Facts
- D.G. McDonald separated from his wife and, as part of a contested separation negotiation, created an inter vivos trust for their minor children.
- The trust was intended to provide the children “support and maintenance,” and the terms were reached after arm’s-length bargaining.
- The trust provided income to the children after adulthood and distributed corpus when each child reached age 35.
- McDonald retained a power to alter, amend, or revoke the trust, but only jointly with his former wife.
- After McDonald’s death, the Commissioner determined an estate-tax deficiency by including trust property in the gross estate.
- McDonald’s will left each child $5 and stated he had provided for them through the trust.
- The estate argued the trust was supported by adequate and full consideration because it resolved marital claims and satisfied McDonald’s legal duty to support minor children.
- The Commissioner contended that only the portion tied to minor-child support could qualify as consideration; benefits extending beyond minority were gratuitous and includible.
Issues
- Whether funding a trust for children pursuant to a contested separation arrangement constituted a transfer for “adequate and full consideration in money or money’s worth,” excluding the trust property from the gross estate.
- Whether, and how, the transfer should be apportioned between amounts reasonably satisfying the decedent’s legal obligation to support minor children and amounts providing additional post-majority benefits.
- Whether the decedent’s retained joint power to alter, amend, or revoke required estate inclusion except to the extent the transfer qualified for the consideration exception.
Decision
- The Tax Court held that only the portion of the trust reasonably attributable to satisfying McDonald’s legal duty to support and maintain his minor children was treated as made for adequate and full consideration and excluded from the gross estate.
- The remainder of the trust value—especially benefits extending into adulthood and distribution of corpus at age 35—was not supported by money-or-money’s-worth consideration and was includible in the gross estate.
- The court partially sustained the deficiency and redetermined it to reflect partial exclusion and partial inclusion.
Legal Principles
- Satisfaction of a legally enforceable obligation (including a parent’s duty to support minor children) can constitute “adequate and full consideration in money or money’s worth” for estate-tax purposes.
- Consideration is limited to the value reasonably tied to the enforceable obligation; provisions operating as post-majority wealth transfers are treated as gratuitous.
- A single trust may be apportioned: consideration-backed portions may be excluded while the gratuitous portion is included in the gross estate.
- Where the decedent retains a power to alter, amend, or revoke a transfer (even if exercisable only jointly with another), estate inclusion applies unless the transfer qualifies for the bona fide sale/adequate-consideration exception, and that exception extends only as far as actual money-or-money’s-worth consideration.
Conclusion
The Tax Court treated the separation-related trust as partly supported by consideration and partly gratuitous, excluding only the portion that discharged the decedent’s minor-child support obligations and including the balance in the gross estate because it provided post-majority benefits not supported by money-or-money’s-worth consideration and remained subject to retained-power inclusion rules.