Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-39

1966-1 C.B. 223

IRS Headnote

An interest passing in trust may qualify for the marital deduction under section 2056 of the Internal Revenue Code of 1954, notwithstanding provisions granting to the trustees administrative powers, including the power to determine the allocation or apportionment of receipts and disbursements between income and corpus, if under the local law applicable to the administration of the trust, reasonable limitations are placed upon the exercise of the powers.

Full Text

Rev. Rul. 66-39

Advice has been requested whether a marital deduction may be allowed under section 2056 of the Internal Revenue Code of 1954 for the value of a bequest in trust, where the trustees were granted certain powers to determine investment and disbursement policy.

The decedent bequeathed to trustees property valued at an amount equal to 50 percent of his adjusted gross estate as defined in section 2056 of the Code, less the value of any other property included in his gross taxable estate, for Federal tax purposes, with respect to which a deduction is allowable under section 2056 of the Code. The trustees were directed to hold and administer the trust and pay the entire net income therefrom to or for the benefit of the decedent's surviving spouse for life, in annual or more frequent installments. The surviving spouse was given the power to appoint by will any part or all of the principal of the trust to her estate.

The trustees of the trust were specifically authorized and empowered, in their sole discretion:

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(e) to retain cash included in any trust fund without investment thereof for such period of time as they shall deem advisable, whenever the trustees shall determine that it is inadvisable to invest such cash because of market conditions or for any other reason;

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(n) to determine whether receipts and disbursements shall be credited to or charged against principal or income, or partly to or against principal and partly to or against income, which determination shall be conclusive upon all persons and corporations interested therein: * * *

Under the State law applicable to the administration of the trust, all exercises of discretion by the trustees are to be made solely in a fiduciary capacity in accordance with the general standards of trust administration imposed upon trustees. In making allocations of receipts and disbursements between principal and income, State law also requires that the trustees apply reasonable accounting principles. Thus, the courts of the State afford a remedy in the case of an allocation by trustees which is contrary to reasonable accounting principles, notwithstanding the authority given to the trustees to make determinations in this regard.

The State law imposes upon the trustees the duty of making good faith investments in the fiduciary capacities. It requires the trustees to invest as prudent men and also to exercise such prudent investment discretion at reasonable intervals. This duty affords the surviving spouse a remedy in the event that the trustees, relying on their authority under paragraph (e) of the will, unreasonably retain assets in the form of uninvested cash.

Section 2056(b)(5) of the Code provides, in part, that, in the case of an interest in property passing from the decedent, if his surviving spouse is entitled for life to all the income from the entire interest, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire interest, no part of the interest so passing shall, for purposes of the marital deduction, be considered as passing to anyone other than the surviving spouse.

Section 20.2056(b)-5(f)(4) of the Estate Tax Regulations provides, in part, as follows:

(4) Provisions granting administrative powers to the trustees will not have the effect of disqualifying an interest passing in trust unless the grant of powers evidences the intention to deprive the surviving spouse of the beneficial enjoyment required by the statute. Such an intention will not be considered to exist if the entire terms of the instrument are such that the local courts will impose reasonable limitations upon the exercise of the powers. Among the powers which if subject to reasonable limitations will not disqualify the interest passing in trust are the power to determine the allocation or apportionment of receipts and disbursements between income and corpus, the power to apply the income or corpus for the benefit of the spouse, and the power to retain the assets passing to the trust.

The administrative powers granted to the trustees under paragraphs (e) and (n) of the will do not evidence an intention to deprive the surviving spouse of the beneficial enjoyment required by the statute. The power of the trustees under paragraph (e) to retain cash without investment is subject to the right of the spouse, under State law, to require that the trustees either make the property productive or convert it within a reasonable time. The powers of the trustees under paragraph (n) to allocate receipts and disbursements between principal and income are subject to reasonable limitations under the applicable State law.

Accordingly, it is held that a marital deduction may be allowed, under section 2056 of the Code, for the value of the bequest in trust in the instant case.