Court Opinion

ID: 6922416
Source: CourtListenerOpinion
Date Created: 2022-07-23 23:06:27.200287+00
Date Added: 2024-06-11T16:06:50.240834
License: Public Domain

MEDINA, Circuit Judge
(concurring).
The majority opinion quotes from the decision of the Tax Court the hypothetical scheme that the Tax Court held the grantor might have put into effect, and from which it concluded that the grantor’s reserved rights under the terms of the trust instrument constituted an “incident of ownership.” I agree that this basis for the decision of the Tax Court is unrealistic and unlawful, but, in concurring in the reversal of the decision of the Tax Court, I would particularly emphasize the terms of the trust instrument itself.
It is clear from the trust instrument that the trustees could not make non-income producing investments either for the purpose of setting up a situation that would make it necessary to borrow against the insurance policies to pay the premiums thereon, or, even without such purpose, if the effect of such investment in non-income producing securities might or probably would make such borrowing necessary. In the very first paragraph of the trust instrument the grantor directed that: “The Trustees upon the maturity of the said policies, will use their best efforts to collect the proceeds thereof * * * and will hold, invest, and reinvest such net proceeds and collect the income therefrom and will pay over the same as hereinafter provided.” In the second paragraph the grantor transferred to the trustees securities and directed that they collect the income therefrom and, “During the lifetime of the Grantor, * * * apply the net income to the payment of the premiums upon the policies of life insurance deposited hereunder, and to pay quarterly to the Grantor, any balance of the net income not required for the purpose of paying such premiums.” And elsewhere in the trust instrument the grantor provided that:
“In case at any time the net income in the hands of the Trustees shall not be sufficient to pay the premiums then due on the policies of insurance deposited hereunder, the Trustees may invade the principal of the Trust Fund and use so much thereof as may be necessary to make up the deficiency, or may obtain loans on any of the policies deposited hereunder and use so much of the proceeds of such loans as may be necessary to make up the deficiency. The Grantor may, in case the net income in the hands of the Trustee shall at any time not be sufficient to pay the premiums then due on the policies of insurance deposited hereunder, pay to the Trustees, on account of income, any amount sufficient to make up such deficiency, and the Trustee shall accept and use such payment for such purpose.”
In the paragraph wherein the grantor stated his intention to part with, and transfer to the trustees, all rights to the insurance policies, the right to surrender them for their cash surrender values and the right to obtain loans on them are listed; however, these rights could of course be exercised only as directed by the grantor elsewhere in the trust instrument and in conformity with the purpose and intent of the trust. In other words, subject to the primary and clearly implied direction that the policies be preserved for and the proceeds paid to the grantor’s son, the beneficiary. The same qualification applies to the power of the trustees to “invest the principal of the Trust Fund in such investments * * * as they in their discretion may deem for the best interests of the Trust Estate.”
Thus, from the trust instrument itself it is evident that the trustees were not empowered to borrow against the insurance policies to make investments; nor could they have embarked upon an investment program which would have required them to do so. The intent of the grantor, and the purpose of the trust, was to preserve the policies for the benefit of the grantor’s son, and to do so by investing the trust principal so as to receive an income with which to pay the premiums on the policies.
On the cross-appeal I also concur in the reversal of the Tax Court.