9 N.E.2d 966 (N.Y. 1937)
Ferdinand Straus died on July 1, 1934, leaving a last will and testament dated May 5, 1934, which contained a provision for a trust for his wife for her life of one-third of the decedent’s property both real and personal.1 On June 28, 1934, three days before his death, he executed trust agreements by which, in form at least, he transferred to trustees all his real and personal property.2
The beneficiary named in the trust agreement brought this action to compel the trustees to carry out its terms.3 The widow challenged the validity of the transfer to the trustees.4
The trial court found that the trust agreements were made, executed and delivered by said Ferdinand Straus for the purpose of evading and circumventing the laws of the State of New York, and particularly sections 18 and 83 of the Decedent Estate Law.5 The trial court also found that the settlor reserved the enjoyment of the entire income as long as he should live, and a right to revoke the trust at his will, and in general the powers granted to the trustees were in terms made subject to the settlor’s control during his life.6
Whether the trust agreements executed by Ferdinand Straus three days before his death effectively divested him of title to his property?7
The validity of the attempted transfer depends upon whether the laws of the State of New York and particularly sections 18 and 83 of the Decedent Estate Law prohibit or permit such transfer.8 If the statute, in express language or by clear implication, prohibits the transfer, it is illegal; if the laws of the State do not prohibit it, the transfer is legal.9 Motive or intent is an unsatisfactory test of the validity of a transfer of property.10 The only sound test of the validity of a challenged transfer is whether it is real or illusory.11
No. Ferdinand Straus died on July 1, 1934, leaving a last will and testament dated May 5, 1934, which contained a provision for a trust for his wife for her life of one-third of the decedent’s property both real and personal.12 On June 28, 1934, three days before his death, he executed trust agreements by which, in form at least, he transferred to trustees all his real and personal property. The beneficiary named in the trust agreement brought this action to compel the trustees to carry out its terms. The widow challenged the validity of the transfer to the trustees.
The trial court found that the trust agreements were made, executed and delivered by said Ferdinand Straus for the purpose of evading and circumventing the laws of the State of New York, and particularly sections 18 and 83 of the Decedent Estate Law. The trial court also found that the settlor reserved the enjoyment of the entire income as long as he should live, and a right to revoke the trust at his will, and in general the powers granted to the trustees were in terms made subject to the settlor’s control during his life.
Under the rule, the statute gives a spouse only an expectant interest that ripens if property forms part of the estate at death.13 The settlor’s transfer left him in full practical control through reserved income, revocation, and direction of the trustees.14 Because the conveyance was intended only to cover up retention of ownership, it remained illusory rather than a genuine divestiture.15 Reality, not appearance, determines whether the property left the estate.16
The trust agreements did not effectively divest Ferdinand Straus of title to his property.17
Whether the settlor's reservation of income for life, power of revocation, and control over the trustees rendered the transfer illusory?18
The test of legality is whether the result is lawful and the means used to achieve that result are lawful.19 The good faith required of the donor or settlor in making a valid disposition of his property during life does not refer to the purpose to affect his wife but to the intent to divest himself of the ownership of the property.20 In no jurisdiction has a transfer in trust been upheld where the conveyance is intended only to cover up the fact that the husband is retaining full control of the property though in form he has parted with it.21 Reality, not appearance, should determine legal rights.22
Yes. The trial court found that the settlor reserved the enjoyment of the entire income as long as he should live, and a right to revoke the trust at his will, and in general the powers granted to the trustees were in terms made subject to the settlor’s control during his life.23 The evidence conclusively establishes that the trust agreements were made for the purpose of depriving the decedent’s widow of any rights in and to his property upon his death.24 Under the trust agreements executed a few days before the death of the settlor, he reserved substantially the same rights to enjoy and control the disposition of the property as he previously had possessed.25
The court applied the illusory-transfer test by examining whether the settlor in good faith divested himself of ownership.26 Retention of income, revocation, and day-to-day control showed that the settlor never intended to part with the property.27 The transfer therefore constituted an unlawful invasion of the widow’s expectant interest even though the formal deed satisfied common-law rules for creating a trust.28
The settlor's reservation of income for life, power of revocation, and control over the trustees rendered the transfer illusory.29