Grossman v. Comm'r of Internal Revenue (In re Estate of Jalkut)

• Decision Date: 29 April 1991
• Docket Number: Docket No. 1770-89.
• Parties: ESTATE OF LEE D. JALKUT, DECEASED, NATHAN M. GROSSMAN, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

96 T.C. 675

96 T.C. No. 27

ESTATE OF LEE D. JALKUT, DECEASED, NATHAN M. GROSSMAN, EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1770-89.

United States Tax Court

Filed April 29, 1991.

In 1971, D created a revocable trust. In the absence of his incapacity, D was the sole permissible beneficiary of the income and principal of the trust during his lifetime. D named himself trustee of the trust. In 1984, D was informed that he had inoperable cancer. In 1984, D made various gift transfers from the revocable trust. In January, 1985, D's physician declared that D would no longer be able to serve as trustee. At that time, substitute trustees were appointed for the revocable trust and additional gift transfers were made from the trust. D died testate in 1985. Held, gift transfers from the revocable trust effected in 1984, although within three years of D's death, are not included in D's gross estate pursuant to I.R.C. sections 2035(d)(2) and 2038(a)(1). Held further, gift transfers from the revocable trust effected in 1985 and within three years of D's death are included in D's gross estate pursuant to I.R.C. sections 2035(d)(2) and 2038(a)(1). John A. Simonetti, for the petitioner.

Vijay S. Rajan, for the respondent.

OPINION

NIMS, CHIEF JUDGE:

Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $55,184.

The issue for decision is whether gift transfers made from the decedent's revocable trust within three years of his death are included in his gross estate pursuant to sections 2035(d)(2) and 2038(a)(1). (Unless otherwise indicated, section references are to sections of the Internal Revenue Code in effect as of the date of the decedent's death. Rules references are to the Tax Court Rules of Practice and Procedure.)

BACKGROUND

This case was submitted fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.

On September 28, 1971, Lee D. Jalkut (decedent) created the Lee D. Jalkut Revocable Trust (revocable trust). The revocable trust was funded by an inter vivos transfer to the trust of decedent's entire estate, including his personal residence, bank and brokerage accounts and publicly-traded stocks.

The decedent appointed himself trustee of the revocable trust and maintained the power to “amend or revoke [the trust] in whole at any time or in part from time to time in any respect * * *.”

On June 27, 1983, the decedent executed an Eleventh Amendment to the trust agreement amending the revocable trust in its entirety. Article III of the trust agreement, relating to payments during the life of the decedent, provided in pertinent part:

During the lifetime of the Grantor, the Trustees shall pay to the Grantor from the trust estate, the income and such sums from the principal as he may request.

If at any time or times the Grantor is unable to manage his affairs, the Trustees may use such sums from the income and principal of the trust estate as the Trustees deem necessary or advisable for the care, support and comfort of the Grantor or his descendants or for any other purpose the Trustees consider to be in the best interests of the Grantor, adding to principal any income not so used. The Trustees are also authorized to make such payments for the benefit of the descendants of the Grantor and such other person or persons as the Grantor had theretofore been accustomed to make (except that no payment in any calendar year to any such descendants or other person shall exceed the maximum amount allowable as an exclusion under Internal Revenue Code Section 2503(b) as amended from time to time), and in addition, may continue to make such payments for philanthropic purposes or otherwise as the Grantor had been accustomed to make prior to such illness or disability; provided, however, that the primary consideration of the Trustees shall at all times be the support and welfare of the Grantor.

The trust agreement contained no further dispositive provisions applicable during the decedent's lifetime.

In 1984, the decedent was diagnosed as having inoperable cancer.

On October 23, 1984, the decedent executed a Thirteenth Amendment to the trust agreement. Article V of the amendment, entitled “Disposition of Trust Estate Upon Death of the Grantor,” provided for the payment of specific gifts and the distribution of personal property from the revocable trust to named individuals and organizations. The remaining assets of the revocable trust were to be held in trust for the benefit of decedent's children.

Article VIII of the Thirteenth Amendment of the trust agreement provided that if the decedent should be unwilling or unable to act as trustee for any reason, then Rosehelen Klein-Fields and Nathan M. Grossman would act as co-trustees of the revocable trust.

On November 14, 1984, the decedent established the Lee Jalkut Family Trust (family trust), an irrevocable trust designed to benefit four of his grandchildren. The family trust was funded by transferring 4,810 shares of a mutual fund with a value of $40,355.90 from the revocable trust.

On December 12, 1984, the decedent established an irrevocable trust for the benefit of Anna S. Jalkut and Jane Jalkut (Jalkut trust). The Jalkut trust was funded by transferring $20,000 from the revocable trust.

On January 25, 1985, the decedent's personal physician wrote to Rosehelen Klein-Fields and Nathan M. Grossman and advised that due to the decedent's failing physical and mental condition, the decedent would no longer be able to act as trustee of the revocable trust. At that time, Rosehelen Klein-Fields and Nathan M. Grossman assumed the duties of co-trustees of the revocable trust.

On January 25, 1985, the co-trustees made the following transfers from the revocable trust:

+------------------------+
                ¦Donee          ¦Amount  ¦
                +---------------+--------¦
                ¦Family trust   ¦$40,000 ¦
                +---------------+--------¦
                ¦Jalkut trust   ¦20,000  ¦
                +---------------+--------¦
                ¦Michael Jalkut ¦10,000  ¦
                +---------------+--------¦
                ¦Theresa Jalkut ¦10,000  ¦
                +------------------------+
                

The parties apparently agree that the family trust and the Jalkut trust were funded with present interest gifts within the annual exclusion limit in both 1984 and 1985. See sections 2503(b) and (c). Consequently, we need not inquire further as to the status of these gifts.

The decedent died testate on February 6, 1985.

On November 4, 1985, Nathan M. Grossman filed a Federal estate tax return on behalf of the decedent's estate. The estate tax return reported a total gross estate of $1,152,139. Schedule G of the estate tax return reported no transfers included in the gross estate under sections 2035 or 2038.

Respondent determined a deficiency in petitioner's estate tax of $55,184 based on a finding that the 1984 and 1985 transfers totaling $140,356 from the revocable trust to the family trust, to the Jalkut trust and to Michael and Theresa Jalkut should have been included in the decedent's gross estate pursuant to sections 2035 and 2038.

The petition in this case was filed by Nathan M. Grossman in his capacity as the executor of the Estate of Lee D. Jalkut. At the time of the filing of the petition herein, Nathan M. Grossman resided in Deerfield, Illinois.

DISCUSSION

The Federal estate tax imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2001; U.S. Trust Co. v. Helvering, 307 U.S. 57, 80 (1939). The taxable estate is defined in section 2051 as the gross estate less deductions. Pursuant to sections 2031 and 2033, the value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death. Further, under a network of statutory rules, the gross estate includes transfers effected during the lifetime of the decedent. See generally sections 2035 through 2038 and 2042 (transfer provisions). The transfer provisions pertinent to the case at hand are section 2035, relating to gifts made within three years of the death of the decedent, and section 2038, relating to revocable transfers.

Section 2035(a) generally provides for the inclusion in the gross estate of any gifts made by the decedent within three years of the decedent's death. Section 2035(b)(2), however, excepts from the general rule gifts for which the decedent was not required to file a gift tax return pursuant to section 6019. See section 2503(b) defining annual exclusion gifts. For transfers made after December 31, 1981, and thus applicable to the transfers here under consideration, section 2503(b) permits a donor to exclude the first $10,000 in annual gifts to each donee.

The application of section 2035(a) is further limited by section 2035(d) which was added to the law by section 424 of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 317, and section 104(d)(2) of the Technical Corrections Act of 1982, Pub. L. 97-448, 98 Stat. 2383. Section 2035(d) provides in pertinent part:

SEC. 2035(d) DECEDENTS DYING AFTER 1981. --

(1) IN GENERAL. -- Except as otherwise provided in this subsection, subsection (a) shall not apply to the estate of a decedent dying after December 31, 1981.

(2) EXCEPTIONS FOR CERTAIN TRANSFERS. -- Paragraph (1) of this subsection and paragraph (2) of subsection (b) shall not apply to a transfer of an interest in property which is included in the value of the gross estate under section 2036, 2037, 2038, or 2042 or would have been included under any of such sections if such interest had been retained by the decedent.

In sum, section 2035(d)(1) provides that the general rule of section 2035(a) shall not apply to the estates of decedents dying after December 31, 1981. Thus, gifts generally are not included in the gross estates of such decedents. However, section 2035(d)(2) mandates that subsection (d)(1) will be disregarded and that the gross estate will take into account the value of...