The issue then becomes, whether in default of appointment, the
balance of the bequest passes under the residuary clause of the
trust (Section 7 of Article Three), or descends to Mrs. Luster's
heirs under the intestacy laws of Illinois. Upon this issue,
initially at least,*fn4 hinges the permissibility of a marital
Illinois law governs in determining the nature of the interest
received by Mrs. Luster. See Ashcraft v. Allen, 90 F. Supp. 543
(M.D.Ga. 1950); In re Sayers F. Harman, 4 T.C. 335 (1945); and 10
Mertens, Supra, § 61.05 at pp. 61-22 and 61-23. Under that law it
is undoubtedly possible to create a "spendthrift trust" in which
only enjoyment in possession is postponed, if properly limited in
time. Such trusts create an equitable vested fee in the
beneficiary at the time of the testator's death. Wagner v.
Wagner, 244 Ill. 101, 114, 91 N.E. 66 (1910); Moore v. Braun,
263 Ill. App.? 243 (1931); De Korwin v. First National Bank of Chicago,
170 F. Supp. 112, 124 (N.D.Ill. 1958).
It is not necessary to such an interest that there be a right
over at the termination of the trust, for the fact that it is a
vested interest means it includes a present right or title, even
though the right to possession may be postponed. Wagner v.
Wagner, supra, 244 Ill. at 111, 91 N.E. 66. Such interest could
pass, if not devised, under the intestacy laws.
Section Two of Article Three, which contains the portion of the
trust bequeathed to Mrs. Luster admittedly contains no right over
in default of appointment. But from the undisputed evidence it
seems that Mr. Luster intended to give his widow $200,000 in lieu
of her statutory share, and to do so in installments in the form
of a spendthrift trust, to protect her. Were the latter not a
consideration, the inference is likely that he would have
bequeathed her a lump sum payment. It can be further inferred
that the general power of appointment evidenced his desire to
allow her to do whatever she wished with the balance of her
bequest upon her death. Were her bequest, in its present form,
the subject of a wholly separate trust instrument, there is
little question but that it would constitute a vested equitable
fee, postponing only the enjoyment in possession, and in default
of appointment, would pass to her heirs. Wagner v. Wagner, supra;
Moore v. Braun, supra; De Korwin v. First National Bank, supra.
Does the residuary clause of Section Seven change the result?
Essentially, Article Three considered as a whole, established a
trust. Section Two is that part which provides for the monthly
payments to Mrs. Luster. The other sections (One, and Three
through Six) are concerned with gifts to other beneficiaries. But
Section Seven provides what happens when the trust terminates
after the initial twenty year (or extended) term.
Section Seven provides: (in pertinent part)
"The trust shall continue for a period of twenty (20)
years after the date of my death, except that if all
the adult living beneficiaries of my trust so desire,
they may continue the trust beyond that period, but
not to exceed the period of twenty-one (21) years
beyond the date of the death of whichever of my
children shall live the longer. At the termination of
the trust, the principal, together with any
accumulated income (after payment of any sum due to
Versuslaw JEAN LUSTER as provided in this Will) shall be
distributed one-half (½) to my son MELVIN R. LUSTER
and one-half (½) to my daughter INA JEAN WOLFE * *
The Government contends that, at the termination of the trust,
Section Seven controls the devolution of all remaining trust
funds, as remain respectively from each of the portions of the
trust (i.e. Sections One, Two, Three and Four).
Should Mrs. Luster die prior to termination of the trust without
exercising her power of appointment, it is alleged, the balance
remaining in Section Two would also pass under Section Seven.
The parenthesized clause, in Section 7, "after payment of any
sum due to Versuslaw JEAN LUSTER as provided in this Will," as the
Government observes, does not explicitly provide for her interest
to pass to her heirs upon the trust's termination, if she has
previously died without exercising her power. It relates only to
the final lump sum distribution at the termination of the trust.
But that is just the point. Section Seven is only concerned
with the time of termination. At that time, if Mrs. Luster is
still living, she is to be paid the balance owed her before the
remainder of the trust funds are distributed. Section Seven does
not purport to cover devolutions occurring prior to the trust's
termination. If Mrs. Luster dies prior to that time, Section
Seven is not concerned with her interests, for in Section Two she
has been given a vested equitable fee under Illinois law. That
means she has an immediate right of present or future
enjoyment. She may exercise her power of appointment, but if she
does not, her vested interest would pass to her heirs under the
intestacy laws, just as would any other fee interest possessed by
her. Her vested interest could not be divested except by express
provision therefor. There is no such provision. We must interpret
her interest as created and intended by the testator. In its
present posture it is vested. Only a specific provision could
transform a spendthrift trust with a power of appointment,
properly limited in time, from a vested equitable fee to a
contingent interest, which would not pass as part of the
beneficiary's intestate estate in default of appointment. Section
Seven does not purport to do that. If she exercises her power and
dies prior to the termination date, the appointees would be
entitled to their bequests immediately upon her death. So if she
dies in default of appointment, her legal heirs would immediately
be entitled to the balance of her interest upon her death.
Section Seven is inapplicable to the contingency of a default of
appointment. It is only concerned with disbursements upon the
termination of the trust. Only if she is living at the time the
trust terminates does Section Seven affect her interests, by
assuring the payment of the lump sum bequeathed to her by Mr.
Hence, we do not believe Section Seven provides for a gift over
to Mr. Luster's children of the balance remaining from Section
Two in default of appointment by Mrs. Luster. Consequently, her
interest is not terminable, and qualifies for the marital
deduction under § 2056(a).
Because of our finding on this point, it is obvious that Mrs.
Luster's interest is not a deductible terminable interest under §
In Count III, plaintiffs seek to recover alleged interest
overpayments of $7,105.61. Insofar as the bulk of the estate
assets apparently consisted of interests in closely held
businesses, the estate elected to pay the estate tax in
installments, pursuant to Sections 6166 and 6601(b) of the
Internal Revenue Code.*fn6
The government contends that the estate failed to make the
third installment payment when due on November 13, 1963; that
under the provisions of § 6166, the entire balance thereby became
due; and that although the interest rate under Section 6166 was
only 4%, the default by the estate caused the interest rate to be
raised to 6% as is provided by Section 6601(a)*fn7 and
Regulation 301.6601-1(b)(2) thereto. The plaintiffs admit that
several installment payments were not paid when due, but deny
that there is any Code authorization for raising the interest
rate from 4 to 6% on estates paying in installments, when
installments are not paid when due.
Plaintiffs' argument will receive scant consideration. Treasury
Regulation 301.6601-1(b)(2) which interprets § 6601(a), states:
"the full amount of the tax to which the extension *
* * applies is not paid on or before the date of the
expiration of the period of the extension * * * the
unpaid amount shall bear interest at the rate of 6
percent per annum from the date of the expiration of
the period of the extension * * to the day on which
payment is received."
Plaintiffs argue that the regulation is an unauthorized
extension of the statute. But all it does is summarize the
statute rather than enlarge it. Certainly Congress could have
provided for an increased rate of interest once the taxpayer
fails to comply with the privilege given him to pay his taxes in
installments. Indeed, Section 6601(a) is all-inclusive in
referring to "any * * * tax imposed by this title." "Title"
refers to the entire Internal Revenue Code of 1954 (Title 26,
U.S.C.), which certainly includes Sections 6601(b) and 6166,
which relate to extensions for estates consisting of closely held
Section 6166 states that if an installment is not paid when
due, the unpaid portion of the tax payable in installments shall
be paid upon notice and demand from the Secretary. Plaintiffs
contend that no notice or demand was received. The estate
subsequently paid up the deficiency caused by its delay in making
certain payments. But that has no bearing upon the interest rate
applicable during the period from default to payment.
The interest provision, § 6601, in subsection (a) states that
interest accrues at six per cent from the last date prescribed
for payment. In subsection (b) it discusses the normal extension
or installment situation under Section 6166 and provides an
interest rate therefor of 4%. But subsection (c), "Last Date
Prescribed for Payment," states that such a date is determined
under chapter 62 (which ends with Sections 6166 and 6167) with
the application of the following rule:
"(rules 1, 2, and 3 are inapplicable)
(4) * * * in all other cases * * * the last date for
payment shall be deemed to be the date the liability
for tax arises (and in no event shall be later than
the date notice and demand for the tax is made by the
Secretary or his delegate)."
That rule rebuts plaintiffs' argument that if no notice of
non-payment was served, interest could not be increased. For
under § 6166(h)(3), the date the liability for tax arises is the
date fixed for each installment payment,
which in turn, under § 6601(c)(4), constitutes "the last date
for payment." We believe interest rose immediately to the normal
six per cent rate once the liability for the tax arose and was
not paid, and that was when the various installment payments were
due. § 6166(h)(3). The provision in § 6601(b) for 4% interest
in the case of extension payments, is an exception to the general
rule of § 6601(a), which yields when the time payments are late,
as is provided in § 6601(c), § 6166(h)(3) and Reg. 301-6601-1(b)
(2). The general rule providing for 6% interest becomes
applicable upon a payment lapse, and no notice or demand is
necessary to raise the rate.
Plaintiffs' arguments on this issue are rejected, and defendant
is allowed summary judgment on Count III.
Upon suitable proof to the Court of the reasonableness of the
fees incurred, as alleged in Count IV, judgment, in part, as
computed by the parties with respect to that issue, may properly
be rendered for plaintiffs. Reg. § 20.2053-3(c).
Plaintiffs' motion for summary judgment is granted as to Count
I, and the Government's motion for summary judgment is granted as
to Counts II and III.