## Facts

- Hans G. M. de Schulthess created two inter vivos trusts, one for each of his two minor daughters.
- He named himself as one of two trustees for both trusts.
- Each trust required the trustees to invest the principal and periodically pay enough income to provide for the daughter’s support, education, maintenance, and general welfare, measured by maintaining the standard of living to which she was accustomed.
- Any income above that required level could, in the trustees’ discretion, either be paid currently to the daughter or accumulated and paid to her when she reached age 21.
- The trustees also had authority to distribute any part or all of the trust principal to the daughter at any time.
- Schulthess died while both daughters were still minors.
- The IRS treated the trust property as includible in Schulthess’s gross estate under I.R.C. §§ 2036 and 2038 and assessed additional estate tax.
- The executors (Leopold and Keane) paid the tax and sued for a refund in federal district court.
- The district court ruled for the estate and granted a refund, and the United States appealed.

## Issues

1. Whether Schulthess’s retained powers as co-trustee—especially the discretionary power to distribute principal and control distributions of excess income—required inclusion of the trust property in his gross estate under I.R.C. §§ 2036(a)(2) and 2038.
2. If inclusion was required, whether the amount includible was the entire trust corpus or should be reduced to reflect the daughters’ enforceable income rights under the support standard.

## Decision

- The Ninth Circuit affirmed in part and reversed in part.
- The court held that the decedent’s retained trustee powers constituted powers to affect the time and manner of the daughters’ enjoyment of trust property within the meaning of the estate-inclusion statutes.
- The court did not accept an all-or-nothing approach that would either include the entire corpus without adjustment or exclude the trusts entirely based solely on fiduciary status.
- The court required inclusion of the trust corpus in the gross estate, reduced by the actuarial value of each daughter’s enforceable right to receive income needed for her support under the trust’s ascertainable standard.

## Legal Principles

- I.R.C. § 2036(a)(2) and I.R.C. § 2038 reach inter vivos transfers where, at death, the decedent retained a power (alone or with a nonadverse party) to affect who will possess or enjoy the property, or to alter the time or manner of enjoyment.
- A settlor’s retention of broad discretionary distribution authority as trustee—particularly a power to distribute principal—can be a retained power for purposes of §§ 2036 and 2038 even when held in a fiduciary role.
- Beneficiaries’ rights defined by an objective, ascertainable support standard can be legally enforceable and may be valued actuarially.
- Where such enforceable income rights exist, the includible amount may be adjusted by excluding the actuarial value of those rights, with the remainder of the trust value included.

## Conclusion

Leopold held that the settlor’s continued role as co-trustee with discretionary authority over trust income and an unrestricted power to distribute principal brought the trusts within §§ 2036 and 2038, but that inclusion was reduced by the actuarial value of the daughters’ enforceable rights to income for their support under the trusts’ objective standard.


Leopold v. United States, 510 F.2d 617 (1975)