SCOTUS Reports

Tag: Transfer in Contemplation of Death

  • Estate of Carnall v. Commissioner, 25 T.C. 654 (1955): Inclusion of Transferred Property in Estate Tax

    25 T.C. 654 (1955)

    When a husband and wife transfer property held as tenants by the entirety to themselves individually in equal shares, only one-half of the value is includible in the deceased husband’s estate, even if the transfer was made in contemplation of death.

    Summary

    In Estate of Carnall v. Commissioner, the U.S. Tax Court addressed whether the entire value of securities transferred by a husband and wife from a tenancy by the entirety to themselves individually in equal shares was includible in the deceased husband’s estate. The court held that only one-half of the value should be included because the husband’s interest in the entirety property at the time of the transfer was one-half. This aligns with the principle that the includible amount in the estate is limited to the decedent’s interest in the transferred property. The transfer was made in contemplation of the husband’s death.

    Facts

    Edward Carnall and his wife, Emily, owned securities as tenants by the entirety, purchased with Edward’s funds. They reported income, gains, and losses from these securities equally on their individual tax returns. In 1945, they transferred these securities to themselves individually in equal shares. The transfer was motivated by advice to avoid estate tax on the total value of the securities. Edward, who had health issues, died in 1947. The Commissioner of Internal Revenue included the entire value of the securities in his estate. A gift tax return was filed and a tax paid in 1945.

    Procedural History

    The case originated when the Commissioner determined a deficiency in estate tax. The executors contested the inclusion of the entire value of the securities. The U.S. Tax Court reviewed the case based on stipulated facts, focusing on the legal implications of the property transfer made by the Carnalls.

    Issue(s)

    Whether the entire value of securities transferred by the decedent and his wife from a tenancy by the entirety to themselves individually in equal shares is includible in the decedent’s estate under Section 811(c) of the 1939 Internal Revenue Code, or only one-half?

    Holding

    No, because the husband’s interest in the entirety property at the time of the transfer was one-half, and since the transfer placed one-half of the entirety property in him outright, no additional share would be includible in his estate under section 811(c).

    Court’s Reasoning

    The court relied on the principle that the amount includible in the gross estate under Section 811(c) is limited to the decedent’s interest in the transferred property. The court cited the precedent in Estate of A. Carl Borner, which held that when such a transfer of entirety property was made to a trust, the husband’s interest was one-half. The court reasoned that the same principle applies when the transfer is to each other, not to a trust. “In all cases under this statute the first inquiry is as to the extent of decedent’s interest in the property transferred.” The court concluded the transfer didn’t increase the husband’s interest in the property, therefore only one-half was includible.

    Practical Implications

    This case highlights that when property is transferred from a tenancy by the entirety to individual ownership, estate tax implications are based on the decedent’s existing interest in the property at the time of transfer. This understanding is crucial for estate planning, specifically in how attorneys advise clients regarding asset ownership. The decision stresses the importance of understanding state property laws (tenancy by entirety) and federal tax rules (Section 811(c)). It is also important for practitioners to consider whether similar holdings regarding tenancies by the entirety, and interests therein, have been modified or changed since the 1955 ruling.

  • Estate of Anna Scott Farnum, 14 T.C. 894 (1950): Determining When a Trust Transfer is Complete for Estate Tax Purposes

    14 T.C. 894 (1950)

    A transfer of property to a trust is deemed complete for estate tax purposes when the grantor executes and delivers the trust deed, relinquishing all control and dominion over the assets, even if the physical transfer of the assets occurs later.

    Summary

    The Tax Court reconsidered its prior decision in light of Public Law 378, addressing whether a transfer to a trust was made in contemplation of death or before March 3, 1931, impacting estate tax liability. The decedent executed a trust deed on January 19, 1931, transferring her remainder interest in three trusts managed by Fidelity-Philadelphia Trust Co. The court held that the transfer was not made in contemplation of death, focusing on the decedent’s motives related to efficient management and family protection, not testamentary intent. It also determined that the transfer occurred on January 19, 1931, when the trust deed was executed and delivered, even though the physical transfer of assets happened after March 3, 1931.

    Facts

    Decedent’s mother died on October 4, 1930, terminating three trusts established by decedent’s grandfather, in which decedent held a one-fourth remainder interest. The Fidelity-Philadelphia Trust Co. managed these trusts. On January 19, 1931, the decedent executed a trust indenture, conveying her interest in the grandfather’s trusts (excluding $100,000) to a new trust, reserving income for herself and providing for her children. Court orders awarded decedent her share on January 6, February 11, and February 13, 1931. Physical assets were transferred to the new trust after March 31, 1931. The decedent enjoyed excellent health and normal activity until approximately April 1940.

    Procedural History

    The Tax Court initially decided the case based on Commissioner v. Church and Spiegel v. Commissioner. After Public Law 378 retroactively changed the legal landscape, the court granted the petitioner’s motion to vacate and reconsider the original decision. The Commissioner then raised new arguments regarding contemplation of death and the timing of the transfer.

    Issue(s)

    1. Whether the trust deed of January 19, 1931, was a transfer of property in contemplation of death under section 811(c) of the Internal Revenue Code?

    2. Whether decedent’s transfer of property in trust occurred before the Joint Resolution of March 3, 1931, or thereafter, impacting the applicability of certain estate tax provisions?

    Holding

    1. No, because the dominant motives for creating the trust were associated with life, not death. The decedent was motivated to continue the management of her assets with an experienced trustee, save on income taxes, and protect her property from speculation.

    2. Yes, the transfer occurred before March 3, 1931, because the transfer was completed upon execution and delivery of the trust deed on January 19, 1931, regardless of when the physical assets were transferred.

    Court’s Reasoning

    The court reasoned that the respondent failed to prove the transfer was in contemplation of death. The decedent’s good health, normal activities, and dominant motives of efficient asset management, tax savings, and family protection pointed to life-associated motives. Referencing United States v. Wells, the court stated the test is “whether the thought of death is the impelling cause of the transfer.” The court distinguished Estate of Davidson v. Commissioner and United States v. Tonkin, finding no integrated testamentary plan. For the second issue, the court emphasized that the decedent, by executing and delivering the trust deed on January 19, 1931, unqualifiedly transferred her interest, reserving no power to revoke or condition the gift. The court stated, “Nothing more remained to be done or could be done by the decedent to divest herself of the assets; she did nothing more.” Citing Edson v. Lucas, the court found a valid gift inter vivos was made. The court focused on the relinquishment of control over economic benefits, citing Sanford’s Estate v. Commissioner, 308 U. S. 39.

    Practical Implications

    This case clarifies that for estate tax purposes, a transfer to a trust is complete when the grantor relinquishes control via a valid trust deed, even if physical transfer of assets occurs later. This provides guidance in determining the timing of transfers regarding changes in tax law. The case emphasizes examining the grantor’s motives when assessing contemplation of death, focusing on life-associated reasons such as asset management and family security. Later cases cite Farnum for the principle that execution of a trust document can constitute a completed gift even absent immediate physical delivery of the underlying assets, particularly where a professional trustee already holds the assets.