Lober v. United States
Headline: Estate tax upheld for assets in family trusts because decedent kept power to give principal away, making those trust assets part of his taxable estate and limiting heirs’ ability to avoid the tax.
Holding:
- Makes it harder to keep trust assets out of a decedent's estate for tax purposes.
- Requires careful drafting if a donor wants to avoid estate inclusion.
- May increase estate tax bills for heirs who receive distributions after donor's death.
Summary
Background
An executor sued for a refund after the tax collector included money and stocks held in irrevocable trusts in the estate of Morris Lober. Lober had set up three similar trusts for his children in the 1920s, named himself (and later his wife) as trustee, and allowed income to be accumulated until age 21 and principal to be held until age 25. Crucially, he also kept the power to turn over any or all of the principal to his children at any time, even up to his death.
Reasoning
The Court considered whether Lober’s power to give or terminate the trusts at will left the trust property effectively under his control at death. Relying on a prior decision, the Court said that a power to end the trust or give away the principal is the same as a power to change or revoke it. The Court emphasized the practical economic fact that the children had no right to immediate use of the trust property unless the father chose to give it to them. For that reason, the Court agreed with the tax agency and lower court that the trust assets had to be counted in Lober’s gross estate for tax purposes.
Real world impact
The decision makes clear that people who put property into trusts but keep the power to distribute the principal risk having those assets taxed as part of their estate. Executors and heirs can face larger estate tax bills when the donor retains such powers. Drafting choices that preserve donor control will affect tax outcomes.
Dissents or concurrances
Two Justices, Douglas and Jackson, dissented from the Court’s judgment, as noted in the opinion.
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