Estate of Jack Green, John F. Conway v. United States
1995 U.S. App. LEXIS 30962, 76 A.F.T.R.2d (RIA) 7094, 68 F.3d 151 (1995)
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Rule of Law:
The reciprocal trust doctrine applies only when the trusts are interrelated and the arrangement leaves the settlors in approximately the same economic position as if they had named themselves as life beneficiaries. Retaining purely fiduciary powers to manage trust assets for third-party beneficiaries, without any retained personal economic benefit for the settlors, is insufficient to trigger the doctrine.
Facts:
- Jack Green and his wife, Norma Green, had two granddaughters, Jennifer and Greer.
- On December 20, 1966, Jack Green established a trust for the benefit of his granddaughter, Jennifer.
- Jack Green named his wife, Norma, as the trustee of the 'Jennifer' trust.
- On the same day, Norma Green established a trust for the benefit of her other granddaughter, Greer.
- Norma Green named her husband, Jack, as the trustee of the 'Greer' trust.
- The terms of both trusts were substantially identical.
- Each trustee's sole authority was the discretion to reinvest assets and time the distribution of the trust's corpus and income until the respective beneficiary turned 21.
- Neither Jack nor Norma Green retained any direct or indirect personal economic benefit from the assets or income of the trusts they created.
Procedural Posture:
- The Internal Revenue Service (IRS) ruled that trust property should be included in Jack Green's gross estate under the reciprocal trust doctrine.
- The Estate of Jack Green challenged the IRS's ruling in the United States District Court.
- The district court ruled in favor of the Estate, concluding that the reciprocal trust doctrine did not apply.
- The IRS, as the losing party, appealed the district court's judgment to the United States Court of Appeals for the Sixth Circuit.
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Issue:
Does the reciprocal trust doctrine apply to uncross trusts and include their value in a decedent's gross estate where the settlors retain only fiduciary powers to manage the timing of distributions to third-party beneficiaries, but do not retain any personal economic benefit?
Opinions:
Majority - Krupansky, J.
No. The reciprocal trust doctrine does not apply because the settlors did not retain an economic benefit that placed them in a similar economic position to one they would have been in had they named themselves life beneficiaries. The Supreme Court's decision in United States v. Grace established that for the doctrine to apply, the trusts must not only be interrelated, but the arrangement must also leave the settlors in 'approximately the same economic position' as if they had retained a life estate. The court reasoned that 'economic value is the only workable criterion.' Retaining purely fiduciary powers, such as the discretion to time distributions to a third-party beneficiary, does not constitute a retained economic benefit for the settlor. Therefore, this arrangement does not satisfy the 'core mandate' of Grace, and the trusts cannot be uncrossed for estate tax purposes.
Dissenting - Jones, J.
Yes. The reciprocal trust doctrine should apply because the trusts were clearly interrelated and the arrangement left the settlors in the same economic position with respect to the powers they retained. The dissent argues that the trusts were created simultaneously with identical terms as part of a prearranged plan, making them interrelated. Furthermore, the power to control the timing and enjoyment of trust assets is a significant power to 'designate' enjoyment under I.R.C. § 2036(a)(2), which is itself a taxable economic power. The majority misinterprets Grace by focusing too narrowly on the 'life beneficiary' language, which was specific to the facts of that case, rather than on the broader principle that the doctrine applies when settlors use a reciprocal arrangement to retain powers that would otherwise be taxable if retained directly.
Analysis:
This decision significantly narrows the scope of the reciprocal trust doctrine by requiring a tangible, retained economic benefit for the settlor, not just retained fiduciary control. It creates a circuit split with other courts, such as the Tax Court in Bischoff, which had held that retained discretionary powers over distributions were sufficient to invoke the doctrine. The ruling provides a clearer safe harbor for estate planners, suggesting that spouses can create trusts for third parties and name each other as trustees without triggering estate tax inclusion, provided they derive no personal economic benefit from the arrangement. This elevates the 'economic position' prong of the Grace test to be a strict requirement of personal financial benefit.
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