Mikel v. Commissioner

Israel and Erna Mikel (plaintiffs) each made a $1,631,000 gift to a family trust in 2007. In December 2011, Israel and Erna each filed a separate gift-tax return reporting the gift, under which each claimed a $720,000 annual exclusion, calculated on the basis that Israel and Erna had each gifted a $12,000 present interest (which was then the annual-gift-tax-exclusion limit) to each of their family trust’s 60 beneficiaries. The documents establishing the trust indicated that each beneficiary had the right to withdraw property from the trust in the year of the trust’s creation or any subsequent year in which property was added to the trust. The trustees were to notify all beneficiaries (including guardians for minor beneficiaries) of the right to withdraw property, which would be lapsed if not exercised within 30 days. Aside from those types of distributions, the trustees could make discretionary distributions for health, support, or maintenance, or for expenses such as reasonable wedding costs, assisting in purchasing a residence, or help entering a trade or profession. If any dispute arose as to distributions, it was to be submitted to an arbitration panel of three Orthodox Jewish persons. The trust included an in terrorem provision specifying that if any beneficiary opposed the distribution of the trust, filed any legal action, or otherwise challenged the distribution, that challenger would have her designation as a beneficiary revoked and would be excluded from further participation in the trust. In October 2007, the attorney working for the trust sent each beneficiary a notice of right of withdrawal, allowing each beneficiary to withdraw property or funds up to $24,000 each from the trust. There was no indication whether any beneficiaries exercised these rights. However, the question of whether such rights constituted a present interest in property—and thus allowed exclusion under the gift-tax exemption—was the key issue. The Commissioner of Internal Revenue (the Commissioner) argued that the in terrorem clause in the trust documents denied the beneficiaries a present interest in property, as such a right would be illusory and not enforceable in a court of law. The Mikels argued that the in terrorem provision had been written to stop a beneficiary from challenging distributions to other beneficiaries and that the trust did grant a present interest in property.