Estate of Norman H. Vissering, Deceased, Elizabeth L. Lafferty v. Commissioner of Internal Revenue, 990 F.2d 578, 10th Cir. (1993)
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Scribd Government Docs990 F.
2d 578
71 A.F.T.R.2d 93-2190, 93-1 USTC P 60,133
ESTATE OF Norman H. VISSERING, Deceased, Elizabeth L.
Lafferty, Executrix, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, RespondentAppellee.
No. 91-9024.
United States Court of Appeals,
Tenth Circuit.
April 6, 1993.
Douglas M. Cain, Sherman & Howard (Raymond J. Turner and Katherine
F. Beckes, with him on the briefs), Denver, CO, for petitioner-appellant.
Robert W. Metzler, Atty., Tax Div. (James A. Bruton, Acting Asst. Atty.
Gen., and Robert S. Pomerance, Atty., Tax Div., with him on the brief),
Dept. of Justice, Washington, DC, for respondent-appellee.
John B. Jones, Jr. and Thomas H. Odom of Covington & Burling,
Washington, DC, and John A. DeVault, III of Bedell, Dittmar, DeVault &
Pillans, Jacksonville, FL, filed a brief of amicus curiae on behalf of their
law firms.
Before McKAY, Chief Judge, LOGAN and SEYMOUR, Circuit Judges.
LOGAN, Circuit Judge.
The estate of decedent Norman H. Vissering appeals from a judgment of the
Tax Court determining that he held at his death a general power of appointment
as defined by I.R.C. 2041, and requiring that the assets of a trust of which he
was cotrustee be included in his gross estate for federal estate tax purposes. The
appeal turns on whether decedent held powers permitting him to invade the
principal of the trust for his own benefit unrestrained by an ascertainable
standard relating to health, education, support, or maintenance. The trust was
created by decedent's mother in Florida and specifies that Florida law controls
in the interpretation and administration of its provisions.
2
The estate argues that decedent was not a trustee at the time of his death
because a New Mexico court's adjudication that he was incapacitated two
months before his death divested him of those powers. Decedent was not
formally removed as trustee; if he ceased to serve it was by operation of Florida
law. However, we assume for purposes of this opinion that decedent continued
as trustee until his death and that his powers are to be adjudged as if he were
fully competent to exercise them at the time of his death.1
The trust at issue was created by decedent's mother, and became irrevocable on
her death in 1965. Decedent and a bank served as cotrustees. Under the
dispositive provisions decedent received all the income from the trust after his
mother's death. On decedent's death (his wife, a contingent beneficiary,
predeceased him), remaining trust assets were to be divided into equal parts and
passed to decedent's two children or were held for their benefit. Decedent
developed Alzheimer's disease and entered into a nursing home in 1984, but he
tendered no resignation as trustee, nor did his guardian or conservator do so on
his behalf after he was found to be incapacitated.
The Tax Court's decision, based entirely upon stipulated facts, resolved only
questions of law, and consequently our review is de novo. First Nat'l Bank v.
Commissioner, 921 F.2d 1081, 1086 (10th Cir.1990).
Under I.R.C. 2041 a decedent has a general power of appointment includable
in his estate if he possesses at the time of his death a power over assets that
permits him to benefit himself, his estate, his creditors, or creditors of his estate.
A power vested in a trustee, even with a cotrustee who has no interest adverse
to the exercise of the power, to invade principal of the trust for his own benefit
is sufficient to find the decedent trustee to have a general power of
appointment, unless the power to invade is limited by an ascertainable standard
relating to health, education, support, or maintenance. Treas.Reg. 20.20411(c), -3(c)(2). See, e.g., Estate of Sowell v. Commissioner, 708 F.2d 1564, 1568
(10th Cir.1983) (invasion of trust corpus in case of emergency or illness is an
ascertainable standard under 2041(b)(1)(A)); Gaskill v. United States, 561
F.Supp. 73, 78 (D.Kan.1983) (life estate with power of disposition but not to
consume the proceeds did not create general power of appointment under
2041(b)(1)(A)), aff'd mem., 787 F.2d 1446 (10th Cir.1986); see also Merchants
Nat'l Bank v. Commissioner, 320 U.S. 256, 261, 64 S.Ct. 108, 111, 88 L.Ed. 35
(1943) (invasion of trust corpus for "the comfort, support, maintenance and/or
happiness of my wife" is not a fixed standard for purposes of charitable
deductions); Ithaca Trust Co. v. United States, 279 U.S. 151, 154, 49 S.Ct. 291,
291, 73 L.Ed. 647 (1929) (invasion of trust corpus for any amount "that may be
necessary to suitably maintain [decedent's wife] in as much comfort as she now
enjoys" is a fixed standard for purposes of charitable deduction).
6
The relevant provisions of the instant trust agreement are as follows:
7
During
the term of [this trust], the Trustees shall further be authorized to pay over or
to use or expend for the direct or indirect benefit of any of the aforesaid
beneficiaries, whatever amount or amounts of the principal of this Trust as may, in
the discretion of the Trustees, be required for the continued comfort, support,
maintenance, or education of said beneficiary.
8
Tax Ct. ex. 3-C at 5-6. The Internal Revenue Service (IRS) and the Tax Court
focused on portions of the invasion provision providing that the trust principal
could be expended for the "comfort" of decedent, declaring that this statement
rendered the power of invasion incapable of limitation by the courts.
We look to state law (here Florida's) to determine the legal interests and rights
created by a trust instrument, but federal law determines the tax consequences
of those interests and rights. Morgan v. Commissioner, 309 U.S. 78, 80, 60
S.Ct. 424, 425-26, 84 L.Ed. 585 (1940); Maytag v. United States, 493 F.2d 995,
998 (10th Cir.1974). The absence of clear and controlling state precedent
regarding the use of the term "comfort" in trust documents for purposes of
determining a general power of appointment under federal estate tax law has
prompted the estate and amici to request that we certify this question to the
Supreme Court of Florida. Because recent changes in Florida trust law
significantly curtail the number of trusts that might be affected by such a
certification,2 and because the language of each trust document in any event
requires individualized attention, we deny the motion to certify to the Florida
Supreme Court.
10
Despite the decision in Barritt v. Tomlinson, 129 F.Supp. 642 (S.D.Fla.1955),
which involved a power of invasion broader than the one before us, we believe
the Florida Supreme Court would hold that a trust document permitting
invasion of principal for "comfort," without further qualifying language, creates
a general power of appointment. Treas.Reg. 20.2041-1(c). See First Virginia
Bank v. United States, 490 F.2d 532, 533 (4th Cir.1974) (under Virginia law,
right of invasion for beneficiary's "comfort and care as she may see fit" not
limited by an ascertainable standard); Lehman v. United States, 448 F.2d 1318,
1320 (5th Cir.1971) (under Texas law, power to invade corpus for "support,
maintenance, comfort, and welfare" not limited by ascertainable standard);
Miller v. United States, 387 F.2d 866, 869 (3d Cir.1968) (under Pennsylvania
law, power to make disbursements from principal in amounts "necessary or
expedient for [beneficiary's] proper maintenance, support, medical care,
hospitalization, or other expenses incidental to her comfort and well-being" not
limited by ascertainable standard); Estate of Schlotterer v. United States, 421
F.Supp. 85, 91 (W.D.Pa.1976) (power of consumption "to the extent deemed by
[beneficiary] to be desirable not only for her support and maintenance but also
for her comfort and pleasure" not limited by ascertainable standard); Doyle v.
United States, 358 F.Supp. 300, 309-10 (E.D.Pa.1973) (under Pennsylvania
law, trustees' "uncontrolled discretion" to pay beneficiary "such part or parts of
the principal of said trust fund as may be necessary for her comfort,
maintenance and support" not limited by ascertainable standard); Stafford v.
United States, 236 F.Supp. 132, 134 (E.D.Wisc.1964) (under Wisconsin law,
trust permitting husband "for his use, benefit and enjoyment during his
lifetime," unlimited power of disposition thereof "without permission of any
court, and with the right to use and enjoy the principal, as well as the income, if
he shall have need thereof for his care, comfort or enjoyment" not limited by
ascertainable standard).
11
However, there is modifying language in the trust before us that we believe
would lead the Florida courts to hold that "comfort," in context, does not permit
an unlimited power of invasion. The instant language states that invasion of
principal is permitted to the extent "required for the continued comfort" of the
decedent, and is part of a clause referencing the support, maintenance and
education of the beneficiary. Invasion of the corpus is not permitted to the
extent "determined" or "desired" for the beneficiary's comfort but only to the
extent that it is "required." Furthermore, the invasion must be for the
beneficiary's "continued" comfort, implying, we believe, more than the
minimum necessary for survival, but nevertheless reasonably necessary to
maintain the beneficiary in his accustomed manner of living. These words in
context state a standard essentially no different from the examples in the
Treasury Regulation, in which phrases such as "support in reasonable comfort,"
"maintenance in health and reasonable comfort," and "support in his
accustomed manner of living" are deemed to be limited by an ascertainable
standard. Treas.Reg. 20.2041-1(c)(2). See, e.g., United States v. Powell, 307
F.2d 821, 828 (10th Cir.1962) (under Kansas law, invasion of the corpus if "it
is necessary or advisable ... for the maintenance, welfare, comfort or happiness"
of beneficiaries, and only if the need justifies the reduction in principal, is
subject to ascertainable standard); Hunter v. United States, 597 F.Supp. 1293,
1295 (W.D.Pa.1984) (power to invade for "comfortable support and
maintenance" of beneficiaries is subject to ascertainable standard).
12
We believe that had decedent, during his life, sought to use the assets of the
trust to increase significantly his standard of living beyond that which he had
previously enjoyed, his cotrustee would have been obligated to refuse to
consent, and the remainder beneficiaries of the trust could have successfully
petitioned the court to disallow such expenditures as inconsistent with the intent
of the trust instrument. The Tax Court erred in ruling that this power was a
general power of appointment includable in decedent's estate.
13
REVERSED and REMANDED.
We observe that the Internal Revenue Service could have vitiated this issue,
although it did not, by asserting that decedent's release of his power of
appointment upon cessation of his trusteeship was made within three years of
his death. I.R.C. 2035 declares that all property of which decedent "has at any
time made a transfer, by trust or otherwise, during the 3-year period ending on
the date of the decedent's death," with exceptions not here applicable, shall be
included in decedent's gross estate for estate tax purposes. Id. 2035(a). See
also Treas.Reg. 20.2041-3(d). The same might have been accomplished under
the unified credit scheme of the Code, by assessing a gift tax under I.R.C.
2514(b) and then combining the gifts with the estate under I.R.C. 2010,
2012
In 1990 the Florida legislature amended its law governing trusts such as the one
before us to limit a trustee beneficiary's power to make distributions of
principal or income to himself sufficiently to eliminate its inclusion in the
trustee's estate as a general power of appointment under 2041(b)(1)(A).
Fla.Stat.Ann. 737.402(4)(a). The statute applies to all instruments executed
after June 30, 1991, and to preexisting trusts unless the settlor amends the
instrument to negate the effect of the statute before the later of July 1, 1994, or
three years after the date on which the trust becomes irrevocable. Id.
737.402(4)(b). The statute does not apply to the situation before us, of course,
because this decedent died in 1988. In light of the amendments, however, there
cannot be a large number of Florida trusts in which the parties in interest have
no power to accept or negate the statutory change
