Title: Indiana Dept. of State Revenue v. Estate of Hungate

State: indiana

Issuer: Indiana Supreme Court

Document:

439 N.E.2d 1148 (1982)
INDIANA DEPARTMENT OF STATE REVENUE, Inheritance Tax Division, Appellant,
v.
ESTATE OF Lola B. HUNGATE, Deceased, Appellee.
Nos. 982S374, 1-481A115.

Supreme Court of Indiana.
September 28, 1982.
*1149 Linley E. Pearson, Atty. Gen., Wm. Eric Brodt, Alembert W. Brayton, Deputy Attys. Gen., Indianapolis, for appellant.
Arthur W. Banta, Anthony W. Mommer, Krieg DeVault Alexander & Capehart, Indianapolis, for appellee.
PIVARNIK, Justice.
This cause comes to us on a petition to transfer from the First District, Indiana Court of Appeals. The Shelby Circuit Court held that the assets of a trust were not in the estate of Lola B. Hungate. The Court of Appeals, First District, reversed the decision of the trial court. Indiana Department of State Revenue, Inheritance Tax Division v. Estate of Hungate, (1981) Ind. App., 426 N.E.2d 433.
Transfer is sought by the appellee pursuant to Ind.R.App.P. 11(B)(2)(c), alleging that the decision in this case conflicts with the decision of the Court of Appeals, Second District, in Matter of Estate of Martindale, (1981) Ind. App., 423 N.E.2d 662. The two issues in conflict, presented for our review, are: 1) whether the donee of an unconditional power of appointment and a right to invade the corpus has substantial ownership in the trust property; and, 2) whether the exercise of the power of appointment in favor of the donee's estate renders the trust property a taxable asset of the estate. Because of the substantial conflict between these two opinions, we grant transfer to resolve the issues in conflict and accordingly vacate the opinion of the Court of Appeals.
The facts and circumstances of this cause were well enumerated in the Court of Appeals opinion and we adopt that portion of the opinion and incorporate it herein as follows:
423 N.E.2d  at 433-34.
The Court of Appeals held in Hungate that Mrs. Hungate's power to enjoy the trust corpus during her lifetime coupled with her general power of appointment constituted a property interest, and that the exercise of the power of appointment in favor of Mrs. Hungate's estate rendered the trust corpus a taxable asset of her estate.
Martindale, supra, was decided by the Second District Court of Appeals and with virtually the same set of facts, came to an opposite conclusion on the two issues:
423 N.E.2d  at 665-66.
We hold that the majority in Hungate is correct in its resolution of these issues and the decision of the Second District Court of Appeals in Martindale is in error.
Martindale relied on State of Indiana, Department of Revenue v. Monroe County State Bank, (1979) Ind. App., 390 N.E.2d 1104. This latter case was also decided by the First District Court of Appeals and was authored by Judge Robertson, the same judge that authored the opinion in Hungate. Judge Robertson correctly distinguished the fact situation in Monroe County State Bank from the fact situations presented in Hungate and Martindale.
In Monroe County State Bank, the decedent had a right to receive the income from the corpus of the trust but had no right to invade the corpus. She did have the right, effective at her death, to choose the beneficiary of the corpus. The decedent, therefore, had no property right in the corpus which she could enjoy during her *1151 lifetime. In the present case, under the terms of her husband's will, Lola Hungate had a complete and unconditional power of appointment with respect to the corpus of trust A, exercisable by her alone and in her sole discretion during her lifetime and also at her death. Such power of appointment could be used by Lola Hungate to "appoint the corpus or any portion of it from time to time at any time during her lifetime" or at her death, to herself, her estate, or to any person, firm or corporation of her choice. The Court of Appeals was correct in ruling that "Hungate possessed an equitable ownership in the corpus by her right to consume it."
The inheritance tax on a resident decedent is imposed pursuant to Ind. Code § 6-4.1-2-2 (Burns Repl. 1979). This section provides:
Ind. Code § 6-4.1-2-4(a)(1) and (3) provides the following:
We agree with Judge Robertson's interpretation of these statutes:
Matter of Estate of Bannon, supra, was also decided by the First District and correctly established the "ownership" theory in our inheritance tax statutes:
Consistent with Bannon, Lola Hungate had a property right in the trust corpus which she could enjoy during her lifetime because she had the right to invade the corpus for her own benefit. Lola's testamentary power thus represented a continuance of her lifetime control over the trust assets. The same was true in Martindale, supra. The decedent in Monroe County State Bank, supra, however, did not have the requisite lifetime interest in the trust property because she had no right over the corpus while alive. This position is further *1152 supported by the decision of the Fourth District Court of Appeals in Estate of Newell, (1980) Ind. App., 408 N.E.2d 552. In Newell, supra, the decedent established a testamentary trust in favor of his widow. The trust authorized the trustee, the Peru Trust Company, to use any or all of the corpus of the trust to pay Mrs. Newell any and all sums she might request for her care, upkeep, pleasure and any other requirements that she might call to the trustee's attention. Mrs. Newell was also given the power to remove the trustee. The Fourth District found that while Mrs. Newell might never actually consume the entire trust corpus, it was unquestionably at her unrestricted disposal. The court held that because of Mrs. Newell's "unlimited power to request any sum she desires, her right to invade and exhaust the trust corpus, and her right to change the trustee, the value of all the trust property should be included in the assessment of her beneficial interest." Id. at 558.
Lola Hungate was given complete and unconditional authority to invade the corpus of the trust created by her husband's will. During her lifetime and at her death she could appoint the entire corpus to herself, her estate, or to any person, firm, or corporation of her choice. Lola Hungate then possessed an ownership interest in Trust A at her death.
Holding as we do now that Lola Hungate had a substantial ownership interest in the trust corpus at her death, the appellee, Estate of Hungate, would still argue that the exercise of the power of appointment in favor of the decedent's estate still does not render the corpus a taxable asset of the estate. Appellee specifically points out that the legislature, in 1929, repealed the provision in the tax code which read:
See 1913 Acts, Ch. 47, § 1(6), 1921 Acts, Ch. 275, § 7(6). The court in Monroe County State Bank, supra, properly interpreted the repeal of this statute to mean that the exercise of the power of appointment was no longer a taxable event. 390 N.E.2d  at 1106. However, the trust in Lola Hungate's estate over which she held an inter vivos general power of appointment, was taxed not because she exercised her power of appointment but because she transferred property, by her will, over which she possessed an equitable ownership interest sufficient to make the property hers for inheritance tax purposes. Such transfers are taxable pursuant to Ind. Code §§ 6-4.1-2-4(a)(1) and (3).
The person who takes an interest on the exercise of a power of appointment takes it, as a general rule, under the donor of the power and not under the donee. I.L.E. Powers § 7 (1970). This common law principle is premised upon the fact that the exercise of a power of appointment is effectuated by the instrument creating the power, such that the appointee derives his title through the donor, not the donee. Usually, the donee possesses merely a power to appoint property for another and the property can pass only from the donor to the appointee, as was the situation in Monroe County State Bank. However, when the donee of a power of appointment possesses more than the testamentary power to appoint, and, in fact, possesses an equitable lifetime ownership interest in the property by virtue of her power to invade the corpus and to appoint the property to herself, then the property, in substance, does belong to the donee and the general common law principle does not apply.
Transfer is granted, however, the decision of the Court of Appeals is affirmed. The judgment of the trial court is reversed and *1153 this cause remanded for proceedings not inconsistent with this opinion.
GIVAN, C.J., and DeBRULER, HUNTER and PRENTICE, JJ., concur.