Section 2041 -- Powers of Appointment
UIL Number(s) 2041.02-00
Date: January 15, 1993
Control No.: TR-32-00347-92
Taxpayer's Name: * * *
Taxpayer's ID No.: * * *
Taxpayer's Address: * * *
No conference held: * * *
Date of Death: * * *
LEGEND:
Decedent = * * *
Spouse = * * *
Trust = * * *
Child 1 = * * *
Child 2 = * * *
x = * * *
ISSUE
Whether the decedent who had the power to invade a trust for support, comfort, happiness, and welfare had a general power of appointment under section 2041(a) of the Internal Revenue Code.
FACTS
Decedent died on October 6, 199O, a resident of Texas. Decedent was predeceased by her husband, Spouse. Decedent was the trustee and surviving primary beneficiary of Trust.
Article III of the trust instrument provides as follows:
B. INCOME DISTRIBUTION. During the lifetime of a primary beneficiary, the Trustee is authorized and directed to distribute all of the net income to the primary beneficiary periodically, but at least annually. After the death of [Spouse] and [Decedent], the [Trust] shall terminate and the corpus be distributed as hereinafter provided.
* * * *
The [Trust] shall continue during the lifetime of [Spouse] or his wife, [Decedent] and shall terminate upon the death of the survivor of them, at which time the corpus of said trust shall pass free of trust and in fee simple in equal parts to their children [Child 1] and [Child 2], if living, or to the lineal descendants per stirpes of the deceased beneficiary, and if none, outright and in fee simple to the survivor of them. . . .
* * * *
D. Anything to this will to the contrary notwithstanding, it is my desire and wish that my sons, their wives and lineal descendants never be in want; and should it become necessary in the discretion of the Trustee, taking into account other income and resources said beneficiaries may have, in order to provide for their health, support, maintenance and education in the manner to which they are accustomed at the date of my death, the Trustee is authorized to use so much of the corpus of the trust created by this Article III hereof for their primary benefit as is necessary in order so to provide for the health, support, maintenance and education of [X's] said sons, their wives, and their lineal descendants.
* * * *
F. Regardless of any other provision of this instrument, . . . [w]henever and as often as the Trustee deems it appropriate so to do, in order to carry out the spirit and purpose of this provision, payments to any beneficiary named herein may be discontinued, and, in lieu thereof, the Trustee may expend for the account of such beneficiary and for his or her support, comfort, happiness and welfare, such amounts as would otherwise be paid over directly to such beneficiary.
LAW and ANALYSIS
Section 2041(a)(2) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any 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)(1)(A) of the Code defines the term "general power of appointment" as a power that is exercisable in favor the decedent, his estate, his creditors, or creditors of his estate. A power to consume, invade, or appropriate property for the benefit of the decedent that is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.
Section 20.2041-1(c)(2) of the Estate Tax Regulations states that a power to consume, invade, or appropriate income or corpus, or both, for the benefit of the decedent that is limited by an ascertainable standard relating to health, education, support, or maintenance of the decedent is, by reason of section 2041(b)(1)(A) of the Code, not a general power of appointment. A power is limited by such a standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). The words "support" and "maintenance" are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard. Examples of powers that are limited by the requisite standard are powers exercisable for the holder's "support," "support in reasonable comfort," "maintenance in health and reasonable comfort," "education, including college and professional education," "health," and "medical, dental, hospital and nursing expenses and expenses of invalidism."
The regulation cited above indicates that a power to invade the corpus of a trust is not a general power of appointment if the circumstances under which the power may be exercised are reasonably ascertainable and relate to the possessor's needs for health, education, support, or maintenance. Although the federal statute controls in determining how the powers and rights possessed by the decedent are taxed, state law prevails in determining the nature and extent of the powers and rights possessed by the decedent. Morgan v. Commissioner, 309 U.S. 78 (1940), 1940-1 C.B. 229. Thus, whether Decedent's power to invade the trust corpus is limited by an ascertainable standard relating to health, education support, or maintenance is a matter of state law, in this case the Texas law of wills.
In Lehman v. United States, 448 F.2d 1318 (5th Cir. 1971), the decedent, a Texas resident at her death, was the sole beneficiary of under the will of her husband. The terms of the will authorized her to consume the corpus of the estate whenever she found the income insufficient for support, maintenance, comfort, and welfare. The estate argued that her authority was limited by an ascertainable standard required under section 2041(b)(1)(A) of the Code. The court focusing on the words "comfort" and "welfare" determined that there was no limit on her ability to invade or consume the estate's corpus under Texas law. The court concluded that the decedent's power to invade corpus for her own benefit was not subject to an ascertainable standard, and thus, the decedent possessed a general power of appointment at death. With regard to Texas law, the court stated:
Whatever restrictions Texas courts may impose upon the exercise of this sort of discretion, we believe [the decedent's] authority under the will and under Texas law substantially exceeded the strict limitation requisite for its immunization against Federal estate tax. . . .
* * * *
Appellant has cited no Texas cases, and we have found none, imposing any legal limitation whatever on a life tenant's power to consume for purposes of "support, maintenance, comfort or welfare."
448 F.2d at 1320.
In this case, Decedent was the trustee and income beneficiary of a family trust. The regulations acknowledge that a beneficiary may possess a power of appointment with regard to trust property. Section 20.2041-1(b)(1) of the regulations. Furthermore, the fact that Decedent held the power in a fiduciary capacity as a trustee did not prevent the power from being a general power of appointment. Estate of Jones v. Commissioner, 56 T.C. 35, 41 (1971), aff'd without published opinion, 474 F.2d 1338 (3d Cir. 1973).
Under the trust instrument, Decedent, as trustee, had the power under paragraphs D or F of Article III to distribute to any beneficiary, including herself, principal of the trust. Since Decedent had at her death the power to distribute trust principal to herself, she held a general power of appointment unless the ascertainable standard exception found in section 2041(b)(1)(A) applied. See Estate of Vissering v. Commissioner, 96 T.C. 749 (1991).
Article III, paragraph D, authorized the trustee to use so much of the corpus of the trust as is necessary in order to provide for the health, support, maintenance and education of X's sons, their wives, and their lineal descendants. This paragraph provided Decedent with the limited degree of economic control over the Trust's property that Congress chose to exempt from the estate tax. See Rev. Rul. 77-60, 1977-1 C.B. 202.
Paragraph F of Article III, however, provided Decedent with additional authority to invade corpus. The paragraph began with the phrase "regardless of any other provision of this instrument." Words must be given their ordinary meaning and the expression "regardless of" means "without taking into account; in spite of." Webster's Ninth New Collegiate Dictionary 991 (1986). Therefore, Paragraph F of Article III of the trust instrument superseded other paragraphs in the instrument.
Paragraph F concluded by providing the trustee (Decedent) with the power to invade corpus for "support, comfort, happiness, and welfare as would otherwise be paid over directly to such beneficiary." These powers are very similar to the powers granted to the decedent in Lehman and provided Decedent with the unrestricted and discretionary right to consume the Trust's corpus. Under Texas law, these powers substantially exceed the limited powers that Congress chose to exempt from the estate tax in section 2041(b)(1)(A) of the Code. Lehman v. United States, 448 F.2d 1318 (5th Cir. 1971). Furthermore, section 20.2041-1(c)(2) of the regulations specifically provides that a power to use property for comfort, welfare, or happiness is not limited by the requisite ascertainable standard. Hence, the power provided Decedent in Paragraph F was not limited by an ascertainable standard.
CONCLUSION
The language in Paragraph F of Article III provided Decedent with the power, during her life, to invade Trust's corpus and such power was not limited by an ascertainable standard relating to Decedent's health, education, support, or maintenance. Accordingly, under section 2041(a) of the Code Decedent had a general power of appointment at her death.
A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.