STATE STREET TRUST COMPANY et al., Executors, Plaintiffs, Appellants, v. UNITED STATES of America, Defendant, Appellee.
No. 5379.
United States Court of Appeals First Circuit.
Heard Oct. 7, 1958. Decided Jan. 23, 1959. Dissenting Opinion Feb. 25, 1959.
263 F.2d 635
Kenneth E. Levin, Atty., Dept. of Justice, Washington, D. C., with whom Andrew F. Oehmann, Acting Asst. Atty. Gen., and Lee A. Jackson and L. W. Post, Attys., Dept. of Justice, Washington, D. C., and Anthony Julian, U. S. Atty., and Andrew A. Caffrey, Asst. U. S. Atty., Boston, Mass., were on the brief, for appellee.
Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.
This is an appеal from a judgment entered in a civil action brought under
It is agreed that the only question now presented is whether the discretionary powers set out in the three trusts render the trust property includible in the decedent‘s gross estate under
In 1925 Milton L. Cushing established three spendthrift trusts for the benefit of three of his children wherein he named himself and a bank as co-trustees. These trusts were irrevocable and there was no express reservation of power to alter, amend or revoke, but the settlor reserved the power to terminate them and cause the properties held in the trusts to be distributed to the respective beneficiaries. In 1949 the decedent exercised this power with respect to each of the trusts, but he did so upon the condition that the respective beneficiaries immediately establish new trusts of the property covered in each of the old ones. The beneficiaries did so and the court below held and the appellants agree that in this situation the decedent must be treated as the settlor. Thus, although the trust instruments in issue are written as though the respective beneficiaries are the settlors, it is admitted that actually the decedent was the settlor, and therеfore that the powers given to the trustees in these trusts must be regarded as having been reserved by the decedent himself.
The District Court found that the 1949 trusts were created primarily to carry out the decedent‘s original purpose to assure the maintenance of his three children. More specifically, that court found that because of a possibility of reverter in the 1925 trusts the decedent was concerned about the possible effect of Estate of Spiegel v. Commissioner, 1949, 335 U.S. 701, 69 S.Ct. 301, 93 L.Ed. 330, which held an estate taxable under
The three 1949 trusts are substantially identical, and they are similar to the 1925 trusts in that they contain no express reservation of power to alter or amend. They differ from the earlier trusts, however, in that they are expressly irrevocable and there is no reservation of power to terminate them and cause distribution of the trust properties to the beneficiaries. The decedent and Old Colony Trust Company are made co-trustees and in the first paragraph of each of thеse trusts, the trustees are directed to pay the net income of the trust funds to the life beneficiary named therein, “quarterly, or oftener if practicable,” and in addition from time to time to pay to that beneficiary or for his benefit, in their “sole and uncontrolled discretion,” such portion or portions of the principal as the trustees “may deem necessary or advisable” for the beneficiaries’ “comfortable maintenancе and/or support.” The District Court held that under Massachusetts law3 the trustees’ power to invade capital for the beneficiaries’ “comfortable maintenance and/or support,” though broad, nevertheless created determinable rights in the beneficiaries which could be enforced in a court of equity. It therefore concluded that under the rule applied in Jennings v. Smith, 2 Cir., 1947, 161 F.2d 74, the corpora of the trusts were not made taxable to thе settlor‘s estate under
“In addition to and not in limitation of all common law and statutory authority, the Trustees shall have power * * * to exchange property for other property; * * * to retain and invest and reinvest in securities or properties although of a kind or in an amount which ordinarily would not be considered suitable for a trust investment, including, but without restriction, investments that yield a high rate of income or no income at all and wasting investments, intending hereby to authorize the Trustees to act in such manner as it is believed by them to be for the best interests of the Trust Fund, regarding it as a whole, even though particular investments might not otherwise be proper; * * * to determine what shall be charged or credited to income and what to principal notwithstanding any determination by the courts and specifically, but without limitation, to make such determination in regard to stock and cash dividends, rights, and all other receipts in respect of the ownership of stock and to decide whether or not to make deductions from income for depreciation, amortization or waste and in what amount; * * * and generally to do all things in relation to the Trust Fund which I, the Donor, could do if living and the Trust had not been executed.”
In conclusion the third paragraph of the trusts provides: “All such acts and decisions made by the Trustees in good faith shall be conclusive on all parties at interest and my Trustees shall be liable only for their own wilful acts or defaults, but in no case for acts in error of judgment.”
The case is very close, but we agree with the result reached by the District Court.
It is true that it is not at all unusual to clothe trustees with power to invest trust assets in securities other than so-called “legals.” And it is also true that it is far from uncommon to provide that trustees shall have the power in their discretion to allocate accretions to the property they hold in trust to principal or to income, at least when there is no settled rule of law to apply and proper allocation is open to honest doubt. Certainly in the exercise of one or both of these powers trustees can to some extent affect the interests of the various beneficiaries. Indeed, even in a trust wherein investment is limited to “legals,” a trustee can effect some shifting of benefits between life beneficiaries and remaindermen by his сhoice of investment with respect to rate of income return or growth potential. But we would hardly suppose that in the ordinary case inclusion of one or both of the above provisions in a trust instrument would be a crucial factor in deciding whether or not the corpus of the trust should be included in a decedent‘s estate.
This, however, is not an ordinary case. Literally, the trustees have power to exchange trust property for оther property without reference to the value of the properties involved in the exchange. And literally, they have power to invest the trust assets in securities yielding either a high rate of income or no income at all, and even in wasting investments, and they have power to invest trust assets in these categories in what-
In spite of the breadth of the language used, we do not conceive, however, that short of “wilful acts or defaults,” the trustees are as free as the wind in their administration and management of the trusts. As stated by Judge Learned Hand in Stix v. Commissioner, 2 Cir., 1945, 152 F.2d 562, 563: “* * * no language, however strong, will entirely remove any power held in trust from the reach of a court of equity. After аllowance has been made for every possible factor which could rationally enter into the trustee‘s decision, if it appears that he has utterly disregarded the interests of the beneficiary, the court will intervene. Indeed, were that not true, the power would not be held in trust at all; the language would be no more than a precatory admonition.”
We may therefore assume that a Massachusetts court of equity at the behest оf a beneficiary would intervene not only in the event of a wilful act or default by the trustees, but would also intervene in the event the trustees should act in utter disregard of the rights of a beneficiary. Thus, no doubt, an appropriate court of the Commonwealth in the exercise of its equity jurisdiction would prevent the trustees from putting all, or nearly all, of the trust assets in wasting investments bearing a high rate of income for the benefit of a life tenant at the expense of a remainderman. And no doubt also, the court would step in to prevent the investment of all, or nearly all, the trust assets in a property yielding little or even no income for the benefit of a remainderman at the expense of a life beneficiary. But short of utter disregard of the rights of a life tenant or a remainderman springing from “arbitrary or dishonest conduct or bad faith, or fraud” Dumaine v. Dumaine, 1938, 301 Mass. 214, 224, 16 N.E.2d 625, 630, 118 A.L.R. 834, a Massachusetts court would have no external standard with which to measure the trustees’ conduct. The area of the trustees’ discretion, although not untrammelled, is about as broad as language can make it and the law permits, and within that area the trustees can act in the administration and management of their trusts to confer or withhold very substantial benefits as between the life tenants and remaindermen.
Perhaps no single power conferred by the decedent on the trustees would be enough to warrant inclusion of the corpora of the trusts in his estate. But we believe that the powers conferred on the trustees, considered as a whole, are so broad and all inclusive that within any limits a Massachusetts court of equity could rationally impose, the trustees, within the scope of their discretionary powers, could very substantially shift the economic benefits of the trusts between the life tenants and the remaindermen. We therefore conclude that under the trusts the decedent as long as he lived, in substance and effect and in a very real sense, in the language of
Since we believe that the corpora of the trusts is includible in the decedent‘s gross estate under
A decree will be entered affirming the judgment of the District Court.
MAGRUDER, Chief Judge, dissents from the opinion and judgment of the Court, and reserves the right to file a dissenting memorandum at a later date.
February 25, 1959.
MAGRUDER, Chief Judge (dissenting).
The opinion of the court in this case was prepared on the eve of our departure for the Caribbean and our court session annually held at San Juan, Puerto Rico. It seemed desirable not to delay announcement of the court‘s opinion and judgment. Therefore, at the conclusion of the court‘s opinion, the following notation was added: “Magruder, Chief Judge, dissents from the opinion and judgment of the Court, and reserves the right to file a dissenting memorandum at a later date.”
Though this was not quite equivalent to a commitment on my part to file such a memorandum, I still feel that I ought to indicate the reasons for my dissent.
In Van Beuren v. McLoughlin, 1 Cir., 262 F.2d 315, decided by us December 12, 1958, we pointed out the drastic, perhaps even ruthless way in which
For the reasons explained in my dissenting opinion in Industrial Trust Co. v. Commissioner, 1 Cir., 1947, 165 F.2d 142, 148, 1 A.L.R.2d 144, I would think that the taxpayers here were entitled to claim that only
At the outset, I would concede that the fact that the grantоr holds the described powers only as a fiduciary is not in itself enough to preclude the imposition of an estate tax. See Welch v. Terhune, 1 Cir., 1942, 126 F.2d 695, certiorari denied 1942, 317 U.S. 644, 63 S.Ct. 37, 87 L.Ed. 519. That case was a holding under
It is admitted by the court that the various types of broad powers of management conferred upon the trustees here are familiar grants to trustees as such, and that the casе is a “very close” one. Confining itself narrowly to the facts of the particular case, the court says that perhaps “no single power conferred by the decedent on the trustees would be enough to warrant inclusion of the corpora of the trusts in his estate. But we believe that the powers conferred on the trustees, considered as a whole, are so broad and all inclusive that within any limits a Massachusetts court of equity cоuld rationally impose, the trustees, within the scope of their discretionary powers, could very substantially
It seems to me that, despite the undoubtedly broad powers of management vested in the trustees here, the court stretches the statutory language too far. It has to say that these powers of management, taken as a whole, because оf their breadth make it impracticable for a Massachusetts court of equity effectively to control the exercise of these fiduciary powers, and therefore constitute a “right” (as distinguished from a “power” the word used in
Moreover, I cannot accept the premise that a Massachusetts court of equity would consider itself impotent to supervise the administration of these trusts so as to control any attempt to shift the incidence of their enjoyment.
It is difficult to imagine how the power “to exchange property for other property” could contribute to the defect the court found ability to prefer the life tenants to the remaindermen or vice versa—except perhaps by a warped investment pоlicy (and investment powers are specifically dealt with). A requirement that the trustee obtain fair value, even if not implied by the word “exchange“, would certainly be imposed by any court of equity. And the Massachusetts court will look behind an apparently authorized exchange of property and strike it down if it conceals any skulduggery or if its result is detrimental in any way to the purposes of the trust the settlor created. See Morville v. Fowle, 1887, 144 Mass. 109, 112, 10 N.E. 766.
The investment pоwers, although obviously designed to permit a more imaginative program of investment than trustees usually may pursue, were not uncontrolled. Although the portfolio might contain, instead of “legals“, investments in wasting assets companies and in stocks with attractive growth potential but paying no current dividends, the trustees were only authorized “to act in such manner as it is believed by them to be for the best interests of the Trust Fund regarded as a whole.” I think this clearly requires the trustees to balance these extraordinary investments so that neither income nor principal would be prejudiced by the unusual nature of the portfolio. The Massachusetts court will enforce such a standard as “best interests” and will substitute its judgment for a bona fide, considered, but unsound decision of the trustee. Corkery v. Dorsey, 1916, 223 Mass. 97, 111 N.E. 795; see Hays’ Estate v. Commissioner, 5 Cir., 1950, 181 F.2d 169, 171-172.
The accounting power given to the trustees is obviously corollary to this investment power and necessary to the successful maintenance of this balance; I believe it must be limited to this purpose and restricted to the best interests of the trust as a whole.1 It is somewhat ironic that a power apparently designed to relax the strict Massachusetts rules that capital gains and stock dividends are both always principal and cash dividends are income, so as to maintain the enjoyment of both the life beneficiaries and the remaindermen, is assigned as
To me, аll these powers are limited by standards which the Massachusetts court of equity could and would apply to supervise effectively the administration of the trust, and therefore none is either a