to 'enjoyment * * * of the property.'
There is recent authority in this Circuit for the proposition that the mere receipt of income is equivalent to enjoyment of the property producing the income.
'If, as was said in Commissioner v. Estate of Church, supra, 335 U.S. at page 645, 69 S. Ct. 322, the most valuable property attribute of stocks is their income, it is no less true that one of the most valuable incidents of income-producing real estate is the rent which it yields. He who receives the rent in fact enjoys the property. Enjoyment as used in the death tax statute is not a term of art, but is synonymous with substantial present economic benefit. * * * Under this realistic point of view the enjoyment of the properties which the decedent conveyed to his children was continued in decedent by prearrangement and ended only when he died.' McNichol's Estate v. Commissioner, 3 Cir., 1959, 265 F.2d 667, 671.
In the McNichol case, a decedent executed trust deeds conveying to his children income-producing real estate with no reservation of interests in the realty or rents to him, but he entered into contemporaneous oral agreements with his children under which he was entitled to receive the rents until he died, and he actually did receive all of the income until he died. The Court of Appeals held that the decedent enjoyed the property in fact until death and that, therefore, it should be included in his gross estate.
Except for the presence of the unenforceable oral agreement between the settlor and his children, McNichol is flat authority for the proposition that the actual fact of uninterrupted receipt of all income, arising from the trust property amounts to a retention of 'enjoyment' within the meaning of the statute. But the McNichol court apparently had doubts whether the receipt of all income from the property alone is sufficient, without the oral agreement, to satisfy the 'enjoyment' clause. The court said:
'We intimate no opinion as to whether we would have followed these decisions if, in the case before us, the decedent had received the rents following the transfer without an agreement with his children that he might do so.' 265 F.2d at page 671, Note 6.
In the case at bar, there is no direct evidence of an oral agreement between trustee and settlor. This Court shares doubts intimated by the Court of Appeals whether such an oral agreement is necessary before there can be 'enjoyment' within the meaning of the statute. Section 811(c)(1)(B)(i) says that enjoyment must be 'retained' by the settlor. The word 'retained' implies that the settlor has not given something away at the time he signed the trust agreement. To 'retain' enjoyment does not necessarily mean retention of a legally enforceable 'right' to income, but it does suggest the need for prearrangement, or informal agreement comparable to the oral agreement in the McNichol case, and not just receipt of the income alone.
However, the court believes that the necessary prearrangement between settlor and trustee can be inferred from the evidence in this case. It will be recalled that in 1936, the settlor filed a gift tax return attempting to exclude from a schedule of assets transferred by the Trust the value of her retained life interest. Thus, in 1936, the settlor thought she had a life interest in the income from the Trust. In actual fact, the settlor did receive the income for life. These two circumstances coupled together create a strong inference that there existed an understanding between the settlor and the trustee that the trustee's so-called 'discretion' would be exercised exclusively in favor of the settlor for her life. The court, therefore, infers that an informal prearrangement comparable to that made in the McNichol case was made, and that settlor 'enjoyed' the property within the meaning of the statute. Consequently, the Trust corpus must be included in the decedent settlor's estate according to law.
The court is aware that the holding in this case places a heavy burden upon the estate of a settlor of a discretionary trust to avoid the inference of secret prearrangements with the trustee when the settlor has in fact received all income during his life. However, any other holding would permit easy evasion of the estate tax. Most settlors would have no trouble finding a trustee friendly to his interests who could be counted on to honor informal prearrangements to exercise 'absolute discretion' over income payments in favor of the settlor during his life. The existence of such prearrangements is difficult at best for the government to prove. Therefore, the court must go beyond the form in which the agreement is drawn, McNichol's Estate v. Commissioner, 3 Cir., 1959, 265 F.2d 667, 673, and, looking to the substance of the matter, draw reasonable inferences from the evidence that such a prearrangement did exist.
The holding here does not necessarily cover facts where, in the exercise of the trustee's 'discretion', the settlor has received the entire income for life but there is no evidence from which any prearrangement can be inferred; or where the settlor has received only a part of the income from the trust property, and at irregular intervals and in irregular amounts; or under any other circumstances in which the election of the trustee to pay income regularly to the settlor apparently was not foreordained at the time of the execution of the trust. However, the fair conclusion in the case at bar is that the settlor 'retained the enjoyment' of the property within the meaning of Section 811(c)(1)(B)(i) of the statute. McNichol's Estate v. Commissioner, 3 Cir., 1959, 265 F.2d 667.
While some of the language in In re Uhl's Estate, 7 Cir., 1957, 241 F.2d 867, arguably may conflict with the conclusion here reached, it should be borne in mind that the facts were quite different in that case. True, the Trust instrument gave absolute discretion to the trustee over income payments in excess of $ 100 monthly. But the trustee apparently exercised his discretion in favor of the settlor in only two out of the eight years of the Trust's duration, and during these two years the discretionary payments were irregular and were never paid directly to the settlor, but indirectly, for medical expenses. See the table of income payments set out in Uhl's Estate v. Commissioner, 1955, 25 T.C. 22, 23.
Order in accordance with this opinion.
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