Estate of McDonald v. Commissioner

D. G. McDonald, after separating from his wife, established a trust to provide support and maintenance for his minor children. This trust arrangement was a thoroughly contested point of negotiation in the separation. The children were to receive income after attaining adulthood and were to be given the corpus after reaching age 35. McDonald kept the power to alter, amend, or revoke the trust, if he acted with his ex-wife. It was agreed that the entire trust was the property of McDonald. After his death, his estate (plaintiff) was involved in a dispute concerning whether the transfer for the trust had been made for consideration. Transfers of property for the support of children by their father had been previously held to have been given for consideration and thus not part of the gross estate for estate-tax purposes. However, other caselaw had considered that such trusts might be for the support and maintenance of minor children to some extent, other such trusts might not be. In the instant matter, the government (defendant) took the position that any portion not providing support and maintenance for the minor children should be considered within the gross estate of McDonald. It also noted that McDonald left each child just $5 in his will, as he stated that he had provided for them by trust. The estate, on the other hand, argued that since the terms of the trust had been negotiated with great difficulty and at arm’s length, the full value of the transferred assets should be construed as being for the support and maintenance of the children (and not included in the gross estate).