Old Colony Trust Co. v. United States
423 F.2d 601 (1970)
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Rule of Law:
Broad, purely administrative powers retained by a settlor-trustee do not cause trust property to be included in the settlor's gross estate, but discretionary powers to distribute or accumulate income do cause inclusion if not limited by a fixed and ascertainable external standard.
Facts:
- A settlor created an inter vivos trust for the primary benefit of his adult son.
- The settlor appointed himself as one of the trustees and served in that capacity until his death.
- The trust instrument's Article 7 granted the trustees broad administrative and management powers, including the right to determine what was principal or income and to 'do all things in relation to the Trust Fund which the Donor could do if living.'
- The trust instrument's Article 4 gave the trustees discretion to increase income payments to the son in case of 'sickness, or desirable in view of changed circumstances.'
- Article 4 also granted the trustees the power to cease all income payments to the son and add the income to the trust principal whenever they decided it was 'for his best interests.'
Procedural Posture:
- The executor of the deceased settlor's estate paid the federal estate tax assessed on the trust's value.
- The executor filed a lawsuit against the United States in the U.S. District Court, seeking a refund of the tax paid.
- On stipulated facts, the district court ruled in favor of the government (United States).
- The executor, as the appellant, appealed the district court's judgment to the United States Court of Appeals for the First Circuit.
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Issue:
Does a settlor-trustee's retention of broad administrative powers and discretionary distribution powers governed by a beneficiary's 'best interests' cause the trust corpus to be included in his gross estate for federal estate tax purposes under IRC §§ 2036(a)(2) and 2038(a)(1)?
Opinions:
Majority - Aldrich, Chief Judge
Yes. The trust corpus is includible in the settlor's gross estate. The court bifurcates its analysis between the administrative powers (Article 7) and the distribution powers (Article 4). It overrules its prior decision in State Street Trust Co., holding that an aggregation of purely administrative powers, which are subject to fiduciary duties and judicial oversight under state law, does not constitute a retained right to designate enjoyment of property under § 2036 or a power to alter under § 2038. However, discretionary powers over distribution are treated differently. Such powers will cause estate inclusion unless they are governed by a fixed and ascertainable external standard. Here, the power to accumulate income for the son's 'best interests' is not an ascertainable standard. It is a subjective measure that provides the settlor-trustee with unmeasurable freedom, tantamount to retaining incidents of ownership and parental control through 'the purse strings,' thus making the trust property includible in his estate.
Analysis:
This decision is highly significant for abandoning the First Circuit's controversial 'aggregation of powers' doctrine from State Street, providing greater certainty that standard administrative powers held by a settlor-trustee will not, by themselves, trigger estate inclusion. The case reinforces the critical importance of the 'ascertainable standard' test for retained distribution powers. By holding that a 'best interests' standard is too subjective, the court compelled estate planners to draft trust instruments with more objective and specific language (e.g., relating to health, education, maintenance, and support) to avoid adverse estate tax consequences for settlor-trustees.
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