## Facts

- A Mississippi resident transferred Mississippi farm land to an irrevocable trust, naming herself trustee for the benefit of her four children and the heirs of any child dying during the trust.
- The deed transferred the land subject to mortgage liens securing debts totaling $36,636.16.
- The trust granted the trustee broad administrative powers to hold, manage, sell, and reinvest trust assets in the beneficiaries’ best interests.
- The trustee was authorized to distribute “net income” to beneficiaries in equal shares in amounts and at times she deemed best; undistributed income could be accumulated and added to principal.
- In 1941, the settlor filed a gift-tax return treating the transfer as a completed gift of the equity (value less mortgage) and paid gift tax.
- At the settlor’s death, there was no accumulated or undistributed trust income.
- The Commissioner assessed an estate-tax deficiency based solely on including the land’s value in the settlor’s gross estate; the Tax Court sustained the deficiency.

## Issues

1. Whether the farm land transferred to an irrevocable trust was includible in the decedent’s gross estate because she retained sufficient powers or economic benefits as trustee.
2. Whether (a) directing or requiring mortgage payment from trust income, (b) discretion to withhold or accumulate income, or (c) an asserted power to terminate the trust constituted retained control over enjoyment requiring estate-tax inclusion.

## Decision

- The Fifth Circuit reversed the Tax Court.
- The court held the Commissioner improperly included the farm land in the decedent’s gross estate.
- The court rejected the Tax Court’s reliance on mortgage-payment treatment, discretionary income provisions, and an asserted termination power as bases for inclusion.

## Legal Principles

- Property transferred to an irrevocable trust is not included in the settlor’s gross estate merely because the settlor serves as trustee with ordinary fiduciary and administrative powers.
- Trustee discretion over timing and amount of income distributions, when constrained by fiduciary duties and limited to beneficiaries’ interests (and not usable for the settlor’s benefit), does not by itself constitute a retained power requiring inclusion.
- A court must identify an actual dispositive power (such as a genuine power to terminate or alter beneficial enjoyment); such a power will not be inferred from broad administrative language.
- A transfer of encumbered property subject to a mortgage does not create estate inclusion solely because the settlor may remain only secondarily or contingently liable on the debt.

## Conclusion

The Fifth Circuit set aside the estate-tax deficiency because the decedent’s irrevocable transfer of the farm land left her with only fiduciary trustee powers and, at most, a remote contingent mortgage liability, neither of which amounted to retained enjoyment or a dispositive power that would bring the land back into her gross estate.


Hays’s Estate v. Commissioner, 181 F.2d 169 (5th Cir. 1950)