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Estate of Gokey v. Commissioner

United States Tax Court
72 T.C. 721, 1979 U.S. Tax Ct. LEXIS 88 (1979)
ELI5:

Rule of Law:

When an irrevocable trust instrument directs a trustee to use income for the 'support, care, welfare, and education' of the grantor's minor children, it creates a mandatory obligation to discharge the grantor's legal support duty. Consequently, the grantor is deemed to have retained enjoyment of the trust property, making its value includable in their gross estate under § 2036(a)(1).


Facts:

  • On October 1, 1961, Joseph G. Gokey established irrevocable trusts for his two minor children, Gretchen (age 7) and Patrick (age 5).
  • Gokey's wife, Mildred A. Gokey, was appointed as the sole trustee.
  • The trust agreement stipulated that the trustee 'shall use such part or all of the net income of his or her trust for the support, care, welfare, and education of the beneficiary thereof.'
  • The trust document further specified that any income not used for these purposes was to be accumulated and added to the trust principal.
  • In the same agreement, Gokey created a separate trust for his wife, which provided that upon her death, a one-third remainder interest would transfer to each of the children's trusts.
  • Joseph G. Gokey died on October 20, 1969, at which time his children Gretchen and Patrick were still minors, aged 15 and 13 respectively.

Procedural Posture:

  • The Estate of Joseph G. Gokey filed a federal estate tax return that did not include the value of irrevocable trusts created for the decedent's minor children.
  • The Commissioner of Internal Revenue determined an estate tax deficiency of $160,502.94, asserting that the value of the children's trusts was includable in the decedent's gross estate.
  • The executor of the estate and the trustees of the trusts filed petitions with the United States Tax Court, challenging the Commissioner's determination of deficiency.

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Issue:

Does a trust instrument that directs a trustee to 'use' trust income for the 'support, care, welfare, and education' of the grantor's minor children create a mandatory obligation to discharge the grantor's legal support duty, thereby requiring the inclusion of the trust's value in the grantor's gross estate under § 2036(a)(1)?


Opinions:

Majority - Judge Wiles

Yes. A trust instrument directing a trustee to use income for the 'support, care, welfare, and education' of the grantor's minor children creates a mandatory obligation that discharges the grantor's legal support duty, requiring the trust's value to be included in the grantor's gross estate. The court reasoned that the term 'shall use' is a mandatory directive, not a discretionary power. It distinguished the regulatory language 'is to be applied' from 'may be applied,' holding that the trust's language falls into the former category. The court further held that under Illinois law, the phrase 'support, care, welfare, and education,' when viewed in the aggregate, creates an ascertainable standard equivalent to the beneficiary's accustomed standard of living, which is synonymous with the legal obligation of support. Because the trust income was required to be used to discharge Gokey's legal obligation, he retained the 'enjoyment' of the property under § 2036, making the trusts' value includable in his gross estate.



Analysis:

This case is a foundational lesson in estate planning, emphasizing the critical difference between mandatory ('shall') and discretionary ('may') language in trust instruments. It solidifies the principle that if a trust's terms require payments that fulfill a grantor's legal obligation of support, the IRS will include the trust's assets in the grantor's estate. The court's interpretation of 'welfare' and 'comfort' as part of an 'ascertainable standard' tied to support prevents drafters from using such terms to create a loophole. The decision serves as a clear precedent that to avoid estate inclusion under § 2036, a support trust for a minor must grant the trustee genuine discretion over distributions.

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