REVENUE RULE 95-58
1995-2 C.B. 191, 1995-36 I.R.B. 16
Internal Revenue Service
Revenue Ruling
Released: August 4, 1995
Published: September 5, 1995
TRANSFERS; TRUST; POWER TO APPOINT SUCCESSOR TRUSTEE
Section 2036. Transfers With Retained Life Estate, 26 CFR 20.2036-1:
Transfers with retained life estate.
Transfers; trust; power to appoint successor trustee. A decedent-grantor's
reservation of an unqualified power to remove a trustee and appoint an
individual or corporate successor trustee that is not related or
subordinate to the decedent (within the meaning of section 672(c) of the
Code) is not considered a reservation of the trustee's discretionary powers
of distribution over the property transferred by the decedent-grantor to
the trust. Rev. Ruls. 79-353 and 81-51 revoked: Rev. Rul. 77-182 modified.
Section 672.--Trust Income, Deductions, and Credits Attributable to
Grantors and Other as Substantial Owners
If a grantor makes a transfer to a trust and reserves an unqualified power
to remove a trustee and appoint an individual or corporate successor
trustee that is not related or subordinate to the grantor (within the
meaning of s 672 (c) of the Code), is the reservation of the power
tantamount to a reservation by the grantor of the trustee's discretionary
powers of distribution?
Section 2038.--Revocable Transfers, 26 CFR 20.2038-1: Revocable transfers
If a decedent-grantor makes a transfer to a trust and reserves an
unqualified power to remove a trustee and appoint an individual or
corporate successor trustee that is not related or subordinate to the
decedent-grantor (within the meaning of s 672(c) of the Code), is the
reservation of the power tantamount to a reservation by the
decedent-grantor of the trustee's discretionary powers of distribution?
Section 2511.--Transfers in General, 26 CFR 25.2511-2: Cessation of donor
dominion and control.
If a donor-grantor makes a transfer to a trust and reserves an unqualified
power to remove a trustee and appoint an individual or corporate successor
trustee that is not related or subordinate to the donor-grantor (within the
meaning of s 672(c) of the Code),
is the reservation of the power tantamount to a reservation by the
donor-grantor of the trustee's discretionary powers of distribution?
Transfers; trust; power to appoint successor trustee. A decedent-grantor's
reservation of an unqualified power to remove a trustee and appoint an
individual or corporate successor trustee that is not related or
subordinate to the decedent (within the meaning of section 672(c) of the
Code) is not considered a reservation of the trustee's discretionary powers
of distribution over the property transferred by the decedent-grantor to
the trust. Rev. Ruls. 79-353 and 81-51 revoked; Rev. Rul. 77-182 modified.
The Internal Revenue Service has reconsidered whether a grantor's
reservation of an unqualified power to remove a trustee and appoint a new
trustee (other than the grantor) is tantamount to a reservation by the
grantor of the trustee's discretionary powers of distribution. This issue
is presented in Rev. Rul. 79-353, 1979-2 C.B. 325, as modified by Rev. Rul.
81-51, 1981-1 C.B. 458. An analogous issue is presented in Rev. Rul.
77-182, 1977-1 C.B. 273. The reconsideration is caused by the recent court
decisions in Estate of Wall v. Commissioner, 101 T.C. 300 (1993), and
Estate of Vak v. Commissioner, 973 F.2d 1409 (8th Cir.1992), rev'g T.C.
Memo 1991-503.
Section 2036(a) of the Internal Revenue Code, in general, provides that the
value of the gross estate includes the value of all property to the extent
of any interest in the property that was transferred by the decedent (for
less than adequate consideration) if the decedent has retained for life the
right, alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom.
Section 2038(a)(1), in general, provides that the value of the gross estate
includes the value of all property to the extent of any interest in the
property that was transferred by the decedent (for less than adequate
consideration) if the decedent held a power, exercisable alone or in
conjunction with any person, to change the enjoyment of the property
through the exercise of a power to alter, amend, revoke, or terminate.
Section 25.2511-2(c) of the Gift Tax Regulations provides that a gift of
property is incomplete to the extent that the donor reserves the power to
revest the beneficial title to the property in himself or herself or the
power (other than a fiduciary power limited by a fixed or ascertainable
standard) to name new beneficiaries or to change the interest of the
beneficiaries among themselves. See also s 25.2511-2(f).
For purposes of ss 2036 and 2038, it is immaterial in what capacity the
power was exercisable by the decedent. Thus, if a decedent transferred
property in trust while retaining, as trustee, the discretionary power to
distribute the principal and income, the trust property will be includible
in the decedent's gross estate under ss 2036 and 2038. The regulations
under ss 2036 and 2038 explain that a decedent is regarded as having
possessed the powers of a trustee if the decedent possessed an unrestricted
power to remove the trustee and appoint anyone (including the decedent) as
trustee. Sections 20.2036-1(b)(3) and 20.2038-1(a) of the Estate Tax
Regulations.
Rev. Rul. 79-353 concludes that, for purposes of ss 2036(a)(2) and
2038(a)(1), the reservation by a decedent-settlor of the unrestricted power
to remove a corporate trustee and appoint a successor corporate trustee is
equivalent to the decedent-settlor's reservation of the trustee's
discretionary powers.
Rev. Rul. 81-51 modifies Rev. Rul. 79-353 so that it does not apply to a
transfer or addition to a trust made before October 29, 1979, the
publication date of Rev. Rul. 79-353, if the trust was irrevocable on
October 28, 1979.
Rev. Rul. 77-182 concludes that a decedent's power to appoint a successor
corporate trustee only in the event of the resignation or removal by
judicial process of the original trustee did not amount to a power to
remove the original trustee that would have endowed the decedent with the
trustee's discretionary control over trust income.
In Estate of Wall, the decedent had created a trust for the benefit of
others and designated an independent corporate fiduciary as trustee. The
trustee possessed broad discretionary powers of distribution. The decedent
reserved the right to remove and replace the corporate trustee with another
independent corporate trustee. The court concluded that the decedent's
retained power was not equivalent to a power to affect the beneficial
enjoyment of the trust property as contemplated by ss 2036 and 2038. See
also Estate of Headrick v. Commissioner, 93 T.C. 171 (1989), aff'd 918 F.2d
1263 (6th Cir.1990).
In Estate of Vak, the decedent had created a trust and appointed family
members as the trustees with discretionary powers of distribution. The
decedent reserved the right to remove and replace the trustees with
successor trustees who were not related or subordinate to the decedent. The
decedent was also a discretionary distributee. Three years later, the trust
was amended to eliminate both the decedent's power to remove and replace
the trustees and the decedent's eligibility to receive discretionary
distributions.
The issue considered in Estate of Vak was whether the decedent's gift in
trust was complete when the decedent created the trust and transferred the
property to it or, instead, when the decedent relinquished the removal and
replacement power and his eligibility to receive discretionary
distributions. The Eighth Circuit concluded that the decedent had not
retained dominion and control over the transferred assets by reason of his
removal and replacement power. Accordingly, the court held that under s
25.2511-2(c) the gift was complete when the decedent created the trust and
transferred the assets to it.
In view of the decisions in the above cases, Rev. Rul. 79-353 and Rev. Rul.
81-51 are revoked. Rev. Rul. 77-182 is modified to hold that even if the
decedent had possessed the power to remove the trustee and appoint an
individual or corporate successor trustee that was not related or
subordinate to the decedent (within the meaning of s 672(c)), the decedent
would not have retained a trustee's discretionary control over trust
income.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 79-353 and Rev. Rul. 81-51 are revoked. Rev. Rul. 77-182 is
modified.
DRAFTING INFORMATION
The principal author of this revenue ruling is Deborah Ryan of the Office
of Assistant Chief Counsel (Passthroughs and Special Industries). For
further information regarding this revenue ruling contact Deborah Ryan on
(202) 622- 3090 (not a toll-free call).
Rev. Rul. 95-58, 1995-2 C.B. 191, 1995-36 I.R.B. 16
