Old Colony Trust Co. v. United States,
423 F.2d 601 (1970)



Procedure Plaintiff executor appealed from a judgment of the United States District Court, which ruled in favor of defendant government, charging the estate of a settlor of an inter vivos trust, who was a trustee until the date of his death, with the value of the principal he contributed by virtue of reserved powers in the trust.


Facts: The income of the trust at issue was payable to the settlor's son: eighty percent of the income was to be paid to the son, and the rest was to be added to the principal. The trust instrument gave the trustees absolute discretion to increase the percentage of income payable to the son in case of illness or changed circumstances, or to decrease the payments if they deemed it to be in the son's best interest. The trust instrument also gave the trustees broad management powers and investment authority. During his life, the settlor was also a trustee of the trust. Upon the settlor's death a tax was assessed against his estate for the principal which settlor has contributed to the trust. The executor of the estate (P) paid the tax and sued to recover the amount paid.

Issue: If there is no ascertainable standard with which a settlor-trustee must comply in his distribution of trust income, will the settlor's estate be taxed according to the value of the principal that the settlor contributed?

Rule:If there is an ascertainable standard, the trustee can be compelled to follow it. If there is not, even though he is a fiduciary, it is not unreasonable to say that his retention of an unmeasurable freedom of choice is equivalent to retaining some of the incidents of ownership.

Holding: Yes. Judgment affirmed.
The Court of Appeals, held that where inter vivos trust instrument gave trustees the discretion to decrease or cut off payments of income to life beneficiary, a son of settlor-trustee, and add income to capital (which son would never receive) when it was to best interests of beneficiary to do so, a finding of ownership control was warranted, and estate of settlor-trustee was properly charged with value of principal he contributed.


Analysis: The estate of a settlor of an inter vivos trust was charged with the value of the principal the settlor contributed by virtue of his reserved powers in the trust. Plaintiff paid the tax and sued for its recovery from defendant government. Defendant claimed that the settlor, who was trustee until his death, had the right to designate the persons who could possess or enjoy the trust property or the income therefrom within the meaning 26 U.S.C.S. § 2036(a)(2), and thus the trustee's estate should have been taxed. The trial court ruled for defendant, and plaintiff appealed. The appellate court affirmed, holding that under the terms of the trust, the settlor-trustee was free to determine his own trustee standard of distribution. Thus, if there was not an ascertainable trustee standard of distribution then the settlor-trustee's estate was correctly taxed.