Old Colony Tr. Co. v. United States - 423 F.2d 601 (1st Cir. 1970)

Rule:

Under distribution powers the trustee can, expressly, prefer one beneficiary over another. Furthermore, his freedom of choice may vary greatly, depending upon the terms of the individual trust. If there is an ascertainable standard, the trustee can be compelled to follow it. If there is not, even though he is a fiduciary, it is not unreasonable to say that his retention of an unmeasurable freedom of choice is equivalent to retaining some of the incidents of ownership. Hence, under those cases, if there is an ascertainable standard the settlor-trustee's estate is not taxed, but if there is not, it is taxed.

Facts:

The estate of a settlor of an inter vivos trust was charged with the value of the principal the settlor contributed by virtue of his reserved powers in the trust. The executor paid the tax and sued for its recovery from defendant government. The government claimed that the settlor, who was trustee until his death, had the right to designate the persons who could possess or enjoy the trust property or the income therefrom within the meaning 26 U.S.C.S. § 2036(a)(2), and thus the trustee's estate should have been taxed. The trial court ruled for the government, and the executor appealed. 

Issue:

Should the estate of a settlor of an inter vivos trust, who was a trustee until the date of his death, be charged with the value of the principal he contributed by virtue of reserved powers in the trust?

Answer:

Yes.

Conclusion:

The appellate court affirmed, holding that under the terms of the trust, the settlor-trustee was free to determine his own trustee standard of distribution. Thus, if there was not an ascertainable trustee standard of distribution then the settlor-trustee's estate was correctly taxed.