Internal Revenue Service
Revenue Ruling
Rev. Rul. 79-353
1979-2 C.B. 325
Section 2036 -- Retained Life Estates
Caution: Revoked by Rev. Rul. 95-58
Modified by Rev. Rul. 81-51
IRS Headnote
Transfers; trust; power to appoint successor trustee. A decedent created an
irrevocable inter vivos trust. The trust instrument provided that the
decedent must not appoint himself trustee, that the corporate trustee might
distribute trust income and principal to decedent's adult children without
limitation, that after the children died the remaining trust principal and
undistributed income would be distributed to decedent's grandchildren, and
that decedent would retain a life power to replace the corporate trustee
without cause. The value of the undistributed trust principal and
accumulated income are includible in the decedent's gross estate under
sections 2036 and 2038 of the Code.
Full Text
Rev. Rul. 79-353
ISSUE
Is the value of property transferred in trust includible in the
decedent-grantor's gross estate under section 2036(a)(2) of the Internal
Revenue Code or section 2038(a)(1) when the grantor has retained the power
to remove the corporate trustee and appoint another corporate trustee in
the circumstances described below?
FACTS
In 1972, the decedent, D, created an irrevocable trust. The trust
instrument provides that D may not appoint himself trustee. The trustee is
authorized to distribute trust income and principal to D's adult children
at such times and in such amounts as the trustee deems proper without
limitation. Remaining trust principal and undistributed income are to be
paid over to D's grandchildren after all D's children have died. D had the
right, for life, to remove the corporate trustee without cause and
substitute another corporate trustee.
When D died in 1977, the original corporate trustee was still serving, and
the value of the trust principal, none of which had been distributed, and
the accumulated income, was 315x dollars.
LAW AND ANALYSIS
Section 2036(a)(2) of the Code provides that the value of the gross estate
shall include the value of any interest in property transferred by a
decedent where the decedent has retained for life the right, alone or in
conjunction with any person, to designate the persons who shall possess or
enjoy the property or the income therefrom.
Section 2038(a)(1) of the Code provides that the value of the gross estate
shall include the value of all property transferred by the decedent where
the enjoyment of the property was subject to change at his death through
the exercise of a power by the decedent, alone or in conjunction with any
person, to alter, amend, revoke, or terminate.
The power to distribute income and principal unlimited by an ascertainable
standard, when reserved by a decedent-grantor, will result in inclusion of
the subject property in his gross estate under sections 2036 and 2038 of
the Code, and this is true regardless of whether he retains this power in
the capacity of trustee. United States v. O'Malley, 383 U.S. 627 (1966);
Walter v. United States, 341 F.2d 182 (6th Cir. 1965). Sections
20.2036-1(b)(3) and 20.2038-1(a) of the regulations.
Under sections 20.2036-1(b)(3) and 20.2038-1(a)(3) of the regulations,
reservation of the power by the grantor to appoint himself trustee is
equivalent to reservation by him of the trustee's powers. Therefore, even
where the decedent has not actually appointed himself trustee, a
determination that he has the power to do so, where the trustee has
significant powers over trust property, will result in inclusion of the
trust property in his gross estate under section 2036 or 2038. See e.g.,
Estate of Farrel v. United States, 553 F. 2d 637 (Ct. Cl. 1977); Mathey v.
United States, 491 F. 2d 481 (3d Cir. 1974); Van Beuren v. McLoughlin, 262
F. 2d 315 (1st Cir. 1958); cert. denied, 359 U.S. 991 (1959); Loughridge's
Estate v. Commissioner, 183 F. 2d 294 (10th Cir. 1950), cert. den., 340
U.S. 830 (1950); Rev. Rul. 73-21, 1973-1 C.B. 405; Rev. Rul. 55-393, 1955-1
C.B. 448.
In Rev. Rul. 73-142, 1973-1 C.B. 405, the settlor-decedent reserved an
unrestricted power to remove the trustee at any time and appoints a new
trustee, with no express limitation on so appointing the settlor. In a
non-adversary proceeding, a lower state court incorrectly concluded that
the decedent had reserved the right to remove and appoint a trustee only
once. The decedent, before death, did remove the original trustee and
appointed another. Rev. Rul. 73-142 considers the fact situation in the
light of Commissioner v. Estate of Bosch, 387 U.S. 456 (1967); Ct. D. 1915,
1967-2 C.B. 337, and concludes that the decedent-settlor's reserved powers
were extinguished before death because the time for appeal had lapsed and
the judgment was final as to the parties. Since the decedent-settlor
possessed no powers at death, the trust property was not includible under
section 2036 or section 2038 of the Code.
Rev. Rul. 77-182, 1977-1 C.B. 273, considers a situation wherein the
decedent-settlor retained a power to appoint a successor corporate trustee
only if the trustee resigned or was removed by judicial process. In holding
that none of the trust property is includible in the decedent-settlor's
gross estate under section 2036(a) of the Code, Rev. Rul. 77-182 concludes
that the settlor's reserved power was not a power to remove the trustee
which would have been regarded as a retention of the trustee's powers.
Thus, reservation by the settlor of the power to remove the trustee at will
and appoint another trustee is equivalent to reservation of the trustee's
powers. In Corning v. Commissioner, 24 T.C. 907 (1955), aff'd per curiam,
239 F. 2d 646 (6th Cir. 1956), an income tax case involving the principles
of Helvering v. Clifford, 309 U.S. 331 (1940), applicable prior to the
enactment of the Internal Revenue Code of 1954, the settlor granted the
trustee the power to change the beneficial interests of the beneficiaries.
The settlor reserved the right to remove the trustee without cause and
replace the trustee with another trustee. Holding that the trust income was
includible in the settlor's gross income, the court stated:
[P]etitioner's continued power to substitute trustees without cause, when
considered together with the power of the trustee to change the beneficial
enjoyment of income or corpus of the trust, gave to petitioner such a
degree of dominion and control over the trust that its income must be
taxable to him. . . .
[P]etitioner argues that . . . he is precluded from appointing himself as
trustee and would be permitted to appoint only a corporate trustee in the
event that he chose to substitute trustees. . . . In any event, petitioner
could substitute an independent corporate trustee after first ascertaining
that such trustee would follow his directions. Should this corporate
trustee subsequently fail to follow his instructions, petitioner could then
replace it with another. Petitioner's power to substitute trustees was
subject to no restrictions and, in practical terms, gave him the broad
powers possessed by the trustee. 24 T.C. at 914-915.
In Van Beuren v. McLoughlin, supra, the trustee was empowered to change the
income and remainder interests of the beneficiaries, and the settlor
reserved the power to remove and substitute the trustee at will. The court
held that the settlor possessed the powers of the trustee for federal
estate tax purposes. Incorporating passages from Corning, the court stated,
"The grantor thus reserved an unrestricted (although unused) power to
remove a trustee and replace him. This is an extremely potent power even if
she could not substitute herself. . . ."
HOLDING
The value of the property transferred in trust, 315x dollars, is includible
in D's gross estate under sections 2036(a)(2) and 2038(a)(1) of the Code.
