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    This document summarizes a court case regarding whether the IRS could collect unpaid taxes from a deceased taxpayer's share of assets held in an inter vivos trust. The taxpayer had retained income from the trust for life and a general power of appointment over the remainder. The court found that under these circumstances, where the taxpayer had retained substantial control and benefits from the trust assets, the assets would be considered part of the taxpayer's estate for purposes of tax collection, regardless of whether any technical remainder interest passed to heirs. The court relied on the legal principle that one should not be able to shield assets from creditors by retaining substantial benefits and control over trust property.

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    United States Court of Appeals, Fourth Circuit

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    Scribd Government Docs
    45 views6 pages
    This document summarizes a court case regarding whether the IRS could collect unpaid taxes from a deceased taxpayer's share of assets held in an inter vivos trust. The taxpayer had retained income from the trust for life and a general power of appointment over the remainder. The court found that under these circumstances, where the taxpayer had retained substantial control and benefits from the trust assets, the assets would be considered part of the taxpayer's estate for purposes of tax collection, regardless of whether any technical remainder interest passed to heirs. The court relied on the legal principle that one should not be able to shield assets from creditors by retaining substantial benefits and control over trust property.

    Original Description:

    Filed: 1977-07-21 Precedential Status: Precedential Citations: 558 F.2d 1165 Docket: 76-1867

    Original Title

    United States v. Wanda Lee Ritter, as Administratrix, Estate of Don McClintock Ritter, Jr., Deceased, as Guardian of William John Ritter, Deborah Kay Ritter, Charles Lloyd Ritter, Iii, and Mark Ritter, and Individually, William John Ritter, Deborah Kay Ritter, Charles Lloyd Ritter, Iii, Mark Ritter, Individually as the Five Heirs at Law and Next of Kin of Don McClintock Ritter, Jr., Deceased, William R. Ritter, Individually, and First Huntington National Bank, as Trustee U/i Dated July 6, 1955 Made by Them and Mildred S. Ritter, Lloyd Ritter, Jr., Don McClintock Ritter, Sr., and Don McClintock Ritter, Jr., and Mildred S. Ritter, Lloyd Ritter, Jr., and Don McClintock Ritter, Sr., 558 F.2d 1165, 1st Cir. (1977)

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    This document summarizes a court case regarding whether the IRS could collect unpaid taxes from a deceased taxpayer's share of assets held in an inter vivos trust. The taxpayer had retained income from the trust for life and a general power of appointment over the remainder. The court found that under these circumstances, where the taxpayer had retained substantial control and benefits from the trust assets, the assets would be considered part of the taxpayer's estate for purposes of tax collection, regardless of whether any technical remainder interest passed to heirs. The court relied on the legal principle that one should not be able to shield assets from creditors by retaining substantial benefits and control over trust property.

    Copyright:

    Public Domain
    Download as PDF or read online from Scribd
    Download as pdf
    45 views6 pages

    United States Court of Appeals, Fourth Circuit

    Uploaded by

    Scribd Government Docs
    This document summarizes a court case regarding whether the IRS could collect unpaid taxes from a deceased taxpayer's share of assets held in an inter vivos trust. The taxpayer had retained income from the trust for life and a general power of appointment over the remainder. The court found that under these circumstances, where the taxpayer had retained substantial control and benefits from the trust assets, the assets would be considered part of the taxpayer's estate for purposes of tax collection, regardless of whether any technical remainder interest passed to heirs. The court relied on the legal principle that one should not be able to shield assets from creditors by retaining substantial benefits and control over trust property.

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    of 6

    558 F.

    2d 1165
    77-2 USTC P 9550

    UNITED STATES of America, Appellant,


    v.
    Wanda Lee RITTER, as Administratrix, Estate of Don
    McClintock Ritter, Jr., Deceased, as Guardian of William
    John Ritter, Deborah Kay Ritter, Charles Lloyd Ritter, III,
    and Mark Ritter, and Individually, William John Ritter,
    Deborah Kay Ritter, Charles Lloyd Ritter, III, Mark Ritter,
    Individually as the five heirs at law and next of kin of Don
    McClintock Ritter, Jr., Deceased, William R. Ritter,
    Individually, and First Huntington National Bank, as trustee
    u/i dated July 6, 1955 made by them and Mildred S. Ritter,
    Lloyd Ritter, Jr., Don McClintock Ritter, Sr., and Don
    McClintock Ritter, Jr., and Mildred S. Ritter, Lloyd Ritter,
    Jr., and Don McClintock Ritter, Sr., Appellees.
    No. 76-1867.

    United States Court of Appeals,


    Fourth Circuit.
    Argued Feb. 15, 1977.
    Decided July 21, 1977.

    Carolyn R. Just, Atty., Tax Div., Dept. of Justice, Washington, D. C.


    (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Robert A.
    Bernstein, Attys., Tax Div., Dept. of Justice, Washington, D. C., John A.
    Field, III, U. S. Atty., Robert B. Allen, Asst. U. S. Atty., Charleston, W.
    Va., on brief), for appellant.
    Charles E. Heilmann, Huntington, W. Va. (Robert H. Burford, Beckett,
    Burford & James, Huntington, W. Va., on brief), for appellees.
    Before CRAVEN * and WIDENER, Circuit Judges, and WILLIAMS,
    District Judge.**

    CRAVEN, Circuit Judge:

    In the district court, the United States sought to foreclose tax liens which
    encumber personalty allegedly belonging to the deceased taxpayer's estate. The
    district court entered summary judgment against the United States, concluding
    that the property in question was not an asset of the estate since it had passed
    directly to the taxpayer's heirs. We do not regard the court's conclusion as a
    sufficient warrant for its result; and, for the reasons below, we reverse.

    I.
    2

    Upon the death of his grandmother, the taxpayer, Don McClintock Ritter, Jr.,
    stood to receive outright 1/10th of the corpus of a testamentary trust previously
    created by his grandfather with 3/10th thereof going to his father and to each of
    two uncles. On July 6, 1955, however, the four remaindermen assigned their
    future interests to a 20-year inter vivos trust, to commence upon the
    grandmother's death. (She died in 1961.) Under the trust agreement
    (Agreement), each settlor was to be an income beneficiary in proportion to his
    original contribution of corpus. They expressly reserved the right to revoke the
    trust at any time by the unanimous consent of the surviving settlors, if any.
    Furthermore, it was provided that if any settlor should die before the expiration
    date of the trust, his share of the income and corpus would be distributed to
    those entitled thereto under his will or otherwise under the West Virginia laws
    of descent and distribution but only "as and when it is due" under the
    Agreement.

    The taxpayer died intestate on October 29, 1966, having collected his current
    income from the trust. After his death, the taxpayer was assessed $69,777.80 in
    delinquent taxes, plus penalties and interest, because he had failed to file tax
    returns for the four years 1961 to 1965. (The assessments were made on the 3rd
    and 17th of May, 1968.) When the administratrix refused to pay the taxes
    assessed against her intestate, the Government sought to reduce the assessments
    to judgment and to foreclose a putative tax lien against the taxpayer's
    proportional share of the trust assets as property "belonging to (him)" or rather,
    in this instance, to his administratrix. See 26 U.S.C. 6321 & 6322.

    II.
    4

    The district court considered the dispositive legal issue to be whether the
    Agreement, as a whole, indicates that the settlor-taxpayer intended to create a
    remainder interest in his heirs. Doubtless the court was moved to frame it so by

    the parties' apparent belief that the heirs would be home free if the property
    passed to them by remainder, while the government would win if the property
    reverted to the settlor's estate. The court wrestled with the inter vivos branch of
    the worthier title doctrine (whereby a remainder to one's "heirs" is deemed to
    revert to the grantor) and concluded that under West Virginia law there was no
    reversion. He treated the doctrine as a rule of construction rather than as an
    inflexible rule of law with the result that the intent of the grantor governed. See
    In re Burchell's Estate, 299 N.Y. 351, 87 N.E.2d 293 (1949). We defer to his
    experience and expertise in the law of his own state. But we think that whether
    the United States can recover its tax does not depend upon how the taxpayer's
    heirs acquired their interest. In short, we hold that the government prevails
    whether the heirs took by "purchase" or by "descent," i. e., whether there was a
    remainder or a reversion with subsequent descent under the law of intestate
    succession.A.
    5

    No matter how clear a settlor's intent to vest a remainder in others may be for
    purposes of the "worthier title" doctrine, see, e. g., In re Burchell's Estate, supra
    (the retention of a general power of testamentary appointment sufficiently
    indicated an intent to make a gift to one's heirs, for otherwise the language is
    otiose), if he has retained too much control over the property he purports to
    convey, the conveyance itself may be considered legally or equitably void. A
    conveyance may be equitably disallowed as a constructive fraud to the extent
    the grantor has unsatisfied creditors, where he has so conveyed his property as
    to enjoy its benefits while shielding it from his debts. Cf. In re Brown, 41
    A.D.2d 275; 342 N.Y.S.2d 174, 179, rev'd in part, 33 N.Y.2d 211, 351 N.Y.S.
    655, 657, 306 N.E.2d 781 (1973).

    Thus the district court erred in failing to consider the applicability to the
    conveyance of the doctrine that a settlor, who has reserved to himself the
    income for life and a general power of appointment over the remainder (with or
    without a gift in default of appointment), has retained "all the substantial
    incidents of ownership" and that therefore "it would be contrary to public policy
    to allow him by this formal change to prevent creditors from reaching the
    property." Restatement of Property, 328, Comment a (1940). 72 C.J.S.
    "Powers" 32 at p. 429 (1951).

    B.
    7

    Under the law of powers of appointment, the creator of the power is known as
    the "donor" and the recipient as the "donee." Here the deceased "non- taxpayer"
    was both donor and donee. Ordinarily equity will not compel or control the
    donee's discretion if he elects not to exercise a general power of appointment.

    But at the same time, it is thought to be the donee's duty to exercise a general
    power, if he does so at all, in favor of his creditors: to do otherwise being
    deemed a species of fraud. Thus, if he appoints in favor of a "volunteer" (i. e.,
    someone who is not a bona fide purchaser), an equity court will treat the
    appointed assets as assets of the donee for the benefit of his creditors, if the
    donee's own estate is insufficient to satisfy their demands. United States v.
    Field, 255 U.S. 257, 41 S.Ct. 256, 65 L.Ed. 617 (1921); First National Bank of
    Chicago v. Mottola, 302 F.Supp. 785 (W.D.Ill.1969). A few jurisdictions
    dissent from this position on the old theory that appointive assets are the actual
    property of the donor and that the donee is merely his agent. Yet even those
    few jurisdictions fall squarely into line where, as here, the donor is also the
    donee, since there can then be no question but that the appointive assets belong
    substantially to the donee and especially where he has also reserved to himself
    the present income from the property. 62 Am.Jur.2d, "Powers," 1116 at 213
    (1972).
    8

    The Restatement of Property correctly sets forth the particular rule by which

    9we are to be guided: CREDITORS OF THE DONEE WHERE DONEE


    10
    CREATES
    TRUST WITH LIFE ESTATE AND GENERAL POWER IN
    HIMSELF.
    11
    When
    a person transfers property in trust for himself for life and reserves a general
    power of appointment, although the power is not exercised, the interest subject to
    such power and the settlor's beneficial life interest, can both be subjected to the
    payment of the claims of creditors of such person and claims against his estate to
    whatever extent other available property is insufficient for that purpose.
    12

    Restatement of Property, 328 (Supp.1948). See also 3 Powell on Real


    Property, P 389 at 359-60 (1972); 72 C.J.S. "Powers" 32 at p. 429 (1951); II
    Scott on Trusts, 156 at 1193-1194 (3d ed. 1967); 93 A.L.R. 1211; Simes and
    Smith, The Law of Future Interests, 944 (2d ed. 1956); A. W. Scott, The
    Effects of a Power to Revoke a Trust, 57 Harv.L.Rev. 362, 364 (1944) ("By the
    great weight of authority it is held that (where the settlor himself has a general
    power of appointment) the settlor is substantially the owner of the property, and
    that his creditors can reach it whether he exercises the power or fails to exercise
    it . . ."); In re Mogridge's Estate, 342 Pa. 308, 20 A.2d 307 (1941); Petty v.
    Moores Brook Sanitarium, 110 Va. 815, 67 S.E. 355 (1910); Egbert v. de
    Solms, 218 Pa. 207, 67 A. 212 (1907); J. S. Menken Co. v. Brinkley, 94 Tenn.
    721, 31 S.W. 92 (1895); Brinton v. Hook, 3 Md.Ch. 477 (1850). Moreover, the
    rule applies whether the power of appointment is exercised or unexercised,
    revocable or irrevocable, presently exercisable or testamentary, and without

    regard to the presence or absence of a gift in default. Restatement of Property


    328, Comment c (Supp.1948); 3 Powell on Real Property, 389 at 360 (1973);
    II Scott on Trusts, 156 at 1195 (3d ed. 1967); Benedict v. Benedict, 261 Pa.
    117, 104 A. 581 (1918) (testamentary power; gift in default to settlor's widow
    and children and if none to his next of kin); Liberty Storage & Warehouse Co.
    v. Van Wyck, 165 Misc. 890, 1 N.Y.S.2d 149, rev'd on procedural grounds, 256
    App.Div. 641, 11 N.Y.S.2d 92 (1939) (testamentary power; gift in default to
    settlor's brothers and sister and nephew).
    13

    Although we find no West Virginia statute or decision precisely on point, we


    do find that in a closely analogous context the West Virginia Supreme Court
    looked beneath the formal niceties of a conveyance to view its plutological
    reality. Where a testator prior to marriage had granted land to a trustee, for his
    own present benefit, and had retained a presently exercisable power of
    appointment over it, with the residue (if any) going to his children upon his
    death, the court held that the grantor retained at least an "equitable estate" in
    fee simple in the appointive assets for purposes of his wife's entitlement to
    dower. Meyer v. Barnett, 60 W.Va. 467, 56 S.E. 206 (1906). We think the
    West Virginia Supreme Court would similarly treat the appointive assets here
    as "equitable assets" of the settlor-donee for the benefit of his creditors.

    14

    Accordingly, the case is remanded to the district court so that it may verify that
    there are no other assets of the taxpayer's estate available to satisfy the
    government's claim, see Restatement of Property, 328, Comment g (1940),
    and enter an appropriate order.

    15

    REVERSED AND REMANDED.


    WIDENER, Circuit Judge, concurring:

    16

    I agree with the result reached by Judge Craven, and, in large measure, with his
    opinion. I state my views separately only to emphasize that I regard the law of
    West Virginia as controlling this case, and to remove from the opinion any
    possible implication that State law does not govern the issue before us.

    17

    I also wish to make it clear that we announce no principle that a creditor can
    recover a debt from assets of a decedent debtor that may have previously
    passed directly to a third party through a remainder interest. Our holding is
    simply that, in accord with established law, it violates public policy for an
    individual to "have an estate to live on, but not an estate to pay his debts with."
    Petty v. Moores Brook Sanitarium, 110 Va. 815, 67 S.E. 355 (1910).1

    18

    I believe the district court applied the wrong State law and that the West
    Virginia Supreme Court, if called upon to decide this case, would find the Petty
    case to be the persuasive precedent, and would reach the same result we reach
    here. See Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18
    L.Ed.2d 886 (1967).

    19

    Petty stands for the proposition that a settlor of a trust cannot create the trust for
    his own benefit, while shielding the trust assets from his creditors. This
    principle, called "well established" by the West Virginia court, is cited with
    approval in Guernsey v. Lazear, 51 W.Va. 328, 41 S.E. 405, 409 (1902). See
    Annot. 34 A.L.R.2d 1335, 1342.

    20

    On this basis, I agree with Judge CRAVEN that the judgment of the district
    court must be reversed.

    21

    Judge WILLIAMS has authorized me to state that he concurs in this opinion.

    Judge Craven prepared the opinion bearing his name but died before the
    preparation of the concurring opinion

    **

    Western District of Virginia, sitting by designation

    While West Virginia has recognized spendthrift trusts by statute, for example,
    such a trust cannot be validly created when the settlor and the beneficiary are
    one and the same person. See W.Va.Code 36-1-18

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