Merrill v. Fahs

Background

A wealthy Florida man agreed the day before his marriage to create a $300,000 irrevocable trust for his new wife and to provide two additional $300,000 trusts by will. In return, the woman gave up most rights she would otherwise have as wife or widow, except for support. The husband reported the trust but claimed no gift tax was owed; the IRS assessed a $99,000 deficiency.

Reasoning

The legal question was whether the wife's release of marital rights counted as "adequate and full consideration in money or money's worth" — in other words, whether her giving up rights was the same as paying money. The Court said the gift tax must be read the same way as the estate tax and that relinquishing marital rights does not qualify as that kind of money's worth. For that reason the transfer is treated as a taxable gift. The Supreme Court affirmed the lower court's judgment against the husband.

Real world impact

The ruling makes similar premarital arrangements vulnerable to gift tax when a spouse gives up marital or survivorship rights in exchange for trusts or payments. That discourages using family settlements to avoid higher taxes and encourages treating such transfers as taxable gifts rather than tax-free exchanges. The case reflects the Court's goal to coordinate gift and estate tax rules to prevent tax avoidance.

Dissents or concurrances

A dissenting Justice said the question was fact-based: a trial court found the present value of the wife's released rights exceeded the payment and that the deal was bona fide, so the transfer should not be taxed as a gift.