## Facts

- A settlor created four substantially identical inter vivos trusts (one per grandchild) and made additional transfers the following year.
- Each trust directed the trustee to pay income to the beneficiary until age 30, when the principal would be distributed outright.
- For a beneficiary who was a minor, the trustee was to retain income, reinvest it, and pay as much income and principal as the trustee deemed necessary for the minor’s maintenance and support.
- Any accumulated, unexpended income was required to be paid to the beneficiary upon reaching majority (age 21).
- On the settlor’s gift tax return, annual exclusions under I.R.C. § 2503(b) were claimed for the trust transfers.
- The Commissioner disallowed the exclusions on the ground that the transfers were gifts of future interests.
- The Tax Court held that the income interests during minority were present interests eligible for the annual exclusions, and the Commissioner appealed.

## Issues

1. Whether, for transfers in trust benefiting minors, the income interest during minority (including mandatory payout of accumulated income at majority) constitutes a present interest qualifying for the annual gift-tax exclusion under I.R.C. § 2503(b).
2. Whether the annual exclusion must be denied in full where the trust fails to satisfy all conditions of I.R.C. § 2503(c) for the entire transfer, even if a severable component satisfies § 2503(c).

## Decision

- The Third Circuit affirmed the Tax Court.
- The court held that the gifts of income interests during the beneficiaries’ minority were present interests and qualified for the annual exclusions to the extent of their value.
- The court rejected an all-or-nothing approach and accepted separating the transfer into distinct interests, allowing the exclusion for the portion meeting § 2503(c).

## Legal Principles

- A transfer in trust may be analyzed as comprising severable interests (e.g., an income interest during minority and later interests in principal).
- Under I.R.C. § 2503(c), a minor’s interest is not treated as a future interest to the extent the property or income may be expended for the minor before age 21 and, if not expended, will pass to the minor at age 21.
- Failure of other components of the overall trust transfer to satisfy § 2503(c) does not prevent treating a qualifying, severable component (such as the minority income interest) as a present interest for § 2503(b) purposes.

## Conclusion

The court held that the annual gift-tax exclusion was available for the value of the trusts’ income interests during the beneficiaries’ minority because those interests could benefit the minors before age 21 and any unexpended income had to be paid to them at majority, even though other aspects of the transfers could be treated as future interests.


Comm’r v. Herr, 303 F.2d 780 (3d Cir. 1962)