TAXATION - GIFTS - A TRUST INSTRUMENT WHICH MAKES A PRESENT GIFT OF PROPERTY TO A MINOR BY MEANS OF A TERMINATION PROVISION EXERCISABLE BY THE DONEE AS VESTING A PRESENT INTEREST
A trust instrument which makes a present gift of property to a minor person by means of a termination provision exercisable by the donee, vests a present interest in the minor donee.
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October 29, 1959
Honorable William S. Schumacher
Washington State Tax Commission
General Administration Building
Olympia, Washington Cite as: AGO 59-60 No. 81
You have requested our opinion to a question which may be stated as follows:
May a trust instrument which purports to make a present gift of property to a minor person by means of a termination provision exercisable by the donee, vest a present interest in the minor donee in view of the practical and legal impediments incident to minority?
We answer this question in the affirmative.
RCW 83.56.040 provides in part:
"A gift tax shall be imposed on the aggregate total of all net gifts for each calendar year and all prior years . . ."
RCW 83.56.050 provides:
"In the case of gifts,other than of future interests in property, made to any person by the donor during any calendar year, the first three thousand dollars of such gifts to such person or body politic or [[Orig. Op. Page 2]] corporate shall not, for the purpose of this chapter, be included in the total amount of gifts made during such year." (Emphasis supplied)
Article 4 of the Tax Commission's regulations relating to gift taxes provides:
". . . An estate or interest limited to commence in possession or enjoyment at a future date is a future interest."
Pursuant to these statutes, a gift of a present interest in property entitles the donor to claim the gift tax exclusion each year. In view of this fact, trust instruments are being drafted with termination provisions which provide for immediate termination upon demand by the minor donee or his guardian. Typical of the language of trust instruments being used for the purpose of obtaining advantage of the gift tax exclusions is the following:
The beneficiary shall be entitled to all or any part of the trust estate or to terminate the trust estate in whole or in part at any time whenever said John Doe or the legally appointed guardian for his estate shall make due demand therefor by instrument in writing filed with the then trustee and upon such demand being received by the trustee the trustee shall pay said trust estate and its accumulations, or the part thereof for which demand is made, over to said John Doe or to the legally appointed guardian for his estate who made such demand on his behalf.
The authorities are in some disagreement as to whether a trust of this nature vests a present or future interest. The weight of authority, however, is to the effect that the trust termination provision creates a present interest. See 65 Harv. L.Rev. 703; 36 Minn. L.Rev. 295; 30 Tex. L.Rev. 258; 100 Pa. L.Rev. 905; 37 Va. L.Rev. 1016. The leading case holding such a trust to vest a present interest is Kieckhefer v. Comm., 189 F. (2d) 118 (7th C.C.A.). The case ofStifel v. Comm., 197 F. (2d) 107, (2nd C.C.A.) (1952), reaches a contrary result on essentially the same facts. The outcome in each case hinges on the interpretation of what constitutes a future interest. As construed and applied by the courts, "future interest" encompasses all gifts whereby use, possession, or enjoyment is postponed for any period, regardless of whether the number of donees is certain or the values ascertainable, or title is vested or contingent. The definition of the term "future interest" most favorable to the position of the Inheritance Tax Division [[Orig. Op. Page 3]] is found in the Supreme Court case ofFondren v. Commissioner of Int. Rev., 324 U.S. 18, 20, 65 S.Ct. 499, 89 L.Ed. 668 (1945):
". . . it is not enough to bring the exclusion into force that the donee has vested rights. In addition he must have the right presently to use, possess or enjoy the property. These terms are not words of art, like 'fee' in the law of seizing, . . . but connote the right to substantial present economic benefit. The question is of time, not when title vests, but when enjoyment begins. Whatever puts the barrier of a substantial period between the will of the beneficiary or donee now to enjoy what has been given him and that enjoyment makes the gift one of a future interest within the meaning of the regulation."
Paraphrasing the above quote, "future interest" has been interpreted to mean it must be read in the nonlegal sense of factually postponed economic benefit. However, there is an overwhelming inference naturally flowing from language used throughout theFondren case that factually postponed legal benefit must arisefrom the terms of the trust itself.
Admittedly, the trust involved in the Fondren case, supra, created a future interest because the enjoyment or use of the gift provided for by the trust was contingent upon the occurrence of future events, not only uncertain, but by the recitals of the instrument itself improbable of occurrence. It is to be noted that theFondren case, supra, did not involve a trust provision which would provide for the immediate termination of the trust upon demand by the minor donee or his guardian. However, the United States Supreme Court in the Fondren case did state that postponement of gift enjoyment must come from the terms of the trust itself:
". . . And there is nothing to indicate that gifts to specified donees in esse and in definite amounts are to be excluded from the denial [of the gift tax exemption],if by the terms of the gift enjoyment is deferred to a future time." (Emphasis supplied)
To petitioner's contention in the Fondren case that if the exemption did not apply in that case, it could not apply in any other case whereby a trust was set up for a minor's benefit, the court stated:
". . . Whenever provision is made for immediate application of the fund for such a purpose [the minor's benefit], whether of income or corpus, the exemption applies." (Emphasis supplied)
[[Orig. Op. Page 4]]
From the preceding language, it is evident that the United States Supreme Court places emphasis on the fact that postponement of enjoyment of the gift must come from the terms of the trust instrument. See 65 Harv. L.Rev. 703, supra.
It is obvious that a trust involving a termination provision with an adult as the beneficiary would constitute a present interest, since an adult couldimmediately make a demand upon the trustee and receive the trust property. Even theStifel case,supra, admits this point. There is no sound reason, either in law or logic, why the situation should be different if a minor has been designated the beneficiary of the trust, since there is still nothing in the terms of the trust which would factually postpone the economic benefit.
The court in theKieckhefer case, supra, aware of the Supreme Court's emphasis placed on the terms of the trust as limiting enjoyment of the gift, did not consider the legal disability of a minor to effectually terminate the trust as a factual postponement of the enjoyment, because such legal disability did not arise from the terms of the trust. Instead, the court relied on the minor's immediate right, as provided in the instrument, to demand the corpus of the trust, and the court stated at page 121:
". . . It is not, however, the use, possession or enjoyment by the beneficiary which marks the dividing line between a present and future interest,but it is the right conferred upon the beneficiary to such use, possession or enjoyment." (Emphasis supplied)
Unquestionably, the trust termination provision confers a right upon an adult beneficiary to such use, possession or enjoyment, and it follows that the right is also conferred upon a minor beneficiary by such trust provision. The fact that the minor cannot effectually exercise this right does not arise intrinsicallyfrom the terms of the trust, but rather from the extrinsic factor of legal disability incident to minority.
TheKieckhefer case draws a line between disabilities imposed by the terms of the trust and those arising from the donee's factual and legal status. Under this reasoning, the former restrictions create future interests while the latter do not change otherwise present interests into future interests. TheKieckhefer approach is to look solely at the trust instrument and if the right to present enjoyment is conferred in the instrument, the inquiry ends, and the classification as a "present interest" results. Under theStifel approach, the finding of a right to present enjoyment in the trust instrument is only the first step to the finding of a present interest, for it inquires into the "surrounding [[Orig. Op. Page 5]] circumstances" at the time of the creation of the trust to determine whether the "right" can be effectually exercised.
In theStifel case, the right given the beneficiary to terminate was limited, during minority, to exercise by a guardian who was never appointed. Court appointment of a guardian was a condition precedent to an exercise of the power. TheStifel opinion holds that neither situation involves a present gift because to assumearguendo that court appointment of a guardian for a minor beneficiary of a trust would be granted as a matter of course, the powers of guardians are nevertheless restricted by court supervision.
On practical as well as legal grounds the distinction drawn by theStifel case is not well taken. The chance of the power being exercised is virtually the same whether or not a guardian is in existence at the time of the trust's creation. In either case the power will not be exercised if there is no need to do so, and if there is a need and no guardian exists, one will be appointed. However, one point made in theStifel opinion seems significant. Assuming there is a guardian it is indicated that he must not be under the control of the donor. This is grounded on the basic policy against allowing the donor to escape taxes by effecting illusory transfers.
Under the Washington laws pertaining to minority guardianship, the restraint on use, enjoyment or sale is dependent on the discretion of both the guardian and then the court. RCW 11.92.010,et seq. Invasion of the corpus of a ward's estate is conditioned upon "cause shown" to the court, all of which are further impediments to the power to exercise thepresent right to "use, possession, or enjoyment" of the minor. In re King, 151 Wash. 120, 275 Pac. 82; 190 Wash. 472. However, the legal assumption that a minor is denied actual physical possession of his estate does not lead to the conclusion that he is thereby denied the right conferred to actual physical possession of his estate which, by its very existence and preservation benefits him daily.
The determination of what interests are the subject of gift, for gift tax exclusion purposes, should be limited to the determination of whether enforceable rights have been conferred upon the donee by the trust instrument. If the inquiry ends here, gifts to minors and adults alike are subject to the same limitations upon the annual exclusion. Direct, unconditional transfers to either are gifts of present interests.
Accordingly, it is our opinion that the conclusion reached in theKieckhefer case,supra, is the preferable result and within the intended area of exclusion established by the legislature. Therefore, the disabilities incident to minority, imposed by law for the protection of a child from his own improvidence or the improvidence of his elders, [[Orig. Op. Page 6]] should not render the gift to a minor a future interest. We should not indulge in legal fiction to change a present interest into a future interest merely because of the donee's minority.
If, however, it is found in fact that the guardian of a minor's estate is subject to the control or dominion of the donor -a danger with which theStifel case,supra, was concerned -such a transaction could, in our opinion, be classified as a gift of a future interest and not entitled to the annual exclusion.
Very truly yours,
JOHN J. O'CONNELL
JOHN W. RILEY
Deputy Attorney General