Estate of Cristofani v. Commissioner

Brief Fact Summary.

The decedent, Maria Cristofani claimed estate tax exclusions of $10,000 for seven years based on a transfer to an irrevocable trust in favor of her children and grandchildren. The Internal Revenue Service invalidated the exclusions that made the gifts in regard to the interest of her grandchildren on grounds that the exclusions were not based on present transfers of property.

Synopsis of Rule of Law.

Whether a gift is a present interest under Section 2503(b) of the Gift Tax is determined by the ability of the beneficiaries to exercise their right to withdraw a trust corpus and the ability of trustee’s legal right to resist a beneficiary’s demand for payment.

Facts.

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The decedent had five grandchildren. Two of them were the children of Frank Cristofani, the decedent’s son. The remaining three children were the children of Lillian Dawson, her other child.

The decedent created an irrevocable Children’s trust I (Children’s Trust) and Cristonfani and Dawson were the trustees. The Children’s Trust identified the decedent’s children as “primary beneficiaries” and the decedent’s grandchildren were considered as “beneficiaries of secondary importance.”

Cristonfani and Dawson could withdraw an amount not to exceed the amount specified for the gift tax exclusion under section 2503(b) under the Children’s Trust.

During a 15 day period following a contribution to the Children’s Trust, each of the grandchildren possessed same right of withdrawal as described above regarding the withdrawal rights of Frank Cristofani and Lillian Dawson. The rights of the grandchildren vested when their respective parent predeceased the decedent or failed to survive the decedent by more than 120 days.

Approximately six months after Maria Cristofani created the trust, she funded it with an undivided 33 percent interest in a Spring Street property. The value of the property transferred was $70,000. The decedent made the exact same disposition of another 333 percent of the property for the same value in 1985.

Maria Cristofani claimed seven annual exclusions of $10,000 each under section 2503(b) for each year 1984 and 1985. The exclusions were claimed with respect to Maria Cristofani’s grandchildren and her children.

The Respondent, the tax court, allowed the exclusions with respect to Maria Cristofani’s children but disallowed them with respect to her grandchildren for the years 1984 and 1985. The Respondent claimed that exlusios0n which Maria Cristofani claimed with respect to her grandchildren were not present transfers of property. The respondent accordingly increased the petitioner’s adjustable tax gifts in the amount of $100,000.

At the time of the transfers, all of the grandchildren were minors

Issue.

Whether the decedent validly claimed a tax exemption in regard to the transfers in trust for the benefit of her grandchildren because their interests did not vest unless their parents predeceased or failed to survive the decedent by 120 days?

Held.

Yes. The grandchildren received a present transfer of interest that is subject to the tax exemption. The likelihood that a beneficiary will actually receive present enjoyment of the property is not the test for determining whether a present interest was received. It is sufficient that the grandchildren were beneficiaries of the trust who had the right to demand payment from the trust during a 15 day period following the contribution to the trust and the trustee would not have the power to resist such a demand. Furthermore, the fact that the trust provisions were made to obtain the benefit of the annual gift tax exclusion does not have change the result in this case.

Discussion.

The gift tax applies to the transfer because the gift was absolute. Whenever the grandchildren chose to exercise their right, even if under limited circumstances, the trustee did not have any power to refuse their request.