In re Dows’ Estate, 167 N.Y. 227 (1901)

The exercise of a power of appointment by will is a taxable transfer, and the tax is determined by the form of the property at the time the power is exercised, not when the power was created; vested remainders are subject to present taxation even if enjoyment is postponed.

Summary

This case addresses whether the exercise of a power of appointment is a taxable transfer under New York’s Taxable Transfer Act, and when such taxes are due. The Court of Appeals held that the exercise of the power of appointment by will is a taxable event. The tax is applied to the property’s form at the time the power is exercised, not when the power was granted. Further, the court found that vested remainders are subject to present taxation, even if the actual possession is delayed. This decision clarifies the application of transfer taxes to property passing through powers of appointment and provides guidance on the timing of taxation for vested remainders.

Facts

David Dows, Sr., devised property in trust to his son, David Dows, Jr., for life, granting Dows, Jr., a power of appointment to designate his children as beneficiaries in his will. If Dows, Jr., died intestate, the property would pass to his surviving children. Dows, Jr., exercised this power in his will, granting life estates to three sons with shifting remainders to each other, effectively giving each son one-third of the property absolutely, but with staggered enjoyment. The surrogate imposed a tax on the property transferred under this power of appointment.

Procedural History

The Surrogate’s Court imposed a tax on the property passing under the power of appointment. The Appellate Division affirmed the Surrogate’s order. The case was then appealed to the New York Court of Appeals.

Issue(s)

1. Whether the tax imposed on transfers made under a power of appointment is a tax on property or on the right of succession, and thus applicable to property invested in tax-exempt securities?
2. Whether the property’s form at the time of David Dows, Sr.’s death (real estate, which was then exempt) or at the time of David Dows, Jr.’s exercise of the power (personalty) controls taxability?
3. Whether the remainders created in David Dows, Jr.’s will are subject to taxation before the precedent life estates terminate and the remainders vest in possession?

Holding

1. Yes, because the tax is on the right of succession, not the property itself.
2. No, because the form of the property at the time of the execution of the power of appointment controls.
3. Yes, because the remainders are vested and their value can be readily computed.

Court’s Reasoning

The court reasoned that the tax imposed under the Taxable Transfer Act is a tax on the privilege of succeeding to property, not a direct tax on the property itself. Citing Magoun v. Illinois Trust & Sav. Bank, the court emphasized that “the right to take property by devise or descent is the creature of the law, and not a natural right—a privilege, and, therefore, the authority which confers it may impose conditions upon it.” Therefore, the tax applies even to assets that would otherwise be exempt from property tax.

Regarding the timing and nature of the property, the court distinguished this case from Matter of Sutton, noting that here, at the time of the exercise of the power of appointment, the property was personalty. Since the taxable event is the execution of the power, the state of the property at that time governs.

The court determined that the remainders created in David Dows, Jr.’s will were presently taxable because they were vested and their value could be readily computed using annuity tables. The court distinguished Matter of Hoffman, stating that those remainders were contingent. The remainders in this case were absolute and not subject to divestment. As such, they fell outside the exception for contingent interests and were subject to immediate taxation.

The court emphasized the practical impact of its decision, noting that the remainders were alienable, devisable, and descendible, further solidifying their character as presently taxable interests.