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Estate of Robert R. Ware v. Commissioner of Internal Revenue

decided: June 13, 1973.


Kiley, Cummings, and Pell, Circuit Judges.

Author: Pell

PELL, Circuit Judge:

This is an appeal by Robert R. Ware, Jr., executor of the estate of his father, Robert R. Ware, deceased, from a decision of the Tax Court to the effect that the value of the corpus of each of five family trusts created by the decedent in 1936 was includable in the father's gross estate for federal estate tax purposes. The tax deficiency involved was approximately $290,000.

The factual background of the controversy is set forth in depth in the Tax Court's opinion, 55 T. C. 69 (1970), and need not be repeated in similar detail here although we note certain salient facts. The trust instruments, while differing in regard to the identity of the beneficiaries, all family members, contain, insofar as the present appeal is concerned, language of similar import. The decedent "shall be and continue the sole Trustee hereunder as long as he shall live and remain competent to act as such Trustee." Decedent's two named brothers were to be successor trustees only if the decedent ceased to be sole trustee. There was no express provision for the decedent's resignation as sole trustee*fn1 nor for the renouncing or releasing of his trustee's rights or duties.

The crucial provision of the trust instruments in relation to this litigation was that income "shall, in the sole discretion of the Trustee herein, be distributed from time to time to the beneficiaries herein or accumulated for their respective benefits." The discretionary determination to accumulate or not to accumulate was vested in the successor trustees only "in the event said Trustee becomes incompetent" and then only during the period of such incompetency. In notarized documents executed on April 12, 1940, May 1, 1940, and May 14, 1943, the decedent obviously attempted to divorce himself, both individually and as trustee, from any connection whatsoever with the trusts. It does not seem to be contended otherwise, the controversy stemming from whether on an extremely technical basis he did not succeed in ridding himself of the discretionary power to accumulate income. The final attempt at repudiation of any connection with the trusts is exemplified by the following:

"I, Robert Rea Ware, * * *, did execute and deliver two instruments, dated April 12, 1940 and May 1, 1940 respectively, by which I intended to and did irrevocably and forever renounce, resign, and relinquish any and all rights, privileges, titles, interests, duties, and claims of any and every nature and description whatsoever vested in me, as Trustee or as an individual, in said Robert Rea Ware Trust. . ., and in confirmation of said instruments dated April 12, 1940 and May 1, 1940 and by these presents, I, individually and as Trustee, hereby irrevocably and forever renounce, resign, assign, and relinquish to the beneficiaries thereunder, in accordance with their respective rights thereunder, any and all past, present, and future rights, privileges, titles, interests, duties, and claims of any and every nature and description whatsoever heretofore or now vested in, belonging, or reserved to me or hereafter vesting in, belonging, or accruing to me, as Trustee or as an individual, in and by the terms and provisions of said Robert Rea Ware Trust . . . ."

The record indicates that the decedent thereafter did not purport to have any connection with the trusts. He died a resident of Illinois, the law of which state is applicable, on July 25, 1964. In the interim, the brothers had resigned as successor trustees, and eventually each primary beneficiary was appointed pursuant to trust provisions as successor trustee of his or her own trust. There was never any accumulation of income.

In 1943, effective May 25 of that year, Illinois passed a Termination of Powers Act, Ill. Rev. Stats. ch. 30, §§ 177-182. Specifically, under § 180 a release of a power executed prior to the effective date is to have the same effect as if the Act had been in effect at the time the release was executed and delivered.

The types of "powers" covered by the Act are defined in broad and sweeping terms. While powers of appointment were included it seems clear that the scope of the Act was not limited to powers of this type only.

The principal thrust of the Tax Court decision was that under Illinois law the decedent could not resign as trustee without court approval and, not having it, he went to his grave undivested of the legal accouterments of the fiduciary status, specifically, with the power to control the manner of the disposition of income. The Tax Court therefore held that the deficiency was properly assessed under 26 U. S. C. § 2036(a)(2) (right to designate the persons who shall enjoy the income) and 26 U. S. C. § 2038 (reserved power to alter).

In reaching this result, the Tax Court dealt extensively with the Illinois Termination of Powers Act and determined that the Act did not accomplish what the decedent and his legal advisors obviously thought it did. In the family trust situation here involved it would have been a simple matter indeed for court approval of a resignation to have been secured, and, as the Tax Court observed, "if he had done so, and had his application been accepted, his resignation would have been complete." As indicated, we entertain no doubt that the acceptance would have been almost automatic. He did not do so apparently because of the general belief among Illinois practitioners that a private inter vivos trust, as opposed to a testamentary trust, did not require court supervision in matters of this sort. This, of course, does not mean that a trustee in the case of the inter vivos trust can exceed the scope of the instrument-provided authority in administering the trust nor that he would not remain answerable in court to an injured cestui que trust if he purported to do so.

In any event, court approval was not secured and, while we question the correctness of the Tax Court's determination that court approval was a sine qua non for legally effective resignation,*fn2 we do not deem it necessary to reach that question, for we find that the action taken was effective under the Illinois Act to divest the decedent of his power to control the distribution of income during the pendency of the trusts.

Turning to the Illinois statute, supra, we find the following portions thereof significantly dispositive:*fn3

"177. (a) 'power' includes . . .any power to invade property, and power to terminate any right or interest thereunder and any power remaining where one or more partial releases have heretofore or hereafter been made with respect to a power, whether heretofore or hereafter created or reserved, whether vested, contingent or conditional, and whether classified in law or known as a power in gross, a power appendant, a power appurtenant, a collateral power, a general, special or limited power, an ...

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