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Hartford National Bank and Trust Co. v. United States

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT


decided: August 11, 1972.

THE HARTFORD NATIONAL BANK AND TRUST COMPANY, EXECUTOR OF THE WILL OF BLANCHE L. EDGAR, DECEASED, PLAINTIFF-APPELLANT,
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLEE

Moore, Smith and Timbers, Circuit Judges.

Author: Moore

MOORE, Circuit Judge:

The Hartford National Bank and Trust Company (Bank), as executor of the will of Blanche L. Edgar, deceased, appeals from a judgment of the United States District Court for the District of Connecticut granting the government summary judgment on the Bank's claim for a refund of federal estate taxes.*fn1 The court below concluded that a split-interest trust created by the decedent's will does not define a standard governing the trustee's power of invasion that is "presently ascertainable, and hence severable from the noncharitable interest,"*fn2 within the meaning of the applicable regulations and case law. We disagree, reverse the judgment below, and remand for further proceedings to determine the value of the charitable deduction.

I.

The decedent died on February 2, 1965, in New London, Connecticut. Her will, executed on August 3, 1961, was probated in New London.*fn3 Article Fifth of her will provides that the residue of her estate is to be given to the Bank as trustee for specified purposes. After enumerating specific bequests to be made from the net yearly income of the trust, the Article directs the trustee to pay the balance of the income to one Janet Clarke and her three children, share and share alike, for the terms of their natural lives, with right of survivorship. In connection with these payments the trustee is empowered to invade the corpus of the trust "as it feels necessary for the physical welfare of said Janet Clarke and her said children and the survivor of them." Upon the death of the survivor of the beneficiaries, the Article directs the trustee to manage the trust funds as a permanent and perpetual trust the income from which is to be paid equally to the Lawrence and Memorial Hospitals and the Second Congregational Church of New London. The gross estate of the decedent as disclosed by the inventory filed in the appropriate Probate Court was $875,002.89, and for purposes of the federal estate tax, $656,989.63. On April 29, 1966, the Bank filed a federal estate tax return showing a federal estate tax liability of $162,088.91. In this return, the Bank had deducted an amount as a charitable deduction. After an audit, the District Director of the Internal Revenue Service informed the Bank of his intention to assess a deficiency in the amount of $19,716.50 plus interest because of his belief that the charitable deduction taken by the Bank was invalid. The Bank paid the deficiency plus interest ($1,215.40) on July 12, 1967, and thereafter filed a claim for a refund. The claim was not granted, and this suit followed.

In deciding for the government on cross-motions for summary judgment, Judge Clarie concluded (1) that the word "physical" in the instruction to the trustee on when to invade the corpus of the trust is not relevant in determining whether the charitable remainder interest is "presently ascertainable,"*fn4 and (2) that the word "welfare," thus left standing alone, is not sufficiently precise to qualify the remainder bequest for the charitable deduction.

II.

Section 2055 of the Internal Revenue Code of 1954 permits a deduction in computing the value of a taxable estate for, inter alia, bequests made to charitable organizations. Before amendment by the Tax Reform Act of 1969,*fn5 the section provided that where the bequest was a remainder interest in trust properties, the corpus of which was subject to invasion for the benefit of noncharitable income beneficiaries, the bequest was deductible only if the amount of the bequest was "presently ascertainable, and hence severable from the noncharitable interest."*fn6 Determining what language created a presently ascertainable interest and what language did not proved a most difficult task. Often the amount of the deduction taken bore only a rough correlation to the amount of the bequest actually made to the charity.*fn7

The central inquiry in determining whether the language of split-interest trusts creates a presently ascertainable charitable remainder interest is whether the principal can be invaded only for purposes the determinants of which are known or known to be remote. Where invasion of the trust principal is permitted as "may be necessary to suitably maintain [the income beneficiary] in as much comfort as she now enjoys"*fn8 the charitable remainder interest is considered to be presently ascertainable because under these instructions the

principal that could be used was only so much as might be necessary to continue the comfort then enjoyed. The standard was fixed in fact and capable of being stated in definite terms of money. It was not left to the widow's discretion, . . . . There was no uncertainty appreciably greater than the general uncertainty that attends human affairs.*fn9

Safely falling within the rubric of "presently ascertainable" are also split-interest trusts the corpus of which can only be invaded for the "comfort and convenience" or "convenience" or "maintenance" or "support" of the income beneficiary or to maintain him in his "station in life."*fn10 So too where the trust corpus can be invaded only for demands arising from emergency, sickness, or accident, the courts have concluded under the lead of Ithaca that the charitable remainder interest is "presently ascertainable."*fn11 These courts would undoubtedly agree with this court's conclusion in Lincoln Rochester that

On the other hand, where the trustee is empowered to invade the trust corpus for the "happiness" or "contentment" of the income beneficiary, then the charitable remainder interest is perceived as not presently ascertainable.*fn13 Such words, it is believed, permit too much speculation and are too subjective to permit the value of the charitable remainder to be ascertained with any degree of accuracy.

We conclude that the power of invasion granted to the trustee by the testatrix in this case is sufficiently objective under current doctrine to permit the charitable remainder interest to be presently ascertained. While the word "welfare" does refer to an individual's well-being not only in terms of his health but also in terms of his happiness,*fn14 we cannot agree with the court below that the modifying adjective "physical" should be disregarded in construing the limitation on the trustee's power of invasion.*fn15 The word's natural meaning limits the trustee to invading the trust corpus only for the material, as opposed to the mental or spiritual, well-being of the income beneficiaries.*fn16 Thus we have no difficulty in concluding as did the courts in Ithaca and its progeny that the testatrix has manifested an intent by her will to insure that the income beneficiaries continue to enjoy their accustomed standard of living free from the vicissitudes of sickness, accident, or other foreseeable but unexpected emergencies.

Given that the split-interest trust created by the testatrix' will does create a presently ascertainable charitable remainder interest, it now becomes necessary to consider all extrinsic factors to determine the value of this interest.*fn17 The testatrix was obviously a person of substantial means. The income from her estate might well be sufficient to support Janet Clarke and her children for their lives, providing them with whatever their "physical welfare" requires -- without need for any invasion of principal. However, the question of the pattern and style of living of the Clarke family is one of fact. Only upon such facts can a reasonable determination of their prospective physical welfare be made. Obviously there is no indication that the testatrix intended this life style to change as a result of her largesse. In fact, her will directs that, except for this particular life interest, the income from her estate, in such perpetuity as may exist, be given to the hospital and the church.

We thus remand for further proceedings devoted to this issue.


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