United States v. Estate of Grace - 395 U.S. 316 (1969)
U.S. Supreme Court
United States v. Estate of Grace, 395 U.S. 316 (1969)
United States v. Estate of Grace
Argued April 22, 1969
Decided June 2, 1969
395 U.S. 316
In 1931 decedent, Joseph Grace, executed a trust instrument providing for payment of income to his wife, Janet, for her life, with payment to her of any part of the principal which a majority of the trustees thought advisable. Mrs. Grace was given power to designate the manner in which the trust estate remaining at her death was to be distributed among decedent and their children. Shortly thereafter, Janet Grace, at decedent's request, executed a virtually identical trust instrument naming decedent as life beneficiary, with the trust corpus consisting of the family estate and securities which decedent had transferred to his wife in preceding years. Upon decedent's death in 1950, the Commissioner of Internal Revenue determined that the trusts were "reciprocal," and included the amount of the Janet Grace trust in decedent's gross estate. A deficiency was assessed and paid, and this refund suit was filed. The Court of Claims held that the value of the trust was not includible in decedent's estate under § 811(c)(1)(B) of the Internal Revenue Code of 1939, which provided that certain transferred property in which a decedent retained a life interest was to be included in his gross estate.
Held: The doctrine of reciprocal trusts, which was formulated in response to attempts to draft instruments which seemingly avoid the literal terms of § 811(c)(1)(B) while still leaving the decedent the lifetime enjoyment of his property, Lehman v. Commissioner, 109 F.2d 99, applies here, and the value of decedent's estate must include the value of the Janet Grace trust. Pp. 395 U. S. 320-325.
(a) "[T]he taxability of a trust corpus . . . does not hinge on a settlor's motives, but depends upon the nature and operative effect of the trust transfer," and, in the reciprocal trust situation, inquiries into subjective intent, especially in intrafamily transfers, create obstacles to the proper application of the federal tax laws. P. 395 U. S. 323.
(b) The application of the reciprocal trust doctrine does not depend on a finding that each trust was created as consideration for the other, and does not require a tax avoidance motive, as such standards, relying on subjective factors, are rarely workable under federal estate tax laws. Pp. 395 U. S. 323-324.
(c) The application of the doctrine requires that the trusts be interrelated, and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as if they had created trusts naming themselves as life beneficiaries. P. 395 U. S. 324.
(d) Here, the trusts are interrelated, as they are substantially identical and were part of a single transaction designed and carried out by the decedent, and the transfers in trust, even though of properties of different character, left each party, to the extent of mutual value, in the same objective economic position as before. P. 395 U. S. 325.
183 Ct.Cl. 745, 393 F.2d 939, reversed and remanded.