Case Name: Schwartz Estate
Court: Supreme Court of Pennsylvania
Jurisdiction: Pennsylvania
Decision Date: 1972-10-04
Citations: 449 Pa. 112
Docket Number: Appeal, No. 37
Parties: Schwartz Estate.
Judges: Before Jonhs, O. J., Eagen, O’Brien, Roberts, Pomeroy, Nix and Manderino, JJ.
Reporter: Pennsylvania State Reports
Volume: 449
Pages: 112–126

Head Matter:
Schwartz Estate.
Argued January 14, 1972.
Before Jonhs, O. J., Eagen, O’Brien, Roberts, Pomeroy, Nix and Manderino, JJ.
Daniel T. Deane, Jr., for appellants.
Harry 0. Liebman, with him Samuel M. IÁébmam, for appellee.
October 4, 1972:

Opinion:
Opinion by
Mr. Chief Justice Jones,
Decedent died testate on December 11,1969, leaving, inter alia, one half of his residuary estate to his wife, Pearl Schwartz (appellee). Approximately three and one-half months prior to his death, decedent transferred a $37,000 bond of the Natural Gas Pipeline Company of America to his son by a prior marriage, under the Pennsylvania Uniform Gifts to Minors Act, Act of June 21, 1957, P. L. 358, §1 et seq., as amended, 20 P.S. §3601 et seq. (Supp. 1971), wherein decedent named himself as custodian. By court appointment, decedent's divorced wife became successor custodian of the bond for her son and one Irwin Kraus was appointed guardian of the son's estate. Thereafter, appellee elected to take against the will pursuant to the Wills Act of 1947, Act of April 24, 1947, P. L. 89, §8, us amended, 20 P.S. §180.8 (Supp. 1971), as well as against all inter vivos conveyances, including the bond in question, under the Estates Act of 1947, Act of April 24, 1947, P. L. 100, §11, as amended, 20 P.S. §301.11 (Supp. 1971). The Orphans' Court Division of the Court of Common Pleas of Montgomery County considered the transfer of the bond by decedent as a "testamentary disposition" and determined that appellee was entitled to one half the value of the bond and all income derived therefrom. Appellants, the court- appointed custodian and the guardian of the son's estate, filed this appeal.
The overall issue presented by this appeal—one of first impression—is whether a corporate bond purchased by a decedent and registered in his name as custodian for his son under Pennsylvania's Uniform Gifts to Minors Act is subject to the widow's election under Section 11 of the Estates Act. Section 11 of the Estates Act of 1947 provides in pertinent part: "A conveyance of assets by a person who retains a power of appointment by will, or a poioer of revocation or consumption over the principal thereof, shall at the election of his surviving spouse, be treated as a testamentary disposition so far as the surviving spouse is concerned to the extent to which the power has been reserved . . . ." (Emphasis added). Section 5(b) of the Uniform Gifts to Minors Act grants the custodian the power to pay over to the minor or use the custodial property for the benefit of the minor at the discretion of the custodian "with or without regard to the duty of himself or of any other person to support the minor or his ability to do so." The precise issue before us is whether the statutory authority given a custodian to use the custodial property "with or without regard" to his duty to support the minor constitutes a "power of . . . consumption" under Section ll of the Estates Act of 1947 when the donor-custodian is also the donee's father with a pre-existing duty of support.
Section 8 of the Wills Act of 1947, Act of April 24, 1947, P. L. 89, §8, as amended, 20 P.S. §180.8 (Supp. 1971), permits a widow to elect to take against her husband's will. The obvious philosophy of Section 11 of the Estates Act of 1947 as well as the common law, Montague Estate, 403 Pa. 558, 170 A. 2d 103 (1961), is to prevent a husband from indirectly disinheriting his wife through an inter vivos transfer while retaining control over the use and enjoyment of the property during Ms lifetime. As noted by the official comments to Section 11 of the Estates Act of 1947, the section preserves for the surviving spouse the right to share in the decedent's assets "where the decedent has retained important rights of ownership at death." (Emphasis added). In such cases the law treats the husband as the owner of the property during his lifetime. If, however, the husband makes an outright gift wMch divests him of any possible interest so that the property can no longer inure to his benefit, nothing in our case law or statutes would allow his widow to claim any part of this property.
This case falls somewhere between the two extremes and forces us to decide whether the potenial benefit which the father-donor-custodian could have derived by distributing the custodial property to fulfill his preexisting support obligation amounts to such a retained "important right of ownership" that the transfer should be treated as a testamentary disposition under Section 11 of the Estates Act.
Our past cases interpreting the interests that must be retained by the settlor or donor in order to invoke Section 11 of the Estates Act of 1947—"a power of revocation or consumption over the principal"—have involved situations where the interest retained by the decedent could be exercised to his own advantage. Thus, in Pengelly Estate, 374 Pa. 358, 97 A. 2d 844 (1953), the settlor of the inter vivos trust reserved the power to consume the corpus of the trust for his maintenance and support "as may in [settlor's] opinion be necessary."
Unlike cases of this nature, a custodian under the Pennsylvania Uniform Gifts to Minors Act cannot consume the principal for his own benefit. While Section 5(b) of the Pennsylvania Uniform Gifts to Minors Act gives discretionary power to the custodian to pay over custodial property to the minor for the minor's "support, maintenance, education and benefit," the act nowhere permits the custodian to use the custodial property for the custodian's benefit. The appellee contends (supported by the dissent) that the decedent had precisely the same right oyer the property after he created the Uniform Gift fund as he had prior to the conveyance. However, under the provisions of the Act, this is clearly not the case. First, subsection (c) of Section 5 provides that the court may order the custodian to pay funds for the support, maintenance or education of the minor upon petition of a parent or guardian or of the minor himself if he has reached age fourteen (as in the instant case). Secondly, subsection (d) of Section 5 provides that the custodian must pay the entire unexpended fund over to the beneficiary at the time of his majority or to his estate in the event he dies a minor.
Thus, it should be clear that a custodian may exercise his power of consumption over the custodial property solely for the benefit of the minor and not for the custodian's benefit. As stated in Section 4 of the Pennsylvania Uniform Gifts to Minors Act, "[a] gift made in a manner prescribed in this act is irrevocable, and conveys to the minor indefeasibly vested legal title to the custodial property. . . ."
However, appellee argues that this decedent-custodian would benefit from the limited power of consumption since this custodial property might relieve the decedent-father of his duty to support his son, Mare Kevin Schwartz. Of course, this argument presupposes the existence of a support obligation on the part of the custodian that can be met by payments from the custodial fund and falls apart whenever a custodian owes no duty of support to the minor. Additionally, we believe the advantage to the present decedent, if there was any advantage, was too indirect and remote and cannot be classified as a power of consumption under Section 11. It appears to be impossible for the custodian to have used his statutory authority to his own advantage; his power of consumption could only be exercised to benefit the minor and the existence of such power of consumption has not been demonstrated on this record to have relieved, actually or potentially, the donor-decedent of his support obligation.
The appellee also cites several United States Tax Court rulings as persuasive authority for the proposition that in a Uniform Gifts to Minors transfer the donor who appoints himself custodian retains sufficient control over the property to make it includable in his estate under Section 11 of the Estates Act. Although this Court is not bound by the Tax Court's interpretations of the Internal Revenue Code in the interpretation of our own Estates Act, we are aware that our
decision in this case will mean that transfers which are included in the decedent's estate for federal tax purposes will not be included for purposes of the spousal election against testamentary dispositions under Section 11 of the Estates Act. There is no inconsistency, however, since the provisions of the Internal Revenue Code applied by the Tax Court are significantly broader than Section 11. Section 2036 of the Internal Revenue Code, Tranfers with Retained Life Estate, makes the value of any property transferred by the decedent includable in the gross estate "to the extent of any interest therein" (emphasis added) retained by the decedent, including "the right . to designate the persons who shall possess or enjoy the property or the income therefrom." Thus, in Estate of Harry Prudowshy v. Commissioner, 55 T. C. 890 (1971), the Tax Court did bring transfers made under the Uniform Gifts to Minors Act back into the estate of the decedent for estate tax purposes. The Tax Court concluded that as long as the decedent had the fund available to use at his discretion for the support of his children he retained sufficient interest to support taxation. See, also, Estate of JacK F. Chrysler v. Commissioner, 44 T.C. 55 (1965), rev'd on other grounds, 361 F. 2d 508 (1966).
Similarly, Section 2038 of the Internal Revenue Code, Revocable Transfers, includes in the gross estate of the decedent the value of any property transferred "to the extent of a/tvy interest therein" (emphasis added) if the decedent can "alter, amend, revoke, or terminate" the transfer. In Dorothy Stuit v. Commissioner, 54 T.C. 580 (1970), the Tax Court recovered the corpus of a Uniform Gift created by a grandmother for her grandchildren where she appointed herself custodian on the theory that she had control over the fund and could distribute it to the minors if she so desired and thxxs "terminate" the transfer. Even under the appellee's construction of Section 11 of our Estates Act, such a transfer could not be treated as a testamentary disposition since the grandmother had no duty to support the minors.
In his capacity as custodian of the fund which he created for his son the decedent clearly had some power over its distribution. The Tax Court has determined that this retained power is sufficient under the provisions of the Internal Revenue Code to make the entire transfer part of the gross estate for federal estate tax purposes whether or not the donor-custodian owes a duty of support to the minor. However, we do not believe that the power retained by the decedent in his capacity as custodian of the gift was such an "important right of ownership" or "power of . . . consumption" to make the transfer a testamentary disposition under Section 11 of the Estates Act. The sole beneficiary of the irrevocable gift was Marc Kevin Schwartz, the decedent's son, who enjoyed indefeasibly vested legal title to the security. Any advantage retained by the decedent was too indirect and remote to constitute a power of consumption.
Decree reversed. Each party to pay own costs.
Mr. Justice Eagen concurs in the result.
The Pennsylvania Uniform Gifts to Minors Act provides for designation of a successor custodian by the court upon the death of the original custodian. Act of June 21, 1957, P. U. 358, §8, <?s amended, 20 P.S. §3608 (Supp. 1971).
Since the argument has not been raised either below or on appeal, we will assume for the purpose of this decision that the donor-custodian could in fact substitute custodial funds for his legal obligation to support. However, it is less than clear under the language of Section 5(b) of the Uniform Gifts to Minors Act that the custodian could use the proceeds of the fund to defray a preexisting support obligation. Nothing in the Act states that the custodian can use the custodial property to relieve himself of his support obligations. In order to give the custodian maximum flexibility in the administration of the fund, the Act specifically provides that he can mate distributions for the benefit of the minor "with or without regard" to his own or any other person's duty to support the minor. The plain meaning of the language does not indicate that the custodian can use the proceeds of the fund in lieu of an independent prior support obligation.
The turning point in cases involving powers of appointment, e.g., Behan Estate, 399 Pa. 314, 160 A. 2d 209 (1960), has been the testamentary character of the inter vivos trust rather than the settlor's ability to benefit himself during his lifetime.