Thank You For Submiting Feedback!
The use, possession, right to the income, or other enjoyment of the transferred property is considered as having been retained by or reserved to the decedent within the meaning of section 2036(a)(1) to the extent that the use, possession, right to the income, or other enjoyment is to be applied toward the discharge of a legal obligation of decedent which includes an obligation to support a dependent. "Is to be applied" is not to be read as "may be applied," which exists where an independent trustee is vested with discretion over distributions.
Decedent Joseph Gokey and Mrs. Mildred Gokey had three children; Bridget, Gretchen, and Patrick, who were born on June 30, 1951, August 21, 1954, and January 13, 1956, respectively. On October 1, 1961, decedent, then 57, executed a trust agreement creating, in part, separate irrevocable trusts for the benefit of Gretchen and Patrick, then 7 and 5. Mrs. Gokey was the sole trustee of both trusts through decedent's date of death. The relevant portion of that trust agreement provides: “Section 2: Until each beneficiary becomes twenty-one (21) years of age, the Trustee shall use such part or all of the net income of his or her trust for the support, care, welfare, and education of the beneficiary thereof, payments from such net income to be made to such beneficiary or in such other manner as the Trustee deems to be in the best interest of the beneficiary, and any unused income shall be accumulated and added to the principal of such beneficiary's trust. After each beneficiary becomes twenty-one (21) years of age, the Trustee shall pay to him or her, in convenient installments, the entire net income of his or her trust.” On November 4, 1969, Mrs. Gokey appointed First National as cotrustee of the children's trusts and on December 15, 1969, it accepted. At the decedent's death and the alternate valuation date, Gretchen's trust contained assets, excluding any remainder interests, valued at $ 398,960.74, of which $ 8,944.49 was cash. On the same dates, Patrick's trust contained assets, excluding any remainder interests, valued at $ 398,722.92, of which $ 8,706.67 was cash. The children’s trust income were used to pay education expenses, professional fees, and Federal and State income taxes. Part of the income was transferred to another bank account to the credit of Mrs. Gokey as guardian. From December 15, 1969, the date First National accepted appointment as cotrustee of Gretchen's and Patrick's trusts, to December 13, 1973, no trust income was ever accumulated and added to the principal of these trusts. In the same October 1, 1961, trust agreement wherein he created a separate irrevocable inter vivos trust for the benefit of Gretchen and Patrick, decedent also created an irrevocable inter vivos trust for the benefit of Mrs. Gokey. Mrs. Gokey's trust provided her with a life estate with a one-third remainder interest upon her death to each of the trusts for the benefit of Gretchen and Patrick. First National was also appointed as cotrustee herein.
Decedent's estate tax return did not include any portion of the value of assets in the irrevocable trusts created on October 1, 1961, for the benefit of Gretchen, Patrick, and Mrs. Gokey. The Commissioner of Internal Revenue determined under section 2036 that the entire value of the assets in Gretchen's and Patrick's trusts was includable in decedent's gross estate. In addition, he determined that the assets in each of the children's trusts included a one-third remainder interest valued at $ 66,245.78. Thus, he determined a $ 160,502.94 deficiency in the Federal estate tax of Joseph G. Gokey, and further determined that trustees Mildred A. Gokey and the First National Bank of Chicago were liable for the same amount under section 6901 as transferees of the assets of the Estate of Joseph G. Gokey.
Are the value of the trust property includable in the decedent’s gross estate?
The language of the children's trusts found in section 2 of the 1961 trust agreement which relates "shall use such part or all of the net income * * * for the support, care, welfare, and education of the beneficiary" clearly manifests decedent's intent to require the trustees to apply the income for the stated purpose. In our view, it is impossible to construe the instrument as one which gives the trustees discretion as to whether or not income shall be used for "support, care, welfare, and education." That standard completely controls the application of the trusts' funds. If those needs exceed the trusts' income, principal may be utilized. If those needs do not absorb all the trusts' income, the remaining income is accumulated and added to principal. Moreover, the section 2 phrase "payments from such net income to be made to such beneficiary or in such other manner as the Trustee deems to be in the best interest of the beneficiary" does not alter our interpretation. Clearly, this phrase only grants the trustee discretion in the method of payment adopted.
In Estate of Bell v. Commissioner, 66 T.C. 729, 734-735 (1976), the court found that the phrase "well being and maintenance in health and comfort" was subject to an ascertainable standard in Illinois: “Although providing a modicum of discretion to the trustees, this language created a standard enforceable in a court of equity. Under Illinois law, a court of equity would look to the beneficiary's accustomed living standard in compelling compliance by the trustees, either to require income distributions for the stated purposes or to restrain distributions for unauthorized purposes.” Similarly, under Illinois law, a court of equity would look to Gretchen's and Patrick's accustomed living standard in compelling compliance by the trustee to require income distributions for the stated purposes. As a result, the terms "support, care, welfare, and education," when viewed in the aggregate, were intended to describe the children's standard of living and are, therefore, subject to an external ascertainable standard. Finally, in Rock Island Bank & Trust Co. v. Rhoads, 353 Ill. 131, 187 N.E. 139, 144 (1933), the Illinois Supreme Court stated: "The word 'comfort' must be construed as relating to her support and ease. * * * Had this clause provided only for her comfort, it cannot be doubted that such would be a limitation * * * to maintain her in the station in life to which she was accustomed." This language was seen as indicative that, under Illinois law, support is equivalent to accustomed standard of living. The court was satisfied that the instrument provides an ascertainable standard under Illinois law. Accordingly, decedent's gross estate includes the value of Gretchen's and Patrick's trusts since those were found to be support trusts within the meaning of section 2036(a)(1) and section 20.2036-1(b)(2), Estate Tax Regs.