The opinion of the court was delivered by: BIUNNO
This is a suit for refund of federal estate tax in connection with the estate of Grace L. Campbell (Grace) who died in 1973. The major item claimed will be controlled by the question whether the assets of a trust established by the will of her father, William H. Lummis, with a power of appointment in Grace, are to be included in the determination of her federal estate tax.
As is well known, the assets comprising the estate of a decedent for the purpose of probate administration under the law of the State with jurisdiction are not necessarily the same as the assets which must be reported as part of the gross estate for federal estate tax purposes.
A common example is the estate by the entirety. Land conveyed by deed to spouses to create such an estate does not pass to a surviving spouse by virtue of the will of the deceased spouse, or by the intestacy laws in case there is no will, because title is derived by virtue of the deed itself. The same is true of joint tenancies with right of survivorship in either real or personal property.
In both examples, the title or ownership of the surviving tenant is not part of the probate estate of the tenant who dies first. In each case, the interest that exists while both live comes to an end with the death of one, who, for failure to survive, has no further claim to or interest in the property. The theory is that during the common lifetimes, each tenant has hold of a handle of the property. With death of one, he no longer holds a handle while the survivor continues to hold his. Nothing is transferred in the contemplation of property law or of probate law.
In applying tax laws, whether State or federal, these property concepts do not necessarily apply, and provisions of the tax laws reflecting different concepts of legal theory can control.
The facts in the present case are not complicated. Lummis made a will in 1933 and died in 1940. He was survived by his widow, Gertrude, and three children, William, Robert and Grace. He left the residue of his estate in trust to provide for Gertrude for life. At her death, what remained was to be divided into four parts.
One part was to be distributed as directed by Gertrude under power of appointment as exercised by her will or, if not exercised, then in equal shares to William, Robert and Grace per stirpes.
Each of the other three parts was to be held in trust, to pay income to each of William, Robert and Grace and on the death of each to pay the principal as directed by power of appointment as exercised by the will of each or, if not exercised, then to that child's issue per stirpes.
In early 1971, Grace executed a will, and died in early 1973 leaving two children, James and Martha, who were also named co-executors. The residuary clause in Grace's will gave the residue of her estate, "including any property over which I may have any power of appointment" to James and Martha or their issue per stirpes.
Thus, Grace's designation under the power of appointment was of the same beneficiaries (James and Martha) who would have received her share of the Lummis trust, so far as shown by the facts presented, if she had not exercised the power.
Under New Jersey law, property received through the exercise of a power of appointment passes directly from the estate of the person who created the power (here, Lummis) to the beneficiaries designated without becoming part of the probate estate of the person who exercises the power (here, Grace). This is not the same as the treatment under the federal estate tax law.
By 26 USC § 2041(b)(3), a power of appointment created by a will executed on or before October 21, 1942 is considered to be created on or before that date even though the testator does not die (to give the will effect) until after that date, so long as the death occurs before July 1, 1949 without having republished the will by codicil or otherwise after October 21, 1942. In this case, both the date of execution of the Lummis will (1933) and the date of death (1940) preceded October 22, 1942, and so the treatment of the power and its exercise is that provided for powers created on or before October 21, 1942 (a "pre-October, 1942" power).
Under the federal estate tax law, 26 USC § 2041(a)(1), the gross estate of a decedent (here, Grace) is to include the value of property with respect to which decedent, by will, exercised a "pre-October 1942" general power of appointment. Failure to exercise the power or the complete release of the power is not to be deemed an exercise of the power. The rules applying to ...