423 F.2d 601
The executor paid the federal estate tax that included the value of the trust principal and filed suit for a refund in the district court.1 All facts were stipulated for the district court proceeding.2 The district court ruled for the government.3 The executor appealed to the United States Court of Appeals for the First Circuit.4
The decedent had been a donor to three inter vivos trusts previously established by his wife.5 He served as a trustee of the trusts until the date of his death.6 The initial life beneficiary was the decedent's adult son.7 Eighty percent of the trust income was normally payable to the son, with the balance added to principal.8 Subsequent beneficiaries were the son's widow and his issue.9
The trust instruments contained powers in Article 4 and Article 7.10 Article 4 permitted the trustees in their absolute discretion to increase the percentage of income payable to the son when needed in case of sickness or desirable in view of changed circumstances.11 The trustees could also cease paying income to the son and add it all to principal during such period as they decided the stoppage was for his best interests.12 Article 7 gave the trustees broad administrative powers, including discretion to acquire investments not normally held by trustees and authority to determine what was to be charged or credited to income or principal.13 It further empowered the trustees generally to do all things in relation to the trust fund which the donor could do if living and the trust had not been executed.14
The government claimed that the powers in the two articles required inclusion of the trust corpus in the decedent's estate.15 The executor disputed this position after paying the tax and seeking recovery.16 The district court had ruled against the executor on the stipulated facts, leading directly to the appeal.17
Whether the broad administrative and management powers granted to the settlor-trustee under Article 7 of the trust instruments require inclusion of the trust corpus in the settlor's gross estate?18
No. The powers in Article 7 are purely administrative in nature and subject to judicial supervision under Massachusetts law.21 In Appeal of Davis, the Massachusetts court held trustees accountable despite language granting them the same dominion and control over trust property as the donor had.22 The provision allowing the trustees to do all things the donor could do if living does not shield them from accountability, as the court in State Street failed to note.23 Therefore, these powers do not constitute the requisite dominion and control for inclusion under sections 2036 or 2038.24
The broad administrative and management powers under Article 7 do not require inclusion of the trust corpus in the settlor's gross estate.25
Whether the distribution and accumulation powers granted to the settlor-trustee under Article 4 of the trust instruments require inclusion of the trust corpus in the settlor's gross estate?26
If there is an ascertainable standard for distributions the settlor-trustee’s estate is not taxed, but if there is not an ascertainable standard, it is taxed because retention of an unmeasurable freedom of choice is equivalent to retaining some of the incidents of ownership.27
Yes. Under Article 4 the trustees could increase the percentage of income payable to the son in their absolute discretion when in their opinion such increase is needed in case of sickness or desirable in view of changed circumstances. They could also cease paying income to the son and add it all to principal during such period as the trustees may decide that the stoppage is for his best interests.28 These provisions do not provide an ascertainable standard.29
The best interests language permits the settlor as father to exercise control over the son's conduct by withholding payments.30 It also allows accumulation of income for the benefit of the son's widow and issue.31 Retention of such unmeasurable freedom of choice is equivalent to retaining incidents of ownership.32 Therefore the corpus is includible in the settlor's gross estate.33
The distribution and accumulation powers under Article 4 require inclusion of the trust corpus in the settlor's gross estate.34