Trusts and Estates

Badgley v. United States

Cite as No. 18-16053
Filed April 28, 2020
U.S. Court of Appeals, 9th Cir.

By Golnaz Yazdchi
Sheppard Mullin Richter & Hampton LLP

Headnote:  Federal Estate Tax – Inclusion of GRAT Interests

Summary:  The full date-of-death value of a GRAT is includable in a decedent’s gross estate for federal estate tax purposes, unless the grantor divests herself of possession of, enjoyment of, or a right to income from the property, leaving no string tying her to the property. 

Decedent Patricia Yoder created a Grantor Retained Annuity Trust (“GRAT”), transferring her partnership interest in a family-run company to the GRAT for the ultimate benefit of her daughters, while retaining a right to an annuity paid from the GRAT for 15 years.  Yoder died before the 15-year annuity period expired.  Following Yoder’s death, the executor filed a federal estate tax return reporting the total date-of-death value of the GRAT’s assets as part of Yoder’s gross estate, and paid estate taxes accordingly.  The executor thereafter brought suit asserting that Yoder’s estate overpaid estate taxes based on the inclusion of the entire date-of-death value of the GRAT.  The executor argued that only the net present value of the unpaid annuity payments should have been included.  The district court held that the full date-of-death value of the GRAT was includable, because Yoder retained both a right to income from the property and a continued enjoyment from the property.

Held: Affirmed.  Although annuities are not specifically mentioned in the definition of the value of a decedent’s estate by statute, the full date-of-death value of a decedent’s GRAT is includable in the gross estate.  The purpose of the statute defining the value of the gross estate is to include in the estate transfers that are essentially testamentary.  There are three “strings” tying a grantor to property transferred during life, which are instructive in determining whether property is includable in the gross estate for federal estate tax purposes: possession, enjoyment, and a right to income therefrom.  To avoid inclusion, a grantor must divest herself of possession, enjoyment, and income from the property, and the beneficiaries’ interest must take effect prior to the grantor’s death.  When a grantor derives substantial present economic benefit from the property, she retains the enjoyment of the property and it is includable in the value of the gross estate.  Retention of an annuity flowing from a GRAT requires inclusion in the gross estate.  Yoder’s annuity stemmed from a property interest placed in the GRAT, so she reserved enjoyment of that interest during her lifetime, and it was not transferred to the beneficiaries before her death.

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