Title: In Re Estate of Saroff

State: kansas

Issuer: Kansas Supreme Court

Document:

229 Kan. 446 (1981)
625 P.2d 458
In the Matter of the Estate of Sam Saroff, Deceased.
No. 51,581

Supreme Court of Kansas.
Opinion filed March 25, 1981.
Craig Kreiser, of the Department of Revenue, argued the cause and Alan F. Alderson and John P. Quinlan, of the Department of Revenue, of Topeka, were with him on the brief for appellant.
Charles D. Green, of Arthur, Green, Arthur & Conderman, of Manhattan, argued the cause and was on the brief for appellee.
The opinion of the court was delivered by
HOLMES, J.:
The Department of Revenue appeals from a Riley County District Court judgment granting appellees' petition for *447 abatement of additional inheritance taxes assessed by the director of taxation against the estate of Sam Saroff, deceased. The case was transferred from the Court of Appeals to the Supreme Court pursuant to K.S.A. 1980 Supp. 20-3018(c).
The State Board of Tax Appeals heard the petition for abatement filed by the co-executors of the estate and sustained the supplemental order of the director of taxation which assessed additional inheritance taxes in excess of fifteen thousand dollars against the estate. On appeal to the district court, the order of the Board of Tax Appeals was reversed and the petition for abatement of the additional taxes granted.
The stipulated facts were:
On March 2, 1977, the Board of Tax Appeals for the State of Kansas ordered that the appeal from the decision of the Director of Taxation be denied and it further ordered that the additional tax due be paid.
On March 16, 1977, Charles D. Green and Jack Goldstein, co-executors of the estate of Sam Saroff, appealed the Board's order to the district court of Riley County. On September 26, 1979, the district court ordered that the order of the Director of Taxation should be set aside and that the Director of Taxation remit to the taxpayers the inheritance tax improperly assessed.
The Kansas Department of Revenue has appealed the district court's ruling. The issue to be decided, according to appellant, is whether, at the death of Sam Saroff, there was a passing of an interest in the trust "to the beneficiary of that trust so as to subject the principal of the trust to Kansas inheritance tax as a transfer intended to take effect in possession or enjoyment after the decedent's death." No assertion is made that the gift or transfer in trust was in contemplation of death.
The trust agreement executed by Sam Saroff granted the trustee broad powers of discretion in the management of the assets in the trust estate similar to many now found in the Uniform Trustees' Powers Act, K.S.A. 58-1201 et seq., and amendments. The dispositive provisions of the trust provide:
It is apparent from the quoted language that if the beneficiary had died without heirs of his body prior to the death of his father, the trust property would have reverted to Mr. Saroff and been taxable in his estate. Appellant takes the position in this court that this possibility of reversion precludes the grant in trust from being a completed gift and is sufficient to bring the trust property into the estate for inheritance tax purposes. At the trial level the appellant based its arguments upon the broad powers of management set forth in the agreement rather than the effect of the possible reversionary interest. Appellees take the position that the court must look to the intent of the testator as disclosed by the trust agreement and the factual situation existing at the time of its execution to determine if the gift was intended to take effect in possession or enjoyment after the death of Mr. Saroff. The trial court found no intention of the settlor to retain such an interest or control that the gift of the property would not take effect in possession or enjoyment until after the death of the settlor. Appellees do not answer the arguments made by appellant but dwell upon the intent of Mr. Saroff as they interpret it from the trust agreement.
At the time of the death of Sam Saroff, K.S.A. 79-1501 provided in part:
The words "made or intended to take effect in possession or enjoyment at or after the death of the grantor," or words of similar import, are widely used in estate and inheritance tax laws including early versions of the federal estate tax statutes. Surprisingly, there has been a dearth of litigation in Kansas as to the proper interpretation of the statute. Our research reveals only one *450 Kansas case in which the possession and enjoyment language of the statute has been considered. In Russell v. Cogswell, 151 Kan. 14, 98 P.2d 179 (1940), supplemental opinion, 151 Kan. 793, 101 P.2d 36 (1940), this court held the corpus of an irrevocable trust, wherein the settlor fully parted with legal title to the trust property, was taxable upon the settlor's death due to a reservation of the income from the property during the settlor's lifetime. The court recognized the distinction between an estate tax and an inheritance tax as follows:
Because of the fact that grantor had retained a life estate in the trust income it was held that although the gift by the grantor was complete, the right to receive did not accrue to the beneficiary until the death of the grantor. In the instant case, Mr. Saroff did not retain any right to the income during his lifetime and although he had broad powers of management under the terms of the trust agreement, he had no authority to invade the corpus or utilize the income for his own benefit or for the benefit of any one other than his son. The sole question before the court is whether the possibility that the principal beneficiary, Stephen David Saroff, might die without issue prior to the death of his father created such a reversionary interest in the trust property that it should be taxed in Mr. Saroff's estate. The right to receive the property by Stephen David was in no way dependent upon his father's death but was solely dependent upon Stephen David living to be 30 years of age regardless of whether his father was dead or alive at such time.
The trial court in reaching its decision did not consider the effect of the possibility that the trust property might revert to the settlor and the thrust of the opinion is to the effect that the reservation of broad powers of management did not bring the property within the purview of the statute. The asserted rule that a possibility of a reversion to or a remainder interest in the grantor is sufficient to require taxation of the property in the grantor's estate has been stated many times in the case law, although most *451 of the cases which state the rule broadly have factual situations where possession or enjoyment is tied to the actual date of death. While it appears to be essential for the grantor of a trust to completely divest himself of all legal title in the trust property to avoid having the trust property included in his estate for federal estate tax purposes as well as for state inheritance tax purposes under statutes which have language similar to ours, the triggering event in most of the cases is the death of the grantor.
The general rule has been stated to be that the retention of any possibility of reversion, no matter how remote or unlikely, would result in the property subject to the reversion being included in the grantor's estate.
The general rule with respect to such transfers is discussed in 85 C.J.S., Taxation § 1147(3), pp. 927-930, where we find:
....
....
The general rule as to inter vivos trusts is stated at pp. 937-938 as follows:
Glosser Trust, 355 Pa. 210, 49 A.2d 401 (1946), is an example of the cases setting forth the general rule. In Glosser grantors created an irrevocable trust of $125,000 for the benefit of their three sons. The trust was to remain in full force and effect for fifteen years, at which time it was to be distributed to the beneficiaries, but could be terminated at any time upon the mutual and concurrent decision of the trustees and of the beneficiaries. The grantors appointed themselves trustees with broad powers of management. No income from the trust was ever distributed to the beneficiaries. At the time of Saul Glosser's death the trust assets were worth $204,044.50.
In holding that the trust was not taxable under Pennsylvania inheritance tax laws, the Supreme Court of Pennsylvania found that the possession and enjoyment of the trust property by the beneficiaries was in no way contingent upon or connected with the death of the donor. However, the court stated the rule to be:
Numerous older cases state the rule in broad language and a few have followed it in cases where the death of the grantor had no connection with the possession or enjoyment of the gift or transfer in trust, but the majority of the cases turn upon some event which is dependent upon the death of the grantor. In the early case of Comm'r v. Estate of Church, 335 U.S. 632, 93 L. Ed. 288, 69 S. Ct. 322 (1949), the settlor created an irrevocable trust in 1924 in which he reserved the right to receive the income during his lifetime. The trust was to continue during his lifetime and *453 upon his death the corpus was to be distributed to his surviving issue and, if none, to his brothers and sisters and to the children of any deceased brother and sister. As in the case at bar, no contingency was made for distribution if the settlor died without children and without any of his brothers or sisters, or their children surviving him. The court stated the rule as:
After stating this broad rule, the court held that the reservation of the right to the income was sufficient to bring the trust property within the rule. The decision was not based upon the possibility that the property might revert to the grantor or his estate. See also Fidelity Co. v. Rothensies, 324 U.S. 108, 89 L. Ed. 782, 65 S. Ct. 508 (1945) (the reservation of a contingent power of appointment); Commissioner v. Estate of Field, 324 U.S. 113, 89 L. Ed. 786, 65 S. Ct. 511 (1945) (reservation of income for life plus possibility of reverter specifically included in the trust instrument).
An extreme case which did result in the value of the trust property being included in the grantor's estate based solely upon a remote possibility of reverter is Commissioner v. Bank of California, 155 F.2d 1 (9th Cir.1946). The settlor created an irrevocable trust of certain properties reserving the income for herself for life. Upon her death the fund was to be divided between her two children. If either of her children were to die in her lifetime, their interest in the trust would go to the child's issue or if no issue existed, to the surviving child. At the time of her death her children were both alive and she had five grandchildren and one great-grandchild.
In holding that the trust principal was includable in the settlor's gross estate, the circuit court of appeals noted that the settlor had a reversionary interest in the trust fund. Acknowledging that settlor would have had to survive both her children, five grandchildren and one great-grandchild before her reversionary interest could be realized, the circuit court held that:
It should be noted however that the grantor had also retained the right to receive the income during her lifetime and the decision also relied upon the federal regulations in effect at the time.
On the other hand, Mr. Justice Holmes in Shukert v. Allen, 273 U.S. 545, 71 L. Ed. 764, 47 S. Ct. 461 (1927), a case remarkably similar to the one now before this court, found that property placed in trust by a fifty-six-year-old grantor for the benefit of his children was not taxable in the grantor's estate. The trust was established in 1921 and the grantor died the same year. The income from the trust was to be accumulated and the trust was to extend for a period of thirty years. There was no ultimate gift over in the event of the death of all possible beneficiaries prior to that of the donor and he had a theoretical possibility of reverter as in the present case. The court stated:
In analyzing the various cases involving the federal estate tax, it is necessary to consider the federal statutes and regulations as they existed at the times involved. Even the United States Congress and the Internal Revenue Service have recognized that some of the decisions and rulings interpreting the "made or intended to take effect in possession or enjoyment at or after the death of the grantor" were unfair in their applications of the so-called general rule and have taken steps to alleviate the problems to some extent. See Bogert, Trusts and Trustees § 273.15 (2nd ed. rev. 1977). Kansas, in 1978, adopted legislation to bring our inheritance tax statutes in line with current federal rules and regulations. K.S.A. 1980 Supp. 79-1537 et seq.
In reaching our decision in this case, we must also keep in mind the fundamental difference between an estate tax and an inheritance tax as pointed out earlier in Russell v. Cogswell, 151 *455 Kan. 14. Our inheritance tax is based upon the right of the beneficiary to receive the property. In the instant case, the right of Stephen David Saroff or his issue to receive the trust property was in no way contingent upon the death of Sam Saroff. He made a complete, out and out conveyance of the property to the trust for a period of years with the remainder over to his son or his issue and that transfer of title to the property bore absolutely no relationship to the time of the grantor's death. Upon reaching thirty years of age, the property would become Stephen's absolutely even if his father were to live to be a hundred years old. When Sam Saroff established the trust, he parted with the beneficial interest in the property and retained nothing more than broad powers of management which would also ensure to any successor trustee. He could not revoke the trust and regain possession and personal control of the assets; he could not change the trust and leave the property to other beneficiaries; he could not utilize trust income or corpus for anyone other than the trust beneficiary and he had no power to deprive his son of ultimately receiving the property if he lived to be thirty years old. Considering the respective ages of Mr. Saroff and his son, it is unlikely that he even gave consideration to the possibility that the property might revert to him. Certainly there is nothing in the record to indicate that he intended the property to remain his until after his death. Unless the possession or enjoyment of the property was dependent upon or certain to be delayed until at or after the death of the grantor, it cannot be said under the factual situation of this case that the grantor retained such an interest as would require inclusion of the property in his estate. Neither contingency exists and the fact that Mr. Saroff did die prior to the expiration of the trust does not alter the fact that his death did not affect the trust in any way (except for the necessity of a successor trustee) and if he had continued to live it would not have been affected. The right of Stephen David Saroff, or the heirs of his body, to receive the trust property was totally divorced from the event of the death of his father.
As stated in 85 C.J.S., Taxation § 1147(3), where the right to receive the property is not dependent or contingent upon the death of the grantor, "It is the intention of the settlor as expressed in the language of the trust instrument that controls." The trial court found no intent which would bring the property into the estate and we concur in its decision.
The judgment is affirmed.