Opinion ID: 104617
Heading Depth: 1
Heading Rank: 3

Heading: the fifth proposal.

Text: THE STATUTORY INTENT OF THE SETTLOR REQUIRED TO MAKE THE ESTATE TAX APPLICABLE IS ABSENT AND A CONTRARY INTENT IS PRESENT. The undisputed evidence shows that, at the time of the transfer by trust, there was an absence of conscious intent on the part of the settlor that the trust property, or any part of it, should ever return to him or to his estate. In fact, there is strong evidence showing that he intended affirmatively to make a complete and irrevocable transfer which would exclude all possibility of a reverter to him. The trust recited as complete a transfer as any outright deed of gift would have recited if made directly to his children, except for the natural feature that, at their immature age, the transfer was made to trustees and these trustees were required by the irrevocable terms of the trust to deliver complete title to the settlor's children, or to their descendants, at a future date. The settlor's intent and the completeness of the transfer would have been no more complete if, instead of fixing the date for the future distribution of the trust property at the date of his own death, he had fixed it arbitrarily at December 19, 1940, which later proved to be the date of his death. The intent and completeness of the transfer, similarly, would have been no more complete if he had fixed the date of termination of the trust to coincide with the death of a third person instead of with his own death. THE STATUTE REQUIRES A FINDING OF THE SETTLOR'S INTENT. Section 811 (c) requires us to find the settlor's intent as a condition of the application of that Section to this case. Accordingly, if the settlor had used language in his trust instrument which expressly, or even impliedly, had created or recognized a possible reverter in favor of the settlor, that language in itself would have been evidence that the settlor had intended the trust to include a reverter in his favor and that he had intended the trust property, in the event of a realization of that reverter, to pass from him to his estate, under the 1920 trust, upon the expiration of that trust at his death. It is, however, in the complete absence of such language in the trust instrument that the Government now claims that a possible reverter has arisen by operation of law. The existence of such a reverter, accordingly, may or may not have been intended in fact, and may not have been even thought about by the settlor. To say that the settlor must have intended all the legal consequences of his acts begs the question. So construed, the Section would have the same meaning as if the word intended had been omitted. Intended should be given its normal, factual meaning. To intend means to have in mind as a design or purpose. [12] The question of intent is one of fact, difficult to determine, but determinable, nevertheless. Section 811 (c) involves more than merely determining whether a transfer took effect, as a matter of law, at or after death or whether a string or tie, as a matter of law, was retained until death. There remains for determination the fact whether the settlor did actually intend that the 1920 transfer take effect in possession or enjoyment upon the expiration of the trust at his death. Section 811 (c) expressly covers transfers either  in contemplation of or intended to take effect in possession or enjoyment at or after . . . death.  (Italics supplied.) We have held that the settlor-decedent's motive must be determined before it can be held that a transfer was in contemplation of death. United States v. Wells, 283 U.S. 102. That case included a transfer in trust, inter vivos, which was held not to have been made in contemplation of . . . death. Similarly, factual intent should be found in order to determine whether a transfer was intended to take effect in possession or enjoyment at or after . . . death. In United States v. Wells , Chief Justice Hughes, speaking for the Court, said (pp. 116-117): The quality which brings the transfer within the statute is indicated by the context and manifest purpose. Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. . . . As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. In cases involving contemplation of . . . death under § 811 (c) the required motive impelling a transfer  is a question of fact in each case. (Italics supplied.) See Allen v. Trust Co. of Georgia, 326 U.S. 630, 636. So also, in each case under § 811 (c), the question whether the decedent has at any time made a transfer, by trust or otherwise, . . . intended to take effect in possession or enjoyment at or after his death, . . . should be one of fact. In determining the issue as to the settlor's intent in making his 1920 transfer, inter vivos, in the present case, the following considerations are material and persuasive: 1. Language of the trust instrument.  There was no language in this instrument which expressed or even affirmatively implied an intent to make a transfer to take effect in possession or enjoyment at or after the death of the settlor rather than in praesenti. If the trust instrument had contained such an express or affirmatively implied declaration of the settlor's intent, it might have been conclusive of the issue. If there had been even a description of, or reference to, a possible reverter to the settlor, that would have been strong evidence of the intent required by § 811 (c). The absence of any such description or reference was consistent with a lack of intent that there be such a reverter. It was negative evidence to the effect that such a reverter was not intended and not desired by the settlor. In an instrument of this kind it is natural for the settlor to give affirmative expression to each beneficial use to which he intends or desires the trust property to be put. It cannot be argued effectively in this case that the complete silence of the trust instrument on the subject of a possible reverter of the trust property to the settlor or to his estate amounted to an expression of intent by the settlor that such a reverter be permitted to arise by operation of law. As a matter of fact, the extrinsic evidence presented in this case tended to establish an opposite intent and desire. In the present case, the overwhelming improbability of a complete failure of beneficiaries was so complete that it supplied a natural reason for omitting further provisions for distribution of the trust property. The likelihood that a 47-year-old settlor would outlive his three children and also his prospective grandchildren obviously was small. As it turned out, none of the settlor's three children predeceased him, and the distribution of the trust property was made to them without reaching his grandchildren. The facts of this case as they existed in 1920 presented to the settlor quite a different problem from that which would have been presented if, at that time, he had named as the only beneficiary of the trust a person with a life expectancy obviously shorter than his own. Standing alone, the instrument evidences a simple transfer in praesenti, comparable to that in Reinecke v. Northern Trust Co., supra . The language of the instrument, therefore, certainly did not, in itself, require the property which was transferred, in 1920, to be included, in 1940, in the settlor's gross estate for federal estate tax purposes. If anything, the language itself, read in the light of Illinois law as stated above in the discussion of the third proposal and as regarded by tle settlor in the light of the advice of his legal counsel, is expressive of an intent that there be no possibility of a reverter, and of an intent to make an absolute and complete transfer to the trustees in praesenti. 2. Remoteness of the possible reverter.  The remoteness of the possible realization of a suggested reverter (whether arising from express provision of a trust or by operation of law) is an important factor in establishing the probable intent of the settlor of any trust to make, thereby, a transfer to take effect in possession or enjoyment at or after his death. If the 1920 trust instrument had named as its sole beneficiary a person having a comparatively short life expectancy, then, assuming a reversion in favor of the settlor under Illinois law, the possibility of its occurrence would have been substantial. It would have been so great that, if the settlor had expressly mentioned such a reversion in the trust instrument, that mention of it would have substantially demonstrated the existence of the intent required by § 811 (c). Even if the settlor had made no express mention of such a reversion and thus had left its effectiveness wholly to the operation of the law of Illinois, the circumstances themselves, including the high probability of the realization of the reversion, would have supplied important evidence upon which to base a finding of the required intent on the part of the settlor. However, with the inclusion of each additional youthful beneficiary of the trust, the basis for a conclusion that the settlor intended to establish a reversion to himself or to his estate and to postpone the transfer of the possession or enjoyment of the property until at or after his death was weakened. The Tax Court, upon undisputed evidence, reduced to a mathematical basis the possibility presented by the suggested reverter in this case. The computations were stated to have been based upon a mortality table and an assumed rate of interest prescribed in Treasury Regulations as applicable to federal estate taxes. The computations also were stated to have been based upon assumed ages of a settlor and of beneficiaries corresponding substantially with those stated in the facts of this case. The computations showed that the probability that a person of the age of this settlor would survive three persons of the respective ages of the primary beneficiaries who were living at the date of the creation of this trust was only 0.01612, or about 1 1/2 chances out of 100. Similarly, the value of the right of a person, of the age of the settlor in 1920, to receive $1 on the death of the last of three persons of the ages of the primary beneficiaries was $0.00390. In 1920, the most favorable computation would thus have placed a value of less than $4,000 upon the settlor's interest in the suggested reverter relating to a $1,000,000 trust fund. These computations do not take into consideration the additional possibility that many grandchildren might have been born in time to qualify as beneficiaries of this trust, and thus further reduce the possibility of reverter. In fact, three such grandchildren were born in time to qualify  thus reducing the value to the settlor, in 1940, of the suggested reverter, on a $1,000,000 trust fund, to about $70. The relation of $70 to $1,000,000 ordinarily would be de minimis and certainly not one which would induce Congress to permit the assessment of a tax of over $450,000 because of its existence. This demonstration of the remoteness of the possible reverter, if any, in this case is persuasive at least in showing the fact to have been that the settlor, in establishing this trust, probably intended it to be nothing other than a completed gift to those of his children or their descendants who might survive him. In 1920 the gift, as such, was tax-free. Such a gift today would be subject to a gift tax. The assessment of a gift tax upon such a transaction emphasizes the impropriety, rather than the propriety, of also applying to it an estate tax at the death of the settlor. In 1920 the character of the gift was the same as it would be today and the fact that it was not subject to a gift tax then does not make it any more subject to the 1940 estate tax than if a gift tax had been paid upon it. 3. Direct evidence of the intent of the settlor.  Substantial evidence confirmed the absence of the factual intent necessary in order to make § 811 (c) applicable. There was no direct evidence indicating the existence of an actual intent on the part of the settlor to provide for a reverter to himself or to his estate or, in any other manner, to cause his 1920 transfer to trustees for the benefit of his descendants to take effect in possession or enjoyment at or after his death. On the other hand, there was undisputed evidence indicating the absence of such an intent. In fact, it indicated the probable existence of a contrary intent. The Illinois attorney who drew the trust instrument testified that, prior to the drafting of the instrument, the settlor had stated that he desired and intended the trust property to be transferred to trustees for the benefit of his children and that he wanted at no time to retain any interest in it. The attorney added that, in drafting the trust, he had endeavored to carry out the instructions of his client and that he believed he had done so. That attorney is a member of the firm representing the estate of the settlor-decedent in the instant case. As attorneys for the estate of the 1940 decedent, they argue that, under the law of Illinois, as they understood it and as they advised their client in 1920, there has not arisen any possibility of a reverter to the settlor under this trust by operation of law or otherwise. The receipt of that opinion by the settlor at the time of executing the trust instrument supports the petitioners' contention that the settlor then intended to translate into this Illinois trust his purpose to make an absolute and complete transfer of the subject matter of the trust, and thereby to make irrevocable provision for its future distribution. In view of the uncontroverted and convincing evidence of the absence of any such factual intent on the part of the settlor as is required to bring his 1920 transfer within the terms of § 811 (c), and in view of the judgment of the Tax Court in favor of the settlor-decedent's executors, there is no need to remand the case to that court for a further finding in support of its judgment. For the reasons stated in the foregoing discussion of the fifth proposal, and also for the reasons stated in the discussion of the third proposal to the effect that no possibility of a reverter arose in favor of the settlor by operation of the law of Illinois, I believe that the judgment of the United States Court of Appeals should be reversed.