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United States v. Estate of Grace

395 U.S. 316, 89 S. Ct. 1730, 23 L. Ed. 2d 332 (1969)

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United States v. Estate of Grace

United States Supreme Court

395 U.S. 316, 89 S. Ct. 1730, 23 L. Ed. 2d 332 (1969)

Facts

Joseph Grace was wealthy when he married Janet Grace. Over the years, Joseph transferred assets into Janet’s name including a family estate, although he retained control over the assets and the family business. In 1931 Joseph created a trust for Janet for life. If another trustee agreed, Janet could invade principal, and she could direct distribution upon her death. Two weeks later, Janet executed a virtually identical trust for Joseph at his request, containing the assets in her name. Both trusts were prepared under a plan Joseph devised to avoid a new gift tax, and he chose which assets each trust included. The trust for Janet terminated when she died in 1937. Her estate included about half the trust’s value after other tax compromises. Joseph died in 1950. His estate-tax return did not include the trust for him in his estate. The tax commissioner found the two trusts reciprocal, included the trust in Joseph’s estate, and assessed a $363,500 deficiency. Joseph’s estate (defendant) paid the deficiency under protest, arguing the reciprocal-trusts doctrine did not apply. The trial court found the trusts were part of a pattern of family giving, not reciprocal trusts. Noting disagreement among appellate courts over an important estate-tax issue, the Supreme Court granted review.

Rule of Law

Issue

Holding and Reasoning (Marshall, J.)

Dissent (Douglas, J.)

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