Court Opinion

ID: 4477586
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:12:37.083424+00
Date Added: 2024-06-11T14:52:21.235705
License: Public Domain

Harron, J., dissenting: I respectfully dissent because I am unable to conclude that the demand clause in Article First of each trust is effective to make the gifts gifts of present interests in trust corpus (which is principal plus any accumulated income) under the reasoning of Fondren, supra. Furthermore, even if it could be held that there are gifts of present interests, there is the question of how much, if any, of trust principal can be applied to the permitted uses, and petitioners have not assumed the burden of showing that the value of what they claim is other than future interests. On this point Disston, supra, requires sustaining respondent. The problem here is not concerned with the nature of the gifts with respect to current net income of the trusts because disbursement thereof each year is conditioned upon the exercise by trustees of their discretion as to how much shall be applied by them for the stated purposes according to what they “shall deem suitable and proper.” Therefore, exercise or nonexercise of this discretion makes the interests in current income future interests under Fondren, supra. Attention turns, then, to the interests in trust corpus. In this matter all of the provisions of each trust agreement together with surrounding circumstances, intentions of the settlor and donors, and the conditions of the donees are taken into account. Comparison is made of the facts here with those in cases which have held that gifts of present interests have been made. Cf. Commissioner v. Sharp, supra; Fisher v. Commissioner, 132 F. 2d 383, affirming 45 B. T. A. 958; Arthur C. Stifel, 46 B. T. A. 568; Chas. F. Roeser, 2 T. C. 298, 304. It is observed that where payment of income or principal is mandatory and is not conditioned upon exercise by anyone of discretion, there are gifts of present interests to the donee. Fondren, supra, makes it clear that even in the instance of minors under the legal disability of being unable to manage and control property, there is no gift of a present interest in trust corpus unless it can be applied immediately for the minor’s use. It is also observed that the Perkins trusts are of a particular type, i. e.,. so much of income or principal or both, as shall be necessary, shall be applied for the education and support of the beneficiary during his minority, and the trusts end when the beneficiary becomes 25 years. These are restricted trusts; the beneficiary and anyone acting for him cannot compel application of income or principal except for the purposes stated in the trust. The word “needs” is not used in these trusts, but the need of the beneficiary is implicit because the purposes for the use of both income and principal are restricted by descriptions and the trustees are directed to decide what is “suitable and proper.” It is stipulated that the settlor and donors had in mind making provision for each beneficiary’s education and support, including the best of medical care; and they were aware, when the trusts were created and the gifts were made, that then the respective parents of each beneficiary were able to provide their child with “adequate support, education, and medical care,” and that the respective parents would continue to have that ability during the minority of their child barring “any emergency such as the physical incapacity or loss of earning power of the parents * * *, or the dissipation of the funds or estates of such parents or other similar misfortune which would render such parents unable to provide for such grandchildren the best of education, medical care and support as desired for such grandchildren by petitioners.” Since the respective parents were able to provide for their child at the time the trusts were created and the gifts were made, it is evident that under the first provision in Article First there is the inherent condition of the existence of some degree of need as the basis for the trustees’ exercise of their discretion “to apply” principal to the prescribed uses. Insofar as the trustees were to apply principal for a beneficiary’s use, under their discretion, gifts of principal are gifts of future interests. Here, as in the Fondren case, the donors’ laudable desire to mate provision for their grandchildren in case of future need cannot nullify the deferment which the recited absence of present need, coupled with the terms of the trust, brought about. The parties have stipulated (par. 21) that at the time the trusts were created and the gifts involved were made, petitioners had no reason to believe that emergencies of the sort described above would occur at any immediate or specific time requiring a distribution to be made of income or corpus under any provisions of the trusts. Next, there is the second provision1 in Article First, which for convenience may be referred to as the “demand” clause, which is the provision which the majority view regards as the crux of the issue presented.2 I believe that there is an obvious way of construing the demand clause. It is that if the trustees should fail to exercise their discretion, as first directed, “to apply” income or principal for the uses and purposes set forth during a beneficiary’s minority, as shall be “suitable and proper,” i. e., in accordance with needs, then a parent of the beneficiary (who is also a trustee) could demand and receive trust corpus (principal, or accumulated income, or both). Viewed in this light, the demand clause takes care of the possibility that the trustees might, at some time, be unable to agree upon the matter of whether to exercise their discretion, or upon the question of how much of principal should be deemed to be a “suitable and proper” disbursement at a certain time for any or all of the designated purposes. Under this view, the demand clause is a “but if” clause, and inherently its use depends upon the occurrence of some contingency in the future. The contingency might be failure of the trustees to exercise their discretion, or “the need of the beneficiary, not existing when the trust or gifts take effect legally, but arising later upon anticipated though unexpected conditions,” such as the happening of such emergencies to the parents of a beneficiary as, it has been stipulated, the petitioners held in mind as a possibility, which is part of the experiences of living. See Fondren. supra. Or, the demand clause may be viewed as a method of altering the first direction to the trustees “to apply” trust principal so as to permit, them “to pay over” trust principal to a parent of a beneficiary (not specified in the first instance). Or, the demand clause might be viewed as a means for substituting the judgment of a parent (or guardian) for that of the trustees as to when a disbursement of principal shall be made, and as to what amount shall be deemed suitable and proper. Under this view discretion is taken out of the trustees and given to a parent (or guardian), and the exercise by a parent of his discretion becomes the contingency which makes the gifts of principal gifts of future interests. And, again, this conclusion is supported by the stipulation (par. 19) that the petitioners, when the trusts were created and the gifts were made, believed that the parents of a beneficiary would not make a demand during his minority for distribution of all or part of the trust corpus. The majority view is that the demand clause in Article First of the trusts establishes that each beneficiary received, at the time the trusts were created and the gifts were made, the “right to substantial present economic benefit” from a trust corpus, free from any condition or contingency which would put a barrier of some period of time between the will of the beneficiary presently to enjoy what was given him and his enjoyment thereof. With this conclusion, I cannot agree. Under the demand clause, a parent, necessarily, would have to be exercising judgment and discretion in making a demand for any distribution, all of which amounts to the implicit existence of a condition within the critical, second portion of Article First, the contingency there being the exercise of the discretion of a parent of a beneficiary. Even under the demand clause, upon which petitioners rely, the gifts in question are gifts of future interests. There is a third provision in Article First of each trust relating to termination of the trust upon the demand of either the beneficiary or his guardian appointed by a court. If such demand is made by a guardian, it must be by a written instrument. There can be no doubt that the clause on termination involves a future interest since each beneficiary was a minor when the gifts were made and, except in one instance, there was no court appointed guardian for any beneficiary. Cf. Stifel v. Commissioner, supra. The first part of Article First gives a discretionary power to the trustees as to distributions of both current income and principal; the second part gives a discretionary power as to distributions of principal to one particular trustee, a parent, notwithstanding the form used in the demand clause of stating that a parent may demand and receive, at any time, distribution of all or part of trust principal, the situation being that a parent who may make such demand is also a trustee. The respondent’s determinations should be sustained under authority of Fondren v. Commissioner, supra.   * * * .Notwithstanding anything to the contrary herein contained the Settlor's said * * * [beneficiary], or a parent of said * * * [beneficiary] or a guardian of said * * * [beneficiary] duly appointed by a Court of competent Jurisdiction, at any time shall have the right t.o demand and receive from the Trustees, and the Trustees at any time, as if holding the trust property as guardian of the said * * * [beneficiary] of the Settlor, may pay to the said * * * [beneficiary], or may pan to a parent of said * * * [beneficiary] or may pay to said guardian appointed by a Court as aforesaid, any or all accumulated income and any or all of the principal of the trust fund. In addition to the right thereby granted to the beneficiary at any time to demand and receive all or any part of the said trust estate, the beneficiary shall be entitled at any time to terminate the trust estate in whole or in part whenever the said beneficiary, * * *, or his guardian duly appointed by the Court as aforesaid, shall make due demand therefor hy instrument in writing filed with the then Trustees acting hereunder * * * (Italics supplied.)    The Perkins trusts were created December 17, 1951. It is interesting to find that in this Court’s opinion in Frances McGuire Rassas, 17 T. C. 160 (filed Aug. 6, 1951, shortly before the Perkins trusts were created), affd. 196 F. 2d 611, a suggestion was made, at page 166, which foreshadowed the problem presented here which, however, was neither raised nor decided in the Rassas case. There it was said about the Rassas trust, The trust indenture in the instant case did not give the beneficiary nor anyone acting for her the right to terminate the trust. Not only did the beneficiary have no right to terminate the trust in the instant case but neither the beneficiary nor anyone acting for her has the right to demand payment of the income. Only such income of the trust estate is payable to the beneficiary as the trustees in their sole discretion shall decide.