Estate of Bischoff v. Commissioner

Hall, dissenting in part: In every one of the cases in which the reciprocal trust doctrine has ultimately been applied, including United States v. Estate of Grace, 395 U.S. 316 (1969), the arrangements that were challenged involved the crossing between grantors of very substantial economic interests. All but one of the cases involved the exchange of life estates or beneficial powers exercisable by the holders for their own benefit. 1 The one exception, a decision of this Court, subsequently reversed by the Court of Appeals for the Third Circuit, involved the exchange of significant powers to shift economic interests as between beneficiaries, i.e., a spray power. Estate of Newberry v. Commissioner, 17 T.C. 597 (1951), revd. 201 F.2d 874 (3d Cir. 1953). However, even if our holding in Newberry’s Estate could have survived the Third Circuit reversal, it could not survive the enunciation of the retained economic benefit test by the Supreme Court in Grace.

Applying the Grace approach to the present case, it seems clear that powers to use principal and interest for minor grandchildren’s needs, deemed by respondent to be exchanged by Bruno and Bertha, were not powers having “economic value” to the decedents. The majority, in applying Grace, in effect, reads the word “economic” out of the Supreme Court’s formulation, saying it was not essential to the principle of the case. Certainly these trusts did not reflect the thinly disguised retention of an “economic interest” which the Supreme Court found determinative. Rather, in each case, the settlor made a completed gift in trust of his or her own property to their minor grandchildren, the natural objects of their bounty, not retaining any power which would include the corpus of the trusts in the settlor’s estate. The trust conferred economic interests only on the beneficiary; they conferred no economic interest on the trustee whose only power was to accelerate the receipt of the economic interest by the beneficiary during his minority. Not even a “spray” power was retained, so that the “retention” on uncrossing the trusts fell short of even the retention in Newberry’s Estate, the previous high water mark of this Court’s application of the reciprocal trust doctrine. Neither settlor would have been economically worse off had the other not elected to make a concurrent gift to the objects of his natural bounty. It is therefore also most difficult to perceive the “interrelation” between the trusts called for in Estate of Grace. In my view, they were concurrent and similar, but not interrelated in any meaningful sense. Had the property in question all happened to belong to one grandparent, there is no reason to believe that grandparent would not have wished to put it in trust, naming the other as trustee, and there would be no question of includability. I see insufficient reason why essentially the same result cannot properly be achieved where each grandparent happens to own part of the property sought to be entrusted. This is not the kind of situation the reciprocal trust doctrine was intended to cover or, at least since Grace, ever has been extended to cover. I recognize the majority’s argument that Congress has decided the question of retained powers which suffice for includability and that indirect retention of the equivalent of such powers through reciprocal arrangements should produce the same result. However, I believe this would carry a good and necessary principle too far— certainly further than the language of Grace would warrant. I conclude that such an extension of the doctrine is unwarranted under these circumstances. While it is true that each settlor gave the other powers, retention of which would have frustrated the estate plan, Congress permits a grantor, and it is common planning, to put such powers in the hands of one’s spouse. The mere fact that both spouses had similar property and one spouse concurrently does the same with his or her own trusts does not improve the economic position of the power-holding spouse or make the other spouse the “transferor.” Congress chose to allow the entrusting to a spouse of the power to accumulate trust income or to distribute trust income or corpus, which power could not be retained personally. It seems to me that until Congress provides to the contrary, it is not for us to say that where spouses happen to own similar property they are barred from each doing concurrently what either could safely do alone. Unlike the cases of illusory relinquishment of economic interests where the reciprocal trust doctrine has been applied, there has here been the real relinquishment of economic value which the statute contemplates for exclusion from the estate.

Drennen, Scott, and Goffe, JJ., agree with this dissenting opinion. Estate of Lindsay v. Commissioner, 2 T.C. 174 (1943) (life estates); Cole’s Estate v. Commissioner, 140 F.2d 636 (8th Cir. 1944) (life estates); Estate of Oliver v. Commissioner, 3 T.C.M. 408 , 13 P-H Memo. T.C. par. 44,138 (1944) (life estates); Hammer’s Estate v. Commissioner, 149 F.2d 857 (2d Cir. 1945) (life estates and power to amend); Orvis v. Higgins, 180 F.2d 537 (2d Cir. 1950) (life estates); McLain v. Jarecki, 232 F.2d 211 (7th Cir. 1956) (life estates); Moreno’s Estate v. Commissioner, 260 F.2d 389 (8th Cir. 1958) (life estates); Estate of Carter v. Commissioner, 31 T.C. 1148 (1959) (life estates); United States v. Estate of Grace, 395 U.S. 316 (1969) (life estates and power to change beneficial interests); Lehman v. Commissioner, 109 F.2d 99 (2d Cir. 1940) (power to withdraw corpus); In re Lueders’ Estate, 164 F.2d 128 (3d Cir. 1947) (life estates and power to withdran corpus). Cf. Krause v. Commissioner, 57 T.C. 890 (1972), affd. 497 F.2d 1109 (6th Cir. 1974) (grantor trust provisions applied for income tax purposes where spouses granted to trustees reciprocal powers to accumulate and pay over income and corpus to each other).