United States v. Baldwin

Murphy, C. J., delivered the opinion of the Court. The United States instituted a civil action in the United States District Court for the District of Maryland on December 19, 1975 to enforce federal tax liens on the assets of a trust of which appellee Mercantile-Safe Deposit and Trust Company (the Bank) is the trustee, and to obtain judgment for income taxes, with penalties and interest, against appellee William W. Baldwin. On September 29,1976, the court granted the Bank’s motion to dismiss the complaint for failure to state a claim upon which relief could be granted, holding that under Maryland law Baldwin had retained only a special or limited power of appointment, and that he did not therefore have “property” or “rights to property” in the trust corpus to which the tax liens could attach. The government appealed to the United States Court of Appeals for the Fourth ⁵⁸⁸ Circuit.

Concluding that “there can be no conclusive resolution of this litigation without the aid of the Court of Appeals of Maryland,” the Fourth Circuit certified for our consideration the following question of law and statement of relevant facts pursuant to the Uniform Certification of Questions of Law Act, Maryland Code (1974) §§ 12-601 to 12-609 of the Courts and Judicial Proceedings Article: “The question on appeal is whether the settlor of an irrevocable trust, reserving to himself only the right to receive, during his lifetime, the income from the investments and other personalty of the trust, has such an estate in the corpus thereof as constitutes ‘property and rights to property’ subject to the lien of the United States for taxes owing by the settlor on such income. Section 6321, Internal Revenue Code of 1954.* Adjectival terms of the instrument in suit are that the settlor retains the power to change the trustee — even to himself, thus including his administration of the trust — and to appoint by his will those who should enjoy the remainder estate in the trust corpus after his death, failing which the remaindermen would be those specified in the trust instrument. “Whether the life tenant subject to these restrictions, but possessed of these privileges, is seised of property or property rights is a determination for the State judiciary exclusively.” “While the facts appear for the most part in the foregoing submission of the question, a complete understanding of them requires this amplification: the settlor or creator of the trust is William W. Baldwin of New York City; the indenture is dated December 10,1935; the trustee at that time was the Safe Deposit & Trust Company of Baltimore, now known as the Mercantile-Safe Deposit and Trust Company; the outstanding taxes against Baldwin ⁵⁸⁹ are on income assessed for certain years between 1950-1959, inclusive, amounting with penalties and assessed interest, less payments and credits, to a grand total of $69,371.00 as of the commencement of this litigation; until his retirement in 1973, the settlor had paid the taxes annually accruing thereon from his current income; and the capital of the trust as of February 1976 had an estimated fair market value of $254,235.60.” ‘SEC. 6321. LIEN FOR TAXES. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.’ ” The government claims that Baldwin, in reserving (1) the right to receive the income of the trust for his life, (2) the right, upon his death, to appoint the trust property to anyone by will, and (3) the right to manage the trust assets (by reserving the right to name himself trustee), has retained all the substantial incidents of ownership of the trust property.

To support this contention, the government cites the Restatement of Property § 328 (1940): “When a person transfers property in trust for himself for life and reserves a general power to appoint the remainder and creates no other beneficial interests which he cannot destroy by exercising the power, the property, though the power is unexercised, can 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.” (Emphasis supplied.) The government argues that, under Wyeth v. Safe Dep. & Tr. Co., 176 Md. 369 , 4 A. 2d 753 (1939), Baldwin’s retained power to appoint the trust corpus by will is a general power, i.e., one exercisable in favor of his creditors or his estate. ⁵⁹⁰ The appellees contend that Baldwin has reserved only a special or limited power of appointment over the trust corpus under Maryland law, that § 328 of the Restatement is therefore inapplicable, and that our decision in Trust Co. v. Bergdorf Etc., Co., 167 Md. 158 , 173 A. 31 (1934), controls this case. They maintain that the rights reserved by Baldwin under the trust instrument do not amount to “property” or “rights to property” in the trust corpus, because Baldwin, as donee of a special power, has no proprietary interest in the trust corpus and cannot appoint it to his estate or his creditors. In answering the certified question, we must first determine whether the power of appointment reserved by Baldwin was a general power exercisable in favor of his estate or creditors, as the government suggests, or whether, as appellees argue, the power retained was a special or limited one.

In the trust instrument, Baldwin retained the power, upon his death, to appoint the trust corpus “to such person or persons in such manner and upon such limitations, whether upon trust or otherwise, as the Settlor by his Last Will and Testament may designate and appoint.” It has long been the rule in Maryland that such language creates a special or limited power in the donee. See, e.g., Balls v. Dampman, 69 Md. 390, 391 , 16 A. 16, 17 (1888), holding that the donee of a power to appoint property by will “in such manner as she may see fit” could not appoint to her creditors, nor could her creditors reach the property in the hands of the appointees. To create a general power of appointment under Maryland law, the donor must employ language specifically authorizing the donee to appoint property to his estate or creditors. Frank v. Frank, 253 Md. 413, 415 , 253 A. 2d 377, 379 (1969).

Accord, Pierpont v. C.I.R., 336 F. 2d 277 (4th Cir. 1964), cert. denied, 380 U. S. 908 (1965); Trust Co. v. Bergdorf, Etc., Co., 167 Md. 158 , 173 A. 31 (1934); Pope v. Safe Dep. & Tr. Co., 163 Md. 239 , 161 A. 404 (1932). See 61 Op. Att’y Gen. 846, 848 (1976).

While conceding that this is the general rule in Maryland, the government argues that the decision of our predecessors in Wyeth establishes that where the donor and donee of the ⁵⁹¹ power are the same, no specific enabling language is necessary to create a general power of appointment. We disagree. In Pope v. Safe Dep. & Tr. Co., 163 Md. 239, 243 , 161 A. 404, 405 (1932), the settlor of a trust reserved the net income for life and a power to appoint “to the use of such person or persons” as he designated in his will.

The settlor exercised his power. The Court held that the appointed property passed by the deed creating the power rather than by the will in which the power was exercised. In characterizing the nature of the donor-donee’s interest in the trust property, it said: “As the equitable life tenant the tenant, qua tenant, could assign, release, or incumber his life estate or have it subjected to the payment of his debts, but in no proprietary capacity could he alienate, bargain and sell, bequeath or devise the property which might be appointed, [citations omitted] Neither, if there were no fraud associated with the execution of the deed, could this property or estate arising upon the termination of his life be made subject to the claims of the appointor’s creditors, whether in bankruptcy, insolvency, or otherwise; nor could it be taken by them in attachment or execution. Balls v. Dampman . . . .” 163 Md. at 246 , 161 A. at 406-07 .

In sum, the settlor in Pope , by retaining a life income interest and a power of appointment over the trust corpus, had not reserved an “estate in the subject-matter of the power” which could pass under his will. 163 Md. at 245 , 161 A. at 406 . Applying these principles to a fact situation similar to that in the instant case, the Court, in Trust Co. v. Bergdorf, Etc., Co., 167 Md. 158 , 173 A. 31 (1934), refused to allow the settlor’s creditors to reach the corpus of an irrevocable trust. In that case, the settlor created an irrevocable inter vivos trust, retaining a life estate in the trust assets and a power to appoint “to such persons in such shares and proportions ... and upon