Taxation-Federal Estate Tax-Inference of Retained Life Interest Under Section 2036(a)
In 1936 decedent established an irrevocable trust naming herself and relatives as beneficiaries. The corporate trustees were directed to pay the trust income, in the exercise of their absolute discretion, either to the settlor or to the other beneficiaries. In filing her 1936 federal gift tax return settlor attempted unsuccessfully to exclude the value of a life estate in the trust income, allegedly retained by her. At her death, the value of the trust corpus was not included in her estate tax return. The Commissioner assessed a deficiency contending that decedent-settlor had retained for her life the “possession or enjoyment” of, or the “right to income from” the trust corpus within the meaning of the forerunner of section 2036 (a) of the Internal Revenue Code of 1954. Plaintiff argued that since the trust was irrevocable and the trustees were vested with absolute discretion, settlor had retained nothing which could properly be included in her estate. In an action for refund of federal estate taxes, held, dismissed. Although a discretionary trust is ordinarily excluded from a decedent’s gross estate, where the settlor had in fact received all the income for her life and acted in the belief that she had a life interest in such income, an informal prearrangement to exercise discretion in favor of the settlor will be inferred. As such, the trust corpus must be included in the deceased settlor’s estate. Estate of Skinner v. United States, 197 F. Supp. 726 (E.D. Pa. 1961), appeal taken by taxpayer to Third Circuit, CCH FED. EST. & GIFT REP. 9007.