—namely the identity of the proposed distributee as the person lawfully entitled to receive the property involved. Since the court had once determined a material fact, in a proceeding in which that fact was necessarily involved, the decision bound both the distributees and the Controller in the tax proceeding. As we have indicated above, the opposite is the situation now before us.

The Controller also relies on Estate of Baglione (1966) 65 Cal.2d 192, 53 Cal.Rptr. 139, 417 P.2d 683. That case is not apposite. The earlier proceeding in this probate did not decide ‘title’ to anything. The W. S. Rosecrans Foundation had ‘title’ (subject to administration) of decedent's one-half interest in the Lillian T. Rosecrans Trust, whether it had acquired title on decedent's death as an appointee or as a legatee; the earlier proceeding, as we have pointed out, merely confirmed the fact that that title was free of any claim of creditor, taxing authority or other possible distributee.³

II

We turn, then, to the determination, on its merits, of the issue before us: Did W. S. Rosecrans have a ‘power of appointment’ over one-half of his mother's trust estate? We conclude that he did not.

(1) The language used by the draftsman of the Lillian T. Rosecrans Trust is not that ordinarily used to create a power of appointment; as the executor points out, it is the language approved (at least by custom) to accomplish a grant to the estate of a named person (usually a life tenant).⁴

(2) Although property subject to a general power of appointment is potentially subject to the claims of the donee's creditors, it is so subject only ‘to whatever extent other available property is insufficient for that purpose.’ (Rest. of the Law, Property, § 329, p. 1862.) The property herein involved, being expressly ‘subject to administration’ was subject to creditors' claims, not as a last resort, but according to the marshalling priorities provided for in sections 751 and 752 of the Probate Code, under which, potentially, the assets of the Lillian T. Rosecrans Trust could have been exhausted before property passing to the widow was reached.⁵

(3) As the provisions of the Lillian T. Rosecrans Trust, above quoted, make clear, decedent had, during his lifetime after his mother's death, a totality of powers equal to those of an owner in fee. He was one of the two trustees, the other being his sister and co-beneficiary. The trustees had the power, under paragraph Seventh, to distribute to themselves, free of the trust, all of its assets and that power was not subject to limitation by any standard. The only limitation was that a distribution by the trustees to one of them had to be concurrent with an equal distribution to the other—not a limitation of any practical significance. When that power to invade and acquire the principal of onehalf of the trust estate is coupled with the power under paragraph Eighth to designate by will the ultimate distributee, we find vested in W. S. Rosecrans an interest which, however it is characterized, is something other than, and more than, a ‘power of appointment.’

Since the Controller's theory, embodied in the order before us, is valid only if decedent held a technical ‘power of appointment,’ and since his interest was not a ‘power of appointment,’ it follows that its disposition was a ‘transfer’ within the meaning of the inheritance tax law⁶ and its value formed part of the base on which the section 13805 exemption should be calculated.

The order is reversed.

FOOTNOTES

1.  All statutory references are to the Revenue and Taxation Code unless otherwise indicated.

2.  Consult Estate of Newton (1950) 35 Cal.2d 830, 221 P.2d 952, for a history of the California statutory changes with reference to the taxation of the exercise of powers of appointment after 1917 and prior to the 1965 revision. Except as to the limited group of powers covered by the 1935 amendment of section 13693 (not herein involved) the exercise of a power was not subject to inheritance tax during the thirty-year period between 1935 and 1965.The theory underlying the first proposition is more subtle. Section 13805 refers to the ‘clear market value’ of the separate property; section 13312 defines ‘clear market value’ as the value of property ‘included in any transfer’; under general principles, ‘property covered by the power is not part of the ‘estate’ of the donee or ‘property which passes by will’ of the donee.' (Rest. of the Law, Property, § 333(d) p. 1875); i. e., the property is ‘transferred’ from the donor to the appointee, it is not ‘transferred’ by the donee.

3.  As we point out below, the interest in the Lillian T. Rosecrans Trust was potentially liable for decedent's debts, whether it passed as a legacy under the will or by exercise of a power of appointment. (Rest. of the Law, Property, § 329, p. 1862.) As we have said above, the characterization of decedent's interest was immaterial in determining the effect of distribution on creditors.

4.  Consult, for example, the language involved in Dorland v. Dorland (1960) 178 Cal.App.2d 664, 3 Cal.Rptr. 262, and in Schade v. Stewart (1928) 205 Cal. 658, 272 P. 567, and that used in the annotation to section 860 of the Probate Code found in Deering's Annotated Codes.

5.  Since we construe the provisions of the Lillian T. Rosecrans Trust, it is immaterial (a) that there were no substantial creditors, or (b) that the provisions of the W. S. Rosecrans Trust provided for a different priority.

6.  The fact that the disposition to the W. S. Rosecrans Foundation was exempt from tax under sections 13841 and 13842 does not affect its status as a ‘transfer’ under section 13304.

KINGSLEY, Associate Justice.

FILES, P. J., and JEFFERSON, J., concur.