395 U.S. 316, 89 S.Ct. 1730, 23 L.Ed.2d 332
In 1908 Joseph P. Grace married Janet Grace. At the time of the marriage Joseph was a very wealthy man while Janet had no wealth or property of her own.1 Between 1908 and 1931 Joseph transferred to Janet a large amount of personal and real property, including the family's Long Island estate. He retained effective control over the family's business affairs. She took no interest and no part in those affairs.2
On December 15, 1931, decedent executed a trust instrument, hereinafter called the Joseph Grace trust. Named as trustees were decedent, his nephew, and a third party. The trustees were directed to pay the income of the trust to Janet Grace during her lifetime, and to pay to her any part of the principal which a majority of the trustees might deem advisable. Janet was given the power to designate, by will or deed, the manner in which the trust estate remaining at her death was to be distributed among decedent and their children.3
Five days later, on December 30, 1931, Janet Grace executed a trust instrument, hereinafter called the Janet Grace trust, which was virtually identical to the Joseph Grace trust. The trust properties included the family estate and corporate securities, all of which had been transferred to her by decedent in preceding years.4
Both trust instruments were prepared by one of decedent's employees in accordance with a plan devised by decedent to create additional trusts before the advent of a new gift tax expected to be enacted the next year.5 Decedent selected the properties to be included in each trust.6 Janet Grace, acting in accordance with this plan, executed her trust instrument at decedent's request.7
Janet Grace died in 1937. The Joseph Grace trust terminated at her death. Her estate's federal estate tax return disclosed the Janet Grace trust and reported it as a nontaxable transfer by Janet Grace.8 The Commissioner asserted that the Janet and Joseph Grace trusts were reciprocal and asserted a deficiency to the extent of mutual value. Compromises on unrelated issues resulted in 55% of the smaller of the two trusts, the Janet Grace trust, being included in her gross estate.9
Joseph Grace died in 1950. The federal estate tax return disclosed both trusts. The Joseph Grace trust was reported as a nontaxable transfer and the Janet Grace trust was reported as a trust under which decedent held a limited power of appointment. Neither trust was included in decedent's gross estate.10 The Commissioner determined that the Joseph and Janet Grace trusts were reciprocal and included the amount of the Janet Grace trust in decedent's gross estate. A deficiency in the amount of $363,500.97, plus interest, was assessed and paid.11 After denial of a claim for a refund, this refund suit was brought. The Court of Claims, with two judges dissenting, ruled that the value of the trust was not includible in decedent's estate under § 811(c)(1)(B) and entered judgment for respondent. The Supreme Court granted certiorari because of an alleged conflict between the decision below and decisions in the courts of appeals and because of the importance of the issue presented to the administration of the federal estate tax laws.12
Whether application of the reciprocal trust doctrine requires a finding that each trust was created as a quid pro quo for the other?13
Application of the reciprocal trust doctrine requires only 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 they would have been in had they created trusts naming themselves as life beneficiaries.14
No. The Court rejects any requirement of a quid pro quo.15
Inquiries into subjective intent create substantial obstacles to proper application of the estate tax laws.16 This is especially true in intrafamily transfers where motives are difficult to determine decades later.17 The objective test instead examines whether the trusts are interrelated and whether each settlor remains in the same economic position.18 The Joseph Grace trust and Janet Grace trust satisfy this standard.19 They are substantially identical in terms and were created at approximately the same time as part of a single transaction designed and carried out by Joseph Grace.20 The transfers in trust left each party, to the extent of mutual value, in the same objective economic position as before.21
Indeed, it appears, as would be expected in transfers between husband and wife, that the effective position of each party vis-à-vis the property did not change at all.
Application of the reciprocal trust doctrine does not require a finding that each trust was created as a quid pro quo for the other.22
Related opinions on this issue
Justice Douglas dissented on the ground that the reciprocal trust device was not presented in this case.23 He observed that each settlor retained a sufficient power over the corpus to require inclusion in the taxable estate because each, as one of three trustees, reserved the right to alter the trust by paying to the chief beneficiary any amounts of the principal of the said trust, up to and including the whole thereof, which the said Trustees or a majority of them may at any time or from time to time deem advisable.24 The provisions of the Joseph and Janet Grace trusts would seem to satisfy the test for inclusion under section 811(d)(2) of the 1939 Code.25
Justice Douglas therefore concluded that the petition should be dismissed as improvidently granted.26
Whether the Janet Grace trust is includible in Joseph Grace's gross estate under section 811(c)(1)(B) of the Internal Revenue Code of 1939?27
Section 811(c)(1)(B) includes in a decedent's gross estate transfers that are essentially testamentary because they leave the transferor a significant interest in or control over the property during life.28 When reciprocal trusts are interrelated and leave the settlors in the same economic position, the value of the trust created by the other settlor is includible to the extent of mutual value.29
Yes. The two trusts are interrelated.30 They are substantially identical in terms and were executed within fifteen days of each other as part of a plan devised by Joseph Grace to create additional trusts before an expected new gift tax.31 The arrangement left Joseph Grace in the same objective economic position as if he had created the trust naming himself as life beneficiary.32 Economic value is the only workable criterion for estate tax purposes.33 Joseph Grace's estate remained undiminished to the extent of the value of the Janet Grace trust.34
The value of that trust must therefore be included in his gross estate.35
The Janet Grace trust is includible in Joseph Grace's gross estate under section 811(c)(1)(B) of the Internal Revenue Code of 1939.36