Cotton, Albert H.

English

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Louisiana Law ReviewVolume 10 | Number 4May 1950TAX PLANNING FOR ESTATES, by William J.Bowie. Nashville: The Vanderbilt University Press,1949. Pp. 93, $2.00.Albert H. CottonThis Book Review is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted forinclusion in Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact kreed25@lsu.edu.Repository CitationAlbert H. Cotton, TAX PLANNING FOR ESTATES, by William J. Bowie. Nashville: The Vanderbilt University Press, 1949. Pp. 93, $2.00.,10 La. L. Rev. (1950)Available at: https://digitalcommons.law.lsu.edu/lalrev/vol10/iss4/17BOOK REVIEWSitself represents previous evaluations of conduct and in turninfluences subsequent evaluations, provide a guide, for an ulti-mate criterion is still lacking. But Professor Hall seems to havefaith in method, though the purpose of the method be left un-explained. Arguing that the current political ideal has formed,again at least since the time of the Stoics, a part of the essenceof positive law (in the sense that such ideal should conform to"justice," "virtue" or "natural law"), and expressing the beliefthat the democratic ideal, self-rule, is the highest political formachievable by man, he concludes that self-rule must form a partof the essence of law. Certainly the democratic form of govern-ment would seem to be that most consistent with man's nature.It also may be that self-rule is less likely to lead to excesseslike Nazism or Communism, which Professor Hall dreads asmuch as any person. To that extent a plea for self-rule is morethan understandable. But if I understand Professor Hall cor-rectly, he, does not actually separate the ethical quality of lawfrom its democratic or non-democratic formulation. In his analy-sis, democratically formulated law has intrinsic value becauseit is the product of the form of government best suited to ascer-tain the "best answers" to human problems; that is, because thereis no better way of ascertaining the ethically valid, law estab-lished by truly democratic processes must be "rationally themost defensible," and therefore "objectively valid."In the last analysis, Professor Hall's third component mustbe regarded as another of those attempts, always necessarilyfutile, to construct an ethical science without first principles.It would be better if it were not necessary to be adversely criticalof the effort of so serious a scholar as Professor Hall. But thereis no way of judging the value of any activity as human activity(that it, not merely in terms of immediate purpose), which isnecessarily the essence of ethics, unless the purpose of man canbe ascertained. This is the province of metaphysics and faith.Those who can accept neither must be content to remain aimlessimpulses to action without right to speak of values.ROBERT A. PASCAL*TAX PLANNING FOR ESTATES, by William J. Bowie. Nashville: TheVanderbilt University Press, 1949. Pp. 93, $2.00.My own liking for this little book is shown by the fact thatI placed it on the list of books for the students in the Estate* Assistant Professor of Law, Louisiana State University.19501LOUISIANA LAW REVIEWand Gift Tax course here to buy under the GI bill. One of themremarked that it was the sort of book that you could show to anintelligent client to explain what you were trying to do for him.It is a remarkably good job of explaining the essentials of acomplex subject in less than 100 pages.There remains the question of the value of the book to thepracticing attorney in Louisiana. Because of the basic differ-ences between the succession laws of this state and those of thecommon law jurisdictions, there is a natural tendency to dis-miss any national book on estate planning as inapplicable to theproblems which will arise here. While adjustments must ofcourse be made, dismissal of this volume would be a mistake.Fundamentally, all estate tax avoidance devices are basedupon property theories of title which ignore economic realities.If the property is not owned by the decedent at the time ofdeath, it is not part of the estate, and obviously not taxable.However, there is a wide field in which property is not "owned"by the decedent in any technical sense, but it is effectively con-trolled (or was gotten rid of by a device which was a substitutefor a will)-and it is here that the battle between the taxpayerand the tax collector has been waged. It has been a losing battle,on the whole, for the taxpayers.1 Professor Bowe's book sum-marizes the devices which still survive.For Louisiana, the best of avoidance devices was alreadyavailable in the community property system, with its view thatone-half of the community property always had belonged to thesurviving spouse. This rule was applied to the tax cases by thecourts,2 but it was reversed by Congress in 1942, so far as theestate tax was concerned. 3 The Supreme Court upheld Congress.But the battle lost in Fernandez v. Weiner4 was won again inCongress in 1948 so emphatically that not only was the recog-nition of community property restored, but its benefits were1. A losing battle, that is, in the courts. Taxpayers have fared betterbefore Congress. See Paul, Studies in Federal Taxation (1937) 27-66; Paul,Taxation for Prosperity (1947) 281. The most recent example is the con-gressional reaction to the government victories in Commissioner v. Church'sEstate, 335 U.S. 632, 69 S.Ct. 322, 93 L.Ed. 310 (1949) and Spiegel's Estatev. Commissioner, 335 U.S. 701, 69 S.Ct. 301, 93 LEd. 327 (1949), as expressedin the Technical Changes Act, Pub. L. No. 378, 81st Cong., 1st Sess. (Oct.25, 1949), discussed in Bittker, Church and Spiegel: The Legislative Sequel(1950) 59 Yale L.J. 395. Most of the estate tax avoidance devices which areeffective today have specific congressional sanction.2. Hernandez v. Becker, 54 F.(2d) 542 (C.C.A. 10th, 1931).3. Int. Rev. Code § 811(e)(2), repealed by Revenue Act of 1948, § 351(a),62 Stat. 116.4. 326 U.S. 340, 66 S.Ct. 178, 90 L.Ed. 116 (1945).[VOL. XBOOK REVIEWSextended to all states through the marital deduction provisions.'Thus the victory of community property, the civil law's con-tribution to the field of tax avoidance, seems secure. The dis-crimination in the present law is not against a majority of states,but against the unmarried, a minority that may safely be ignored.The two principal common law devices for the avoidance ofestate taxes are the irrevocable gift and the trust. The gift, ofcourse, has always been recognized by Louisiana law, but withsignificant limitations not known to the common law.6 The trust,in Louisiana, is a recent statutory innovation,7 and is subjectto limitations unknown in common law trusts.In the use of the gift to avoid estate taxes, Louisiana lostthe first major battle in the courts because of a provision in theCivil Code that gifts between spouses were always revocable.8The legislature amended the code, 9 and today gifts betweenspouses are as effective a device for the avoidance of an estatetax in Louisiana as they are in any other state. Their practicalimportance, however, is diminished by the present recognitionof community property and the marital deduction.Making a valid gift, of course, does not lead to complete taxexemption. There is then the gift tax to pay. As Professor Bowepoints out, however, because of the gift tax exemptions andexclusions, and the appreciably lower gift tax rates, importantsavings are possible through the making of inter vivos gifts,despite the gift tax. There are, indeed, some savings eventhough the gift is held to be in contemplation of death and theestate tax is levied in the end.Under the Civil Code' ° it is true that donations of more thanthe disposable portion of the estate are not irrevocable, but sub-ject to reduction. Further, it cannot be conclusively determinedwhether a gift falls within these provisions until the honor'sdeath.' However, it is probable that these gifts are not "re-vocable," and hence not taxable under the estate tax, under theprovisions of the Internal Revenue Code. The Federal statute5. Int. Rev. Code § 812(e). The effect of the present law is explainedin Rubin and Champagne, Community Property Aspects of the 1948 RevenueAct (1949) 9 LOUISIANA LAW REVIEW 1.6. Arts. 1467-1755, La. Civil Code of 1870.7. La. Act 81 of 1938 [La. R.S. (1950) §§ 9:1791-9:2212].8. Art. 1749, La. Civil Code of 1870. Howard v. United States, 125 F.(2d)986 (C.C.A. 5th, 1942), noted in (1942) 55 Rarv. L. Rev. 684; Vaccaro v.United States, 149 F.(2d) 1014 (C.C.A. 5th, 1945).9. La. Act 187 of 1942 [La. R.S. (1950) §§ 9:2351-9:2353].10. Art. 1504, La. Civil Code of 1870.11. Guidry v. Caire, 181 La. 895, 160 So. 622 (1935).1950]566 LOUISIANA LAW REVIEW [VOL. Xrefers to a power of revocation in the decedent either actingalone or with others.12 The Louisiana Civil Code provisions indi-cate that the power of reduction is not in the donor at all, sincethe donation is made effective for his life, and the right to sue athis death is given only to his forced heirs.13 The adaptability ofthe suggestions with regard to gifts in Louisiana, consequently,is limited to gifts of the disposable portion of the estate, or togifts in the proper proportion to the forced heirs. Otherwisethe gifts may be swept back into the estate in an action broughtby the forced heirs, thus raising the possibility of an estate taxclaim by the federal government. 4The trust, however, is the greatest of the tax avoidancedevices. Most estate tax battles have been fought over it. Evenwith the set-backs that taxpayers have suffered, the basic pat-tern of a trust or bequest to the son for life, with remainder tosuch of the grandchildren as the son shall designate, is effectivetoday to make the estate tax payable only every other genera-tion instead of every generation.'5 Such a trust or bequest, how-ever, is impossible in Louisiana. The duration of a Louisianatrust is limited to ten years after the settlor's death, or to ten12. Int. Rev. Code § 811(d) (1939).13. Arts. 1503, 1504, La. Civil Code of 1870. Adopted as well as naturalchildren may be forced heirs. If, however, the donation is within the termsof Art. 1497, La. Civil Code of 1870, making donations of all of the donor'sproperty void, the transaction is clearly taxable, since the power of revoca-tion there is in the donor and within the words of the federal statute.The right of revocation for ingratitude, given to the donor by Art. 1560,La. Civil Code of 1870, is so limited in the situations where it can be invoked,and in its effect under Art. 1562, La. Civil Code of 1870, that it is suggestedthat it is not a "power of revocation" within the meaning of the FederalEstate Tax. In the case of a collation, under Arts. 1227-1241, La. CivilCode of 1870, since the moving party must be an heir rather than the donor,It is suggested that the arguments in the text against taxability of a re-duction are applicable.14. Guidry v. Caire, 181 La. 895, 160 So. 622 (1935) is an example of anaction of this type. Whether such an estate tax claim would be valid isa complex problem beyond the scope of this review. The additional dangerof tax claims as the result of the tacit revocation of donations inter vivos,under the rule of Atkins v. Johnston, 213 La. 458, 35 So.(2d) (1948), is pointedout in Note (1949) 9 LOUISIANA LAW REvIsw 294.15. This type of trust with a special power of appointment is specificallyexempted from taxation by Int. Rev. Code § 811(f) (2) (A). The power ofappointment is prohibited in Louisiana. Art. 1573, La. Civil Code of 1870.If the grandchildren are alive at the time of the testator's death, muchthe same result might be achieved by a bequest of the naked title to thegrandchildren, and the usufruct to the son, as permitted by, Art. 1522, La.Civil Code of 1870. Succession of Fertel, 208 La. 614, 23 So.(2d) 234 (1945).The tax result would be the same as in the common law trust, and thetheory upon which it is based is also the same-that title vests directlyin the grandchildren from the decedent. The bequest should be made tothe grandchildren by name, and the device is useful only where there isno danger of disinheriting after-born grandchildren.1950] BOOK REVIEWS 567years after child beneficiaries attain their majority. 16 Further,the beneficiaries of a Louisiana trust must be in being at thetime it is established. 7 The trust for grandchildren not in esseis an impossibility. Any tax avoidance device which dependsupon a trust for a lifetime's duration, or a trust for childrennot in esse cannot be used in Louisiana.Charitable trusts with indefinite duration are specifically per-mitted in Louisiana by statute.' Taxes may be saved by usingpart of the disposable portion of the estate to establish a chari-table trust with future expenditures for charitable objects undercontrol of a trustee who may be a member of the family.' 9 Themore important device of retaining control of a family business,by leaving the bulk of the estate to a charitable foundation con-trolled by the family, and, through claiming the charitable de-duction avoiding the sale of the business, perhaps at a sacrifice,to meet the demand of the tax collector for cash, runs counterto the doctrine of forced heirship. It could only be done here.with the acquiescence of all of the forced heirs.The charitable foundation as a method of preventing theforced sale of a family business to satisfy the tax collector'sdemand for cash has been the favorite method for preservingthe country's largest fortunes.20 As Professor Bowe points out,however, it may also be useful in preserving a relatively smallbusiness, and, while it sacrifices capital which would go to thetax collector anyway, it preserves control.16. La. R.S. (1950) § 9:1794.17. La. R.S. (1950) § 9:1902. The same would be true of a direct gift,under Art. 1482, La. Civil Code of 1870. Another important limitation onLouisiana trusts, though not particularly significant for estate tax purposes,is that while the legitime may be placed in trust (La. R.S. [1950] § 9:1793),the income of the legitime must be paid to the beneficiary at least once ayear. The act is silent as to accumulations where the legitime is not in-volved, and presumably they would be permitted.18. La. R.S. (1950) § 9:2271-9:2295. In Louisiana, the trust for life withremainder to charity, of the type involved in Henslee v. Union PlantersNat. Bank, 335 U.S. 595, 69 S.Ct. 290, 93 L.Ed. 239 (1949), and similar cases,would probably be held to be invalid, as violating the ten year limitation,rather than valid, as an exempt charitable trust. This is the view taken inWheeler, The Louisiana Law of Charities (1941) 15 Tulane L. Rev. 177, 194.The same result could be achieved by an outright bequest to the charity,coupled with a contract by it to pay an annuity to the widow. The valueof the annuity, like the value of the life estate in the common law trust,would be subject to estate tax, but the corpus would escape.19. Pires v. Youree, 170 La. 986, 129 So. 552 (1930). But see Successionof Purkert, 184 La. 792, 167 So. 444 (1936). In drafting such a trust, thetrustee should be named as such and it would be well to recite that thepowers are to be exercised under the Charitable Trusts Act.20. Comment, (1950) 59 Yale L.J. 477. The exemption of charitble be-quests is provided in Int. Rev. Code § 812(d) and of gifts in Int. Rev. Code§ 1004(a)(2)(B).LOUISIANA LAW REVIEWMost of the tax saving devices in Professor's Bowe's bookare not dependent upon the types of trust which are impossiblein Louisiana for their success. There is more than enough thatis of practical importance here to make the book well worthreading. Where a gift in trust is recommended, in jurisdictionswhere such a gift is possible, the same tax results can oftenbe achieved in Louisiana by an outright gift. Where a trust,impossible in this state, is really needed, Louisiana lawyersshould not overlook the possibilities of setting up a trust inanother state. Assuming that movable property is involved, andthat it is moved to the state of the trustee's domicile before thetrust is set up by contract in that state, the law of that statewill govern the validity of the trust.21 It should be noted, how-ever, that there is no constitutional obstacle to the taxation ofthe trust by the state of the trustee's domicile, either in in-heritance of property taxation 2 2 though most states where im-portant trust business is transacted do not levy such taxes.No one ought ever to write on this subject without makingthis warning: There are many situations in which the best es-tate plan, for the particular family, is not the one which savesthe most taxes. The estate tax avoidance devices which remaineffective generally require almost completely giving up controlover the property. There are many circumstances where it maybe worth the estate tax to retain complete control. ProfessorBowe begins his book with this warning, and it is appropriatethat this review should end by repeating it.ALBERT H. COTTON*21. Restatement, Conflict of Laws (1934) § 294, and Louisiana Annota-tions; Land, Trusts in the Conflict of Laws (1940) § 23; Hulin v. Faure,15 La. Ann. 622 (1860).22. Greenough v. Tax Assessors of City of Newport, 331 U.S. 486, 67S.Ct. 1400, 91 L.Ed. 1621 (1947).* Assistant Professor of Law, Louisiana State University.[VOL. X

TAX PLANNING FOR ESTATES, by William J. Bowie. Nashville: The
Vanderbilt University Press, 1949. Pp. 93, $2.00.

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TAX PLANNING FOR ESTATES, by William J. Bowie. Nashville: The Vanderbilt University Press, 1949. Pp. 93, $2.00.

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