Internal Revenue Service
Revenue Ruling
Rev. Rul. 76-503
1976-2 C.B. 275
Section 2041 -- Powers of Appointment
Caution: Amplified by Rev. Rul. 77-158
IRS Headnote
General power of appointment; conjunctive control of trust. One third of
the value of a trust created by three siblings, each of whom named an adult
child as one of three trustees who together had complete discretionary
power over the assets of the trust and individually had the right to name a
relative as successor, is includible in a decedent-trustee's estate as
property subject to a general power of appointment under section 2041 of
the Code.
Full Text
Rev. Rul. 76-503
Advice has been requested as to the amount includible in a decedent's gross
estate as the value of property subject to a general power of appointment,
under section 2041 of the Internal Revenue Code of 1954, in the
circumstances described below.
In 1973, three siblings named A, B, and C owned equal interests in their
family business. They decided to place the business in trust for the
benefit of their descendants and with a view toward keeping the family
enterprise intact. Each sibling-grantor designated one of the sibling's
adult children as one of the three trustees of the trust. Under the terms
of the trust, income is to be accumulated and added to principal until the
trust terminates. The trust shall terminate exactly twenty years after the
death of the last surviving descendant of A, B, and C who is living at the
date of creation of the trust.
The trustees are empowered to manage the trust assets in their complete
discretion. They are also empowered to distribute trust property to
whomever they select, including themselves, in such proportions, at such
times, and for such purposes as they see fit. Each trustee is privileged to
designate one of the trustee's relatives to serve as a successor trustee in
the event of the trustee's death or resignation. In the absence of such a
designation, the oldest adult living descendant of the deceased or resigned
trustee who is willing to serve as the new trustee shall occupy the vacant
trustee position.
The decedent, D, was selected by A to be one of the three trustees and D
continued in that position until D's death in 1975.
The question presented is whether any amount is includible, with respect to
the trust described above, in D's gross estate under section 2041 of the
Code as the value of property subject to a general power of appointment, in
view of the fact that the power was held jointly by D and two cotrustees.
Section 2041(a)(2) of the Code requires inclusion in the gross estate of
the value of all property with respect to which the decedent has, at the
time of death, a "general power of appointment" created after October 21,
1942.
Section 2041(b) of the Code provides, in relevant part, the definition of
the term "general power of appointment" as follows:
(b) DEFINITIONS.--For purposes of subsection (a)--
(1) GENERAL POWER OF APPOINTMENT.--The term "general power of appointment"
means a power which is exercisable in favor of the decedent, his estate,
his creditors, or the creditors of his estate; except that--
(A) * * *
(B) * * *
(C) In the case of a power of appointment created after October 21, 1942,
which is exercisable by the decedent only in conjunction with another
person--
(i) If the power is not exercisable by the decedent except in conjunction
with the creator of the power--such power shall not be deemed a general
power of appointment.
(ii) If the power is not exercisable by the decedent except in conjunction
with a person having a substantial interest in the property, subject to the
power, which is adverse to exercise of the power in favor of the
decedent--such power shall not be deemed a general power of appointment.
For the purposes of this clause a person who, after the death of the
decedent, may be possessed of a power of appointment (with respect to the
property subject to the decedent's power) which he may exercise in his own
favor shall be deemed as having an interest in the property and such
interest shall be deemed adverse to such exercise of the decedent's power.
(iii) If (after the application of clauses (i) and (ii)) the power is a
general power of appointment and is exercisable in favor of such other
person--such power shall be deemed a general power of appointment only in
respect of a fractional part of the property subject to such power, such
part to be determined by dividing the value of such property by the number
of such persons (including the decedent) in favor of whom such power is
exercisable.
For purposes of clauses (ii) and (iii), a power shall be deemed to be
exercisable in favor of a person if it is exercisable in favor of such
person, his estate, his creditors, or the creditors of his estate.
Section 20.2041-3(c) of the Estate Tax Regulations provides the following
with respect to jointly held powers of appointment created after October
21, 1942:
* * * * *
(2) Such power is not considered a general power of appointment if it is
not exercisable by the decedent except with the consent or joinder of a
person having a substantial interest in the property subject to the power
which is adverse to the exercise of the power in favor of the decedent, his
estate, his creditors, or the creditors of his estate. An interest adverse
to the exercise of a power is considered as substantial if its value in
relation to the total value of the property subject to the power is not
insignificant. For this purpose, the interest is to be valued in accordance
with the actuarial principles set forth in sec. 20.2031-7 or, if it is not
susceptible to valuation under those provisions, in accordance with the
general principles set forth in sec. 20.2031-1. A taker in default of
appointment under a power has an interest which is adverse to an exercise
of the power. A coholder of the power has no adverse interest merely
because of his joint possession of the power nor merely because he is a
permissible appointee under a power. However, a coholder of a power is
considered as having an adverse interest where he may possess the power
after the decedent's death and may exercise it at that time in favor of
himself, his estate, his creditors, or the creditors of his estate. Thus,
for example, if X, Y, and Z held a power jointly to appoint among a group
of persons which includes themselves and if on the death of X the power
will pass to Y and Z jointly, then Y and Z are considered to have interests
adverse to the exercise of the power in favor of X. Similarly, if on Y's
death the power will pass to Z, Z is considered to have an interest adverse
to the exercise of the power in favor of Y. * * *
(3) A power which is exercisable only in conjunction with another person,
and which after application of the rules set forth in subparagraphs (1) and
(2) of this paragraph constitutes a general power of appointment, will be
treated as though the holders of the power who are permissible appointees
of the property were joint owners of property subject to the power. The
decedent, under this rule, will be treated as possessed of a general power
of appointment over an aliquot share of the property to be determined with
reference to the number of joint holders, including the decedent, who (or
whose estates or creditors) are permissible appointees. Thus, for example,
if X, Y, and Z hold an unlimited power jointly to appoint among a group of
persons, including themselves, but on the death of X the power does not
pass to Y and Z jointly, then Y and Z are not considered to have interests
adverse to the exercise of the power in favor of X. In this case X is
considered to possess a general power of appointment as to one-third of the
property subject to the power.
In the above-quoted portion of section 20.2041-3(c)(2) of the regulations,
the example provided describes Y and Z as having substantial interests, in
the property subject to the jointly held power of appointment, that are
adverse to exercise of the power in favor of the decedent X because the
power will pass to Y and Z upon the death of X. In such a situation, Y and
Z will be able to exercise, by themselves, the power in their own favor
after the death of X, so it is in their economic interest to refuse to
agree to exercise the power in favor of X during X's lifetime. Their
ability to benefit themselves is thus enlarged by the death of X. In such
circumstances, the Code and regulations (quoted above) provide that the
potential survivors of the decedent hold an interest and that it is adverse
to the exercise of the power in favor of the decedent.
Where, however, as in the example in section 20.2041-3(c)(3) of the
regulations, the surviving coholders of the power do not receive, at the
death of the decedent, the entire power of appointment between themselves
but must continue to share the power with the decedent's replacement, they
would not necessarily be in a better economic position after the decedent's
death than they are before the death. In such a situation, the fact that
the coholders may survive the decedent does not mean that they stand to
profit by refusing to exercise the power in favor of the decedent during
the decedent's lifetime. Therefore, the coholders of the power do not have
an interest that is adverse to exercise of the power in favor of the
decedent for purposes of section 2041(b)(1)(c)(ii) of the Code.
If the coholders of the power, who must share their power with the
decedent's replacement upon the death or resignation of the decedent, have
no interest in the subject property other than as coholders of, and
permissible appointees under, the power, those facts alone cannot support
the conclusion that they hold adverse interests. As a result, the
decedent's power meets the definition of a "general power of appointment"
because the coholders of the power in actuality have no substantial
interest in the subject property, which is adverse to the exercise of the
power in favor of the decedent.
If the coholders of the decedent's general power of appointment are, along
with the decedent, permissible appointees of the subject property, the
amount includible in the decedent's gross estate is the value of the
subject property divided by the total number of holders of the power who
are also permissible appointees, pursuant to section 2041(b)(1)(C)(iii) of
the Code and section 20.2041-3(c)(3) of the regulations, quoted above.
Accordingly, in the instant case, one third of the value of the trust (as
of the date of death of D or appropriate alternate valuation date) is
includible in the gross estate of D under section 2041 of the Code as
property subject to a general power of appointment.
