ESTATE OF CRISTOFANE V. COMMISSIONER
97 T.C. 74 (1991)



PROCEDURAL POSTURE: Petitioner estate sought review of the decision of respondent Commissioner of Internal Revenue ("IRS"), who disallowed exclusions under 26 U.S.C.S. § 2503(b) for payments by the estate to decedent's grandchildren.

FACTS: Settlor created a trust for the benefit of her two children and five grandchildren. She intended to transfer most of the trust assets into the trust during her lifetime. Under the terms of the trust, at the time a transfer was made, any of the beneficiaries had the right to withdraw an amount from the trust corpus equal to the Federal Gift Tax Exclusion ($10,000). This right was to exist for 15 days following the transfer. During her life. Settlor made two separate transfers of property into the trust, each worm $70,000, during different taxable years. She did not report these transfers as taxable gifts. Instead, she claimed exclusions of $10,000 for each of her children and grandchildren, totaling the full amount of the transfers. The commissioner (D) allowed the exclusions made with respect to Settlor's two children, who had a present interest in the trust income, but disallowed those claimed for the grandchildren.

ISSUE: May a settlor who transfers property into a trust claim a gift tax exclusion for trust beneficiaries who do not have a present interest in the trust?

HOLDING: Decedent executed an irrevocable trust to her two children. Under the terms of the trust, her two children, as trustees, could each withdraw an amount not to exceed the amount specified for the gift tax exclusion under 26 U.S.C.S. § 2503(b). Decedent died before she made two $ 70,000 transfers into the trust. These transfers were not reported on federal gift tax returns. Instead, estate claimed them as annual exclusions for two years under § 2503(b) to her children and five grandchildren, who held contingent remainder interests in the trust. The IRS disallowed the exclusions for decedent's grandchildren. The estate sought review of the IRS' decision. The court found that the estate was entitled to the exclusions for decedent's grandchildren because their right to withdraw an amount not to exceed the § 2503(b) exclusion represented a present interest for the purposes of § 2503.

OUTCOME: The court decided that the estate was entitled to gift tax exclusions for decedent's grandchildren because their right to withdraw an amount from decedent's trust not to exceed the gift tax exclusion represented a present interest for the purposes of the gift tax exclusion.