SCOTUS Reports

Tag: Revocable Transfer

  • Estate of Siegel v. Commissioner, 74 T.C. 613 (1980): Estate Tax Inclusion of Employment Contract Payments

    Estate of Murray J. Siegel, Deceased, Frederick Zissu and Norman Lipshie, Executors, Petitioner v. Commissioner of Internal Revenue, Respondent, 74 T.C. 613 (1980)

    Payments to a decedent’s children under an employment contract are not includable in the gross estate under Section 2039 if the decedent’s right to disability payments was considered wage continuation and not post-employment benefits, but are includable under Section 2038 if the decedent retained the power to alter the beneficiaries’ enjoyment in conjunction with the employer.

    Summary

    The Tax Court addressed whether payments to the children of Murray J. Siegel under an employment contract with Vornado, Inc. were includable in his gross estate for federal estate tax purposes. Siegel’s contract provided for salary continuation in case of disability and payments to his children upon his death. The court held that the payments were not includable under Section 2039 because the disability payments were deemed wage continuation, not post-employment benefits. However, the court found the payments includable under Section 2038 because Siegel retained the power, in conjunction with Vornado, to modify the children’s rights under the agreement, constituting a power to alter, amend, revoke, or terminate the transfer.

    Facts

    Murray J. Siegel, president and CEO of Vornado, Inc., entered into an employment agreement that commenced on October 1, 1965, and was extended through amendments to November 30, 1979. The agreement stipulated that if Siegel died or became disabled during the term, Vornado would pay his salary to him or his children. Specifically, in case of death or disability, his children would receive monthly payments equivalent to his salary for the remainder of the contract term. The agreement also contained a clause stating that the children’s rights could be modified by mutual consent of Siegel and Vornado. Siegel died on September 21, 1971, while actively employed, and his children became entitled to the payments. The estate excluded the commuted value of these payments from the gross estate.

    Procedural History

    The Estate of Murray J. Siegel petitioned the Tax Court to contest the Commissioner of Internal Revenue’s determination that the commuted value of payments to Siegel’s children under the employment contract should be included in the decedent’s gross estate for federal estate tax purposes. This case was heard in the United States Tax Court.

    Issue(s)

    1. Whether the commuted value of payments to decedent’s children under the employment contract is includable in decedent’s gross estate under Section 2039(a) because decedent had a right to receive post-employment disability benefits under the contract.
    2. Whether the commuted value of payments to decedent’s children is includable in decedent’s gross estate under Section 2038(a)(1) because decedent retained a power to alter, amend, or revoke his children’s rights under the employment contract.

    Holding

    1. No, because the agreement did not provide for post-employment benefits; the disability payments were considered wage continuation, contingent upon continued service to the best of his ability, not an annuity or other post-employment payment under Section 2039(a).
    2. Yes, because the provision in the agreement allowing decedent and Vornado to mutually consent to modify the children’s rights constituted a retained power to alter, amend, revoke, or terminate the enjoyment of the transferred property under Section 2038(a)(1).

    Court’s Reasoning

    Section 2039 Issue: The court reasoned that Section 2039(a) includes in the gross estate the value of an annuity or other payment receivable by beneficiaries if the decedent possessed the right to receive an annuity or other payment. The critical question was whether the disability payments under Siegel’s contract constituted ‘post-employment benefits’ or merely ‘wage continuation.’ The court emphasized that ‘annuity or other payment’ under Section 2039 does not include regular salary or wage continuation plans. The court found that the agreement, interpreted in light of Vornado’s practices and the ongoing service obligation of Siegel even during disability, indicated that disability payments were intended as wage continuation. The court distinguished this case from *Bahen’s Estate v. United States* and *Estate of Schelberg v. Commissioner*, noting that in those cases, disability benefits were more clearly post-employment benefits, not tied to a continuing service obligation. The court admitted parol evidence to clarify the terms of the agreement, finding it was not fully integrated regarding the definition of ‘disability’ and ‘termination of employment due to disability.’

    Section 2038 Issue: The court determined that Section 2038(a)(1) includes in the gross estate property transferred by the decedent if the enjoyment was subject to change through the decedent’s power to alter, amend, revoke, or terminate. Paragraph Fifth of the employment agreement explicitly stated that the children’s rights were ‘subject to any modification of this agreement by the mutual consent of Siegel and the Corporation.’ The court rejected the estate’s argument that this clause merely reflected standard contract law allowing parties to renegotiate. The court distinguished *Estate of Tully v. United States* and *Kramer v. United States*, where no such express reservation of power existed. The court reasoned that by explicitly reserving the power to modify the children’s rights with Vornado’s consent, Siegel retained a greater power than what would exist under general contract law, making the transfer revocable under Section 2038(a)(1). The court noted that under New Jersey law and the Restatement of Contracts, third-party beneficiary rights become indefeasible unless a power to modify is expressly reserved, which was done here.

    Practical Implications

    This case clarifies the distinction between wage continuation and post-employment benefits under Section 2039 for estate tax purposes. It highlights that disability payment provisions in employment contracts may not trigger estate tax inclusion under Section 2039 if they are genuinely tied to continued service obligations during disability, rather than being considered retirement-like benefits. However, *Estate of Siegel* serves as a crucial reminder that explicitly reserving a power to modify beneficiary rights in an agreement, even if seemingly reflecting general contract law, can have significant estate tax consequences under Section 2038. Legal practitioners drafting employment contracts with death benefit provisions must carefully consider the wording regarding modification rights and the nature of disability payments to avoid unintended estate tax inclusion. This case emphasizes the importance of clear and unambiguous language in contracts, especially concerning estate tax implications, and the potential pitfalls of explicitly stating powers that might otherwise be implied under general law.

  • Estate of Showers v. Commissioner, 14 T.C. 902 (1950): Inclusion of Trust Assets in Gross Estate

    Estate of Showers v. Commissioner, 14 T.C. 902 (1950)

    When a decedent retains the power to terminate trusts established with community property, the full value of the trust assets, including accumulated income, is includible in the decedent’s gross estate for federal estate tax purposes, regardless of whether the decedent directly contributed all the assets.

    Summary

    The Estate of E.A. Showers contested the Commissioner’s determination that proceeds from life insurance policies and the value of assets in several trusts were includible in Showers’ gross estate. Showers had transferred insurance policies to his wife and established trusts for his daughters, retaining the power to terminate the trusts. The Tax Court held that the insurance proceeds attributable to premiums indirectly paid by Showers after a certain date were includible, as was the full value of the trust assets because of his retained power to terminate, even if the assets were initially community property or generated by trust income.

    Facts

    E.A. Showers, domiciled in Texas, irrevocably assigned four life insurance policies to his wife in 1938. In 1942, he gifted his community one-half interest in oil leases to his wife. From 1943 until his death in 1946, premiums on the insurance policies were paid from the income generated by these oil leases. Showers and his wife also created five trusts for their daughters in 1937 and 1938, funded with community property. Showers, as trustee, had the power to terminate the trusts and distribute the assets to the beneficiaries.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in estate tax, increasing the value of the gross estate by including insurance proceeds and the value of the trust properties. The Estate petitioned the Tax Court, contesting the Commissioner’s determination. The case was submitted on stipulated facts and exhibits.

    Issue(s)

    1. Whether the premiums paid on the life insurance policies after 1942 were indirectly paid by the decedent, making the insurance proceeds includible in his gross estate under Section 811(g)(2) of the Internal Revenue Code.

    2. Whether the value of the trust assets, including the wife’s share of community property initially transferred and properties acquired with trust income, is includible in the decedent’s gross estate under Section 811(d)(1) due to the decedent’s power to terminate the trusts.

    Holding

    1. Yes, because the premiums were paid with income derived from property transferred by the decedent to his wife, and the decedent retained control over the funds used to pay the premiums.

    2. Yes, because the decedent’s power to terminate the trusts extended to the entire trust estate, including assets acquired with trust income, and because Section 811(d)(5) treats transfers of community property as made by the decedent.

    Court’s Reasoning

    The court reasoned that although the wife nominally paid the insurance premiums from her separate account, the funds originated from a gift from the decedent specifically to enable her to pay these premiums. The court emphasized that the decedent retained control over the account and personally signed the checks for the premium payments, demonstrating an “indirect” payment by the decedent. The court quoted committee reports, stating “This provision is intended to prevent avoidance of the estate tax and should be construed in accordance with this objective.”

    Regarding the trusts, the court emphasized that under Texas law, the husband has exclusive control over community property. Furthermore, Section 811(d)(5) explicitly states that transfers of community property are considered to be made by the decedent for estate tax purposes. Because Showers retained the power to terminate the trusts, the court applied Commissioner v. Holmes’ Estate, 326 U.S. 480 (1946), holding that this power affected not only the timing of enjoyment but also who would ultimately enjoy the assets, thus justifying inclusion in the gross estate. The court also stated that death was the key factor that effectuates the gift, and therefore the total current value of the gift must be considered. The court noted that closing agreements regarding gift tax liability did not preclude the inclusion of trust values in the gross estate.

    Practical Implications

    Estate of Showers highlights the importance of carefully structuring lifetime gifts and trusts to avoid estate tax inclusion. It demonstrates that even when assets are transferred to another individual or placed in a trust, the retention of significant control or powers by the grantor can result in the assets being included in their gross estate. This case is especially relevant in community property states, where Section 811(d)(5) can significantly impact estate tax planning. The case teaches that powers to terminate trusts, even if held in a fiduciary capacity, can trigger estate tax inclusion. Later cases applying the “indirect payment” principle for life insurance demonstrate continued scrutiny of funding sources. Attorneys in community property states must meticulously analyze the source of funds and the degree of control retained by the grantor to properly advise clients on estate tax implications.

    1. *. H. Rept. No. 2333, 75th Cong., 2d sess. (1942-2 C. B. 372, 490-1) and S. Rept. No. 1631, 75th Cong., 2d sess. (1942-2 C. B. 504, 676-7.
    2. 1. ART. 4614. Wife’s separate property.
    3. 2. SEC. 402. COMMUNITY INTERESTS.
    4. 3. SEC. 811. GROSS ESTATE.

  • Coulter v. Commissioner, 7 T.C. 1280 (1946): Trust Corpus Inclusion in Gross Estate

    7 T.C. 1280 (1946)

    The value of property transferred to a trust is includible in a decedent’s gross estate under Section 811(c) of the Internal Revenue Code if the decedent retained the right to have the trust corpus used for her benefit, effectively postponing the complete transfer of the property until her death; additionally, the value is includable under Section 811(d)(2) if the decedent retained the power, in conjunction with other trustors, to revoke the trust and alter the enjoyment of the trust property.

    Summary

    Lelia Coulter transferred property to a trust in 1920, retaining the right to income and potential corpus invasion for her support. The Tax Court addressed whether the value of the trust corpus should be included in her gross estate for estate tax purposes. The court held that the transfer was not made in contemplation of death but was includible under Section 811(c) because Lelia retained the right to have the corpus used for her benefit, postponing complete transfer until death. It was also includible under Section 811(d)(2) as she retained a power to revoke the trust with other grantors, affecting enjoyment of the property. The court also determined the fair market value of certain corporate stocks within the trust.

    Facts

    Lelia Coulter, along with her three children, created a trust in 1920, contributing property she inherited from her husband. The trust terms provided Lelia with $200 per month from net income and additional sums at the trustee’s discretion for her support. The trustee could also invade the corpus if the income was insufficient for her needs. The trust also included a provision allowing the trustors to jointly revoke the trust. Upon Lelia’s death in 1942, the Commissioner of Internal Revenue sought to include a portion of the trust corpus in her gross estate.

    Procedural History

    The Commissioner determined an estate tax deficiency, arguing that the transfer to the trust was made in contemplation of death or intended to take effect at or after death. The executor of Lelia’s estate, Joel Wright Coulter, challenged the deficiency in the United States Tax Court.

    Issue(s)

    1. Whether the transfer of property to the trust by the decedent was made in contemplation of death or intended to take effect in possession or enjoyment at or after death, within the meaning of Section 811(c) and (d) of the Internal Revenue Code.

    2. Whether the Commissioner erred in determining the value of certain corporate stocks contained in the transfer.

    Holding

    1. No, the transfer was not made in contemplation of death. Yes, one-half of the value of the corpus is includible in the gross estate because the decedent retained the right to have corpus used for her benefit, postponing the complete transfer until death; and because the decedent retained the power, in conjunction with the three children-trustors, to revoke the trust and thus change the enjoyment of the trust property.

    2. The Commissioner’s valuation of the stocks was partially incorrect; the fair market value of the stock was determined to be lower than the Commissioner’s assessment.

    Court’s Reasoning

    The court reasoned that because Lelia retained the right to have the corpus used for her benefit during her life, this postponed the complete and ultimate transfer of the property until her death, bringing it within the provisions of Section 811(c) of the Internal Revenue Code. The court distinguished this case from those where the trustee’s discretion is uncontrolled by external standards. Here, the trust instrument contemplated the trustee *should* invade the corpus if the decedent’s needs were not met by income. The court also found that Lelia, in conjunction with her children, retained the power to revoke the trust. Even though the trust specified how the assets would be distributed upon termination, the fact that Lelia could alter *who* ultimately received those assets meant it was still includible in the estate. Quoting Commissioner v. Holmes Estate, 326 U.S. 480, the court stated that “one who has the power to terminate contingencies upon which the right of enjoyment is staked, so as to make certain that a beneficiary will have it who may never come into it if the power is not exercised, has power which affects not only the time of enjoyment but also the person or persons who may enjoy the donation.” The court also determined the fair market value of the stocks based on an analysis of the company’s assets, liabilities, earnings, and restrictions on the sale of the stock.

    Practical Implications

    The Coulter case illustrates that even broad discretionary powers granted to a trustee can be interpreted as retaining a right to benefit from trust assets, leading to estate tax inclusion. The case highlights the importance of carefully drafting trust instruments to avoid retaining powers or interests that could trigger inclusion in the grantor’s gross estate. Trust instruments in California, and potentially other jurisdictions, should avoid giving grantors powers that allow them to alter who ultimately benefits from the trust. This decision reinforces the principle that the ability to affect *who* enjoys the property, not just *when* they enjoy it, can trigger estate tax inclusion. Subsequent cases have cited Coulter to underscore the importance of examining the substance of retained powers when determining estate tax liabilities and valuing closely held stock.