Court Opinion

ID: 3541840
Source: CourtListenerOpinion
Date Created: 2016-07-05 22:53:25.035953+00
Date Added: 2024-06-11T14:06:14.533936
License: Public Domain

On July 20, 1915 Augusta Kohrs transferred to the Union Bank and Trust Company of Helena, Montana, 1,500 shares of capital stock of Conrad Kohrs Company, a Montana corporation, in trust for the purposes and under the conditions outlined and declared in the instrument of transfer thereof.
The Union Bank  Trust Company accepted the transfer of the stock and the trust imposed upon it in the trust agreement.
The trust agreement provided that the shares of stock were transferred to the trustee in trust for the following uses, trusts and purposes:
"In trust, to hold the legal title to said shares of stock and to collect and receive all dividends, receipts, proceeds or other money arising therefrom, and to pay over all net receipts and profits arising therefrom to my husband, Conrad Kohrs, so long as he shall live, and in trust, upon the death of my said husband, *Page 148 
to continue to hold said shares of stock in trust and thereafter during my lifetime to pay me all receipts and profits arising therefrom, and in trust, upon my death, to hold said shares of stock in trust and to pay over one-half of all net receipts and profits arising therefrom to my daughter, Anna M. Boardman, her heirs, executors, administrators or assigns, until the youngest of my grandchildren, then living, shall attain the age of twenty-five years, and then to turn over said one-half of said shares and all receipts, proceeds and profits thereof, not theretofore accounted for under the terms of this trust, to my said daughter, Anna M. Boardman, her heirs, executors, administrators, or assigns, and in trust to pay over the other half of all net receipts and profits arising therefrom to my daughter, Katherine K. Warren, or in the event of her death, to her child or children, until the youngest of my grandchildren then living, shall attain the age of twenty-five years, and then to turn over said other half of said shares and all receipts, proceeds and profits thereof, not theretofore accounted for under the terms of this trust, to my said daughter, Katherine K. Warren, or, in the event of her death, to her children in equal parts, share and share alike."
Then follow provisions for the protection of the grandchildren of the trustor and of their contingent interest in the trust estate.
On August 15, 1915 and May 17, 1918 supplemental agreements were made by Augusta Kohrs and accepted by the trustee clarifying the original agreement. These agreements are not involved in the instant case.
On April 12, 1934, a further agreement was executed by Augusta Kohrs reciting the execution of the aforesaid trust agreement of July 20, 1915 and stating, that "since the creation of said trust my husband, Conrad Kohrs, has died, and my youngest grandchild has arrived at the age of 25 years;
"Now, Therefore, in view of such changed conditions, it is my wish and desire, and I hereby direct that upon my death there be paid to my daughter, Anna M. Boardman, one-half of the profits, income, and dividends from said shares of stock during her lifetime, and to my daughter, Katherine K. Bogart, *Page 149 
formerly Katherine K. Warren, one-half of said income, profits, and dividends during her lifetime. Upon the death of my daughter, Anna M. Boardman, one-half of said shares and the income, profits and dividends therefrom which have not been paid to her belong to and become the property of my grandchildren now living share and share alike, and in the event of the death of any said grandchildren prior to the death of Anna M. Boardman, the share of such grandchild to vest in, belong to, and became the property of the heirs of such grandchild. Upon the death of my daughter, Katherine K. Bogart, the other half of said shares and the income, profits and dividends therefrom which have not been paid to her to belong to and become the property of my grandchildren now living share and share alike, and in the event of the death of any of said grandchildren prior to the death of Katherine K. Bogart, the share of such grandchild to vest in, belong to, and become the property of the heirs of such grandchild.
"I hereby direct my said Trustee to distribute, transfer, and deliver over said shares of stock in accordance with my intention and purpose as above stated. Said trust to finally terminate upon the death of the survivor of my two daughters.
"The said trust heretofore created to be modified and the said instruments creating and defining said trust to be amended accordingly."
Augusta Kohrs died October 29, 1945. The respondents were appointed as executors of her will dated January 6, 1944. A special appraiser was appointed to appraise and fix the value of the estate for inheritance tax purposes. He appraised the fair market value of the estate, other than the 1,500 shares of the capital stock of the Conrad Kohrs Company, at the sum of $85,706.08 and appraised the value of the 1,500 shares of stock of the Conrad Kohrs Company at $640,451.36 as of the date of death of Augusta Kohrs, decedent.
At the hearing of the executor's final report and petition for determination of inheritance tax the court assessed the tax on the transfer of the 1,500 shares of stock in Conrad Kohrs Company at the rate fixed by the statute in force on July 20, 1915, *Page 150 
the date of the creation of the trust. This appeal is from the order of the district court determining the inheritance tax due.
It was mutually stipulated and agreed by and between the parties at the time of the hearing that the only question was the question of law as to whether the rate of tax imposed by section 7724, Revised Codes of Montana 1907, in effect at the time of transfer of July 20, 1915, should apply or whether the trust estate should be taxed at the rate provided by Chapter 145, Code of Civil Procedure, Revised Codes of Montana 1935, in effect at the date of the death of Mrs. Kohrs. That is the question presented by this appeal.
In 1915 when Mrs. Kohrs transferred the stock of the Conrad Kohrs Company to the trustee the statute provided: "* * * all property which shall pass by will or by the intestate laws of this State, from any person who may die, seized or possessed of the same, while a resident of this State * * * or any interest therein or income therefrom, which shall be transferred by deed, grant, sale or gift made in contemplation of the death of the grantor or bargainor, or intended to take effect in possession or enjoyment after such death to any person or persons, or to anybody politic corporate, in trust or otherwise, * * * shall be and is subject to a tax * * *." Section 7724, Revised Codes of Montana 1907. The rate fixed by the statute was $1 on each $100 of the clear market value when beneficial interests passed to enumerated relatives of the class applicable to the instant case.
The present statute imposes a tax at a higher rate "upon any transfer of property * * * or income therefrom in trust or otherwise * * * in the following cases, * * *
"(3) When the transfer is of property made by a resident or by a nonresident when such nonresident's property is within the state, or within its jurisdiction, by deed, grant, bargain, sale or gift, made in contemplation of the death of the grantor, vendor, or donor, or intended to take effect in possession or enjoyment at or after such death. * * *" Section 10400.1, Revised Codes of Montana, 1935.
Thus except for the increased rate, for all practical purposes *Page 151 
the portions quoted from section 7724, R.C.M. 1907 and from section 10400.1, R.C.M. 1935 are alike.
From the beginning this court has declared the tax imposed by[1]  the statute to be an inheritance tax, i.e. a tax not on the property of decedent but upon the right and privilege of receiving property by will or succession or by any inter vivos transfer operating as substitutes for testamentary dispositions. State ex rel. Davis v. State Board of Equalization, 104 Mont. 52,64 P.2d 1057, 108 A.L.R. 1397, and cases therein cited. In re Wadsworth's Estate, 92 Mont. 135, 11 P.2d 788.
Such a tax must be distinguished from an "estate tax" which[2]  has been defined as a tax imposed "upon the privilege of transfer at death." 28 Am. Jur., "Inheritance Estate  Gift Taxes," section 10, p. 12. The federal government and some of the states impose estate taxes. A majority of the states impose inheritance taxes.
For a judicial explanation of the difference between the two systems see the dissenting opinion of Justice Roberts in Coolidge v. Long, 282 U.S. 582, 608, 51 S. Ct. 306, 75 L. Ed. 562.
It is not here contended that the transfer to the trust was a transfer in contemplation of death. We are concerned with the taxibility of the trust created as a transfer intended to take effect in possession or enjoyment at or after death.
A transfer intended to take effect in possession or enjoyment[3]  at or after death is when the legal title is transferred by way of a trust, reservation of life estate or some other such device whereby the grantor attempts to retain the beneficial interest until his death or after.
A transfer to a trust projects the effect of the transfer into the future and splits the ownership of the property so that under some circumstances less than a complete transfer takes place and actual possession and enjoyment of the fruits of the property by the transferee is postponed.
This division of the attributes of ownership has led to two lines of decisions. Some courts have looked to the vesting in *Page 152 
interest of the property as the determinative time for the imposition of the transfer tax and the fixing of the rate of tax.
The courts that adopt this theory reason that when the initial transfer of legal title is irrevocable the remainderman's interest in the remainder after the life estate vests and when he comes into possession of the property after the death of the life tenant he is taking the estate that vested in him at the time of transfer and his interests are not enlarged by the death of the life tenant.
The case of May v. Heiner, 281 U.S. 238, 50 S. Ct. 286, 287,74 L. Ed. 826, 67 A.L.R. 1244, is an example of this point of view. The United States Supreme Court there said: "At the death of Mrs. May no interest in the property held under the trust deed passed from her to the living; title thereto had been definitely fixed by the trust deed. The interest therein which she possessed immediately prior to her death was obliterated by that event."
As was pointed out in Milliken v. United States, 283 U.S. 15,19, 51 S. Ct. 324, 326, 75 L. Ed. 809, the only question in May v. Heiner, supra, was construction of the federal statute and the United States Supreme Court has looked to the time when the legal title vested and said that the gift to such a trust as is here involved with a reservation of life income is not a transfer "intended to take effect in possession or enjoyment at or after death."
An estate is "vested" when there is an immediate right of[4, 5]  present enjoyment, or a present fixed right of future enjoyment. Hignett v. Sherman, 75 Colo. 64, 224 P. 411, 415; People v. Strom's Estate, 363 Ill. 241, 2 N.E.2d 94, 95. "When there is an immediate fixed right of present or future enjoyment an estate is vested — vested in possession when there exists a right of present enjoyment, and vested in interest when there is a present right of future enjoyment." Ziegler v. Love,185 N.C. 40, 115 S.E. 887, 888; People v. Welch's Estate, 235 Mich. 555,565, 209 N.W. 930.
Recognizing this fundamental distinction between "vesting in interest" and "vesting in possession," various state courts *Page 153 
have construed the phrase "intended to take effect in possession or enjoyment at or after such death" to mean the time when the estate "vested in possession" instead of following the federal rule of looking to the time when the estate "vested in interest." See Blodgett v. Guaranty Trust Co., 114 Conn. 207, 158 A. 245; affirmed in Guaranty Trust Co., of New York v. Blodgett,287 U.S. 509, 53 S. Ct. 244, 77 L. Ed. 463; Worcester County Nat. Bank v. Commissioner, 275 Mass. 216, 175 N.E. 726, and In re Estate of Rising, 186 Minn. 56, 242 N.W. 459, 463.
The distinction has been well stated by the Minnesota court in the Rising case, supra. "Our Legislature, without impugning the common-law concept of the vesting in interest of the remainder, which is effected by a gift with reservation of life estate or use to the donor, has simply recognized that death, although not the `generating source' of interest, is yet the operative event which causes `the vesting in possession,' and the coming into enjoyment, and so perfects title in the remainderman. That operation is plainly, and in any view, a succession of such real and substantial sort, with such vital and enlarging effect on property rights as to make it the proper subject of an excise."
When we consider that our inheritance tax is an excise upon the right to receive and that the tax upon transfers intended to take effect in possession or enjoyment at or after death is a tax upon such a transfer when it is used as a substitute for testamentary disposition, the logic of making the moment of death the time at which the transfer is made becomes apparent. This was well expressed in Crocker v. Shaw, 174 Mass. 266, 54 N.E. 549,550. "We see no difference in principle between property passing by a deed intended to take effect in possession or enjoyment on the death of the grantor, and property passing by will. In either case it is the privilege of disposing of property after the death of the grantor or testator which is taxed, * * *."
"It is the vesting of the property in possession and enjoyment on the death of the grantor and after the statute took effect, that renders it liable. * * *" Quoted in In re Wallace's Estate,131 Or. 597, 282 P. 760, 762. *Page 154 
The decisions of this court from the time of Gelsthorpe v. Furnell, 20 Mont. 299, 51 P. 267, 39 L.R.A. 170, have foreshadowed the holding that this state will look to the vesting in possession for determining the rate of tax. In the latter case the court refused to sustain the trial court which based its decision on when the estate was vested in interest rather than looking to the time when beneficiaries under the will came into possession and enjoyment.
A closer case is In re Estate of Schuh, 66 Mont. 50,212 P. 516, 518, involving an absolute inter vivos transfer of certain stocks, bonds, mortgages and cash from the donor to her four children. The donees, in turn, executed a trust agreement with a bank as trustee whereby all the property transferred to them was delivered to the trustee who was to pay the donor an income for life and then upon her death the property was to be delivered to the four children. The court said: "The liability for tax depends upon the character of the estate transferred. The terms `enjoyment' and `possession' are well defined and understood."
Further on the court continued: "The restrictions as to the use of the estate and the income therefrom during the lifetime of the grantor are utterly incompatible with the right of present possession or enjoyment. The status of the estate as a trust estate was not to be changed during the lifetime of the grantor. Construed in the most favorable light for her children, the estate created by the agreements was a vested future interest, to take effect in possession and enjoyment upon the death of Mary Schuh, defeasible upon the death of the children without issue prior to the death of the grantor. The contention of appellant that title to the property vested in the children upon the execution of the transfer agreement is unimportant here. It was not vested indefeasibly, and so far as we are concerned in this case, it matters not whether the title vested indefeasibly orwas contingent or subject to be divested. The possession andenjoyment of the estate was not for the children in any eventuntil the death of the grantor. These were reserved for the donor for her full lifetime, and therefore the remainder to her children falls within *Page 155 
the exact provisions of the statute relating to transfers to take effect in possession or enjoyment at the death of the donor, and was therefore subject to the tax. In re Green's Estate, 153 N.Y. 223,47 N.E. 292; Keeney [v. Comptroller of State of New York]222 U.S. 525, 32 S.Ct. Rep. 105, 56 L. Ed. 299, 38 L.R.A., N.S. 1139; Barclay's Trustee v. Commonwealth, 156 Ky. 455,161 S.W. 510, 51 L.R.A., N.S. 232." (Emphasis added.)
In Re Estate of Oppenheimer, 75 Mont. 186, 243 P. 589, 44[6]  A.L.R. 1470, it was held that a remainder that vested in a widow after the death of her husband under the provisions of an inter vivos ante-nuptial contract in lieu of her dower rights was a taxable transfer intended to take effect in possession or enjoyment at or after death. And this court defined our policy as follows: "The policy of the law will not permit the owner of an estate evading payment of inheritance taxes by any device which secures to him for life control of the property transferred in trust and the benefit of income therefrom during the life of the transferor." In re Wadsworth's Estate, 92 Mont. 135, 149,  11 P.2d 788, 792.
Therefore the principle that the significant element in[7]  possession or enjoyment is the passing of the economic benefits rather than the shifting of technical legal title is an established one in this state. The vested character of the right is immaterial if the right to immediate possession and enjoyment is deferred until the grantor's death. In re Estate of Schuh, supra.
Subsection 4 of Section 10400.1, revised Codes of Montana 1935, provides: "Such tax shall be imposed when any such person or corporation becomes beneficially entitled, in possession or expectancy, to any property or the income thereof, by any such transfer whether made before or after the passage of this act; provided that the provisions of this act shall apply to all estates of all decedents who have died since the first day of April, 1921. * * *"
In determining whether such a transfer as the one in the instant case was one intended to take effect at or after death we *Page 156 
have looked beyond the mere vesting in a legal sense of title to the gift to the actual shifting of the economic interest. See In re Mayer's Estate, 110 Mont. 66, 99 P.2d 209. We look to what the transferee actually receives.
There are, then, two sound differences between the position taken by the federal courts and some states and the attitude adopted by a majority of the states and concurred in by the state of Montana. The first is of course the fundamental difference between taxing the right to make the transfer as imposed by federal statute and our tax upon the right to receive property by some substitute for testamentary disposition. Compare Leach v. Nichols, 285 U.S. 165, 52 S. Ct. 338, 76 L. Ed. 681, with Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S. Ct. 123, 73 L. Ed. 410, 66 A.L.R. 397.
The second difference is the policy of this state to look at the time when the estate "vested in possession" as the critical time for the imposition of the tax as against the policy of some other jurisdiction who look to the "vesting in interest."
If the significant factor for the imposition of the tax is the[8, 9]  shifting of the economic benefit it follows that the transferee becomes beneficially entitled to the property when he becomes entitled to all of the incidents of ownership. The transfer of bare legal title does not give the transferee such rights of possession and enjoyment as to fix that time for the imposition of the tax. It is not until the beneficiary becomes entitled to the income and other economic interests that the transfer is complete and he then becomes beneficially entitled to the possession of the property or income therefrom. That is the time that determines when the tax shall be imposed and the rate that is in effect at that time is the rate at which the tax is assessed.
Such cases as In re Houston's Estate, 276 Pa. 330, 120 A. 267; Lilly v. State, 156 Md. 94, 143 A. 661, and Safe Deposit and Trust Co. of Baltimore v. Bouse, 181 Md. 351, 29 A.2d 906, which declare that the rate of inheritance tax is to be determined according to the law in effect at the time when the remainders vest in interest, at which time the rights of the parties become *Page 157 
fixed and certain, are based upon a construction of the statute that is not in accord with the established meaning of taking effect in possession or enjoyment as that phrase has been construed by this court and used by our legislature and are therefore not in point.
The respondents contend that if the tax is imposed at the rate[10]  in effect at the death of the trustor it will be a violation of the Fourteenth Amendment to the Constitution of the United States and of section 10, Article I of the United States Constitution and sections 11 and 27 of Article III of the Constitution of the state of Montana as a taking of property without due process of law and the impairment of a contract.
We cannot agree. As we have construed the statute and analyzed the previous decisions of this court we have consistently said the test is when the interest transferred takes effect in actual possession and enjoyment of economic benefits. "There is here no question, then, of statutory retroactivity." Coolidge v. Long,282 U.S. 582, 51 S. Ct. 306, 75 L. Ed. 562; Guaranty Trust Co. of New York v. Blodgett, 287 U.S. 509, 513, 53 S. Ct. 244,77 L. Ed. 463. The state may select any time as the time at which the tax attaches. It may fix the moment of death or the time of transfer. Fernandez v. Wiener, 326 U.S. 340, 66 S. Ct. 178, 90 L. Ed. 116; Central Hanover Bank  Trust Co. v. Kelly, 319 U.S. 94, 98,63 S. Ct. 945, 87 L. Ed. 1282; Cahen v. Brewster, 203 U.S. 543,27 S. Ct. 174, 51 L. Ed. 310, 8 Ann. Cas. 215.
The legislature of this state has designated the moment of death as the time of transfer under the facts of the instant case.
In 1923, between the time the trust was created and the death of the trustor, the rate of tax was increased. But it is not unconstitutional to measure a tax by rates not in force when the gift was made. Milliken v. United States, 283 U.S. 15,51 S. Ct. 324, 75 L. Ed. 809. In the latter case the United States Supreme Court said: "But a tax is not necessarily and certainly arbitrary and therefore invalid because retroactively applied, and taxing acts having retroactive features have been upheld in view of the *Page 158 
particular circumstances disclosed and considered by the court."
On July 20, 1915, the date on which the decedent created the trust and made the gifts intended to take effect in possession or enjoyment at or after her death the transaction was subject to a tax under the provisions of section 7724, Revised Codes of Montana 1907. These provisions were carried forward into subsequent Acts, section 10377, Rev. Codes of Montana 1921; 1923 amendment; sec. 10400.1, Rev. Codes of Montana 1935. In re Wilson's Estate, 102 Mont. 178, 197-198, 56 P.2d 733, 105 A.L.R. 367. Again quoting Milliken v. United States, supra, at 283 U.S. page 24, 51 S.Ct. at page 327, 75 L. Ed. 809: "The decedent, when he made his gift, was as well warned that it might be taxed on that basis as he was that it would be so taxed if on that day he had made the same disposition of it by will. * * * The present gift was subject to the excise when made; and, for reasons already indicated, we think a mere increase in the tax, pursuant to a policy of which the donor was forewarned at the time he elected to exercise the privilege, did not change its character." See In re Bass' Estate, Okla. Sup., 190 P.2d 800, and Merchants' Nat. Bank of Boston et al. v. Merchant's Nat. Bank et al., 318 Mass. 563, 62 N.E.2d 831, 837.
Counsel have ably briefed and argued the effect of the so-called modification of the trust on April 12, 1934. The state contends that this is a revocation of the original trust agreement and a new transfer to the trustor's granddaughters. The respondents contend that this instrument in 1934 did not constitute a revocation or renunciation and that the consent of all beneficiaries to the trust was not obtained and therefore under the provisions of section 7921, Revised Codes 1935, the trust could not be revoked, altered or modified.
That question is not before us on this appeal. The state board of equalization has appealed from an order determining inheritance tax in the matter of the estate of Augusta Kohrs, deceased. If the instrument of April 12, 1934 had any legal effect it was a transfer of the rights and interests of the beneficiaries Anna M. Boardman and Katherine K. Bogart, to their children. *Page 159 
If it was such a transfer and without consideration it may have been a taxable transfer and upon the death of Mrs. Boardman or Mrs. Bogart, a tax might be due the state. Cerf v. Commissioner of Int. Rev., 3 Cir., 141 F.2d 564. But that is a matter that must be determined in another proceeding and has no effect on the tax levied by the state on the creation of the original trust in 1915.
The order of the district court determining the inheritance tax in the estate of Augusta Kohrs is set aside and the cause remanded to the district court to impose the tax at the rate prescribed by Chapter 145, Code of Civil Procedure, Revised Codes of Montana, 1935, the statute in effect at the date of death of decedent.
Mr. Chief Justice Adair, and Associate Justices Choate and Angstman, concur.