Jennings v. Smith
1947 U.S. App. LEXIS 2899, 35 A.F.T.R. (P-H) 1203, 161 F.2d 74 (1947)
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Rule of Law:
A decedent's power as a trustee to distribute trust income or principal does not cause the trust property to be included in the gross estate for tax purposes if the power is governed by a definite, external, and ascertainable standard that a court of equity can enforce.
Facts:
- In December 1934, Oliver Gould Jennings created two irrevocable trusts, one for the family of each of his two sons.
- Jennings named himself and his two sons as the three trustees for both trusts, with decisions to be made by a majority vote.
- The trust instruments granted the trustees discretion to pay out net income if they determined it was 'reasonably necessary to enable the beneficiary in question to maintain himself and his family, if any, in comfort and in accordance with the station in life to which he belongs.'
- The trustees also had the power to invade the trust's capital if a beneficiary 'should suffer prolonged illness or be overtaken by financial misfortune which the trustees deem extraordinary.'
- During Jennings's lifetime, income payments were made from one son's trust based on the stated standard, but no capital invasions were made from either trust as the triggering conditions did not occur.
- Oliver Gould Jennings died on October 13, 1936, while serving as a co-trustee.
Procedural Posture:
- The executors of Oliver Gould Jennings's estate sued the Collector of Internal Revenue in U.S. District Court to recover overpaid estate taxes.
- The defendant collector asserted a defense claiming the estate had actually underpaid its taxes by failing to include the value of two trusts in the gross estate.
- The U.S. District Court, the court of first instance, held that the trust property was includible in the gross estate.
- The District Court entered judgment for the defendant collector.
- The plaintiffs, the executors of the estate, appealed this decision to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does a decedent's power as a co-trustee to distribute trust principal or income, which is exercisable only upon the occurrence of specific contingencies or based on a determinable standard, constitute a power to 'alter, amend, or revoke' under § 811 of the Internal Revenue Code, thereby requiring the inclusion of the trust property in the decedent's gross estate?
Opinions:
Majority - Swan, Circuit Judge
No. A power held by a decedent-trustee that is constrained by a definite, external standard enforceable in equity is not a power to 'alter, amend, or revoke' under § 811(d), nor is it a retained 'right' to designate enjoyment under § 811(c). The court reasoned that the power to invade capital was contingent upon specific events—prolonged illness or extraordinary financial misfortune—that had not occurred, so enjoyment was not subject to change at the date of death. Similarly, the power to distribute income was governed by an ascertainable standard related to maintaining the beneficiaries' station in life. This standard was not one of 'untrammeled discretion' but was a fiduciary duty that a court of equity could enforce, compelling distribution if the conditions were met or restraining it if they were not. Because the decedent's power was so qualified, he did not retain the type of control targeted by the statute, and his death did not enlarge or mature any beneficiary's interest.
Analysis:
This case establishes the influential 'ascertainable standard' doctrine in estate tax law. It provides a crucial distinction between a trustee's broad, subjective discretion over trust assets—which would cause inclusion in a grantor's estate—and discretion limited by fixed, objective standards related to a beneficiary's health, education, support, or maintenance. By clarifying that powers governed by such an external, judicially enforceable standard do not constitute a retained power to alter or amend a trust, the decision created a significant estate planning tool. This allows grantors to act as trustees for family trusts without triggering adverse estate tax consequences, provided the trust instrument carefully drafts the limits on their fiduciary powers.
