Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-56

1969-1 C.B. 224

IRS Headnote

Examples are provided to illustrate the principle that administrative powers or directions conferred on fiduciaries under wills, inter vivos trusts, or by applicable local law do not result in the disallowance or diminution of the marital deduction under sections 2056 and 2523 of the Code.

Full Text

Rev. Rul. 69-56

Advice has been requested as to the effect that various directions to, or powers conferred upon, an executor or trustee (hereinafter called the "fiduciary") under a will or inter vivos trust instrument (hereinafter called the "governing instrument") or by applicable local law have on the estate or gift tax marital deduction allowable under sections 2056 and 2523 of the Internal Revenue Code of 1954, for an interest transferred in trust for the benefit of the transferor's spouse.

In each of the several instances in which advice has been sought, the transferor has transferred, either in lifetime or by will, property to a trust. In each case, under the governing instrument: (a) the fiduciary is directed to pay, at least annually, all of the net income from the trust to the transferor's wife for life, and (b) the wife is given the testamentary power, exercisable by her alone and in all events, to appoint the entire trust principal to her estate. The various situations may be illustrated by the examples set forth below.

Example 1

The governing instrument confers upon the fiduciary any one or more of the following powers or directions pertaining to the allocation or apportionment of receipts and expenditures to or between income and principal:

1. To apportion or not to apportion, between successive beneficial interests, interest income and expense, rental income and expense, real estate taxes, or other items of periodic income and expense. (Under applicable State law, the fiduciary's determination must be made so as to balance fairly the interests of successive beneficiaries.)

2. To treat ordinary cash dividends as income when received, regardless of the declaration date or record date.

3. To treat extraordinary cash dividends as principal.

4. To treat stock dividends as principal.

5. To treat capital gains dividends of regulated investment companies as principal.

6. To charge to income or principal, executor's or trustee's commissions, legal and accounting fees, custodian fees, and similar administration expenses.

7. To maintain reasonable reserves for depreciation, depletion, amortization, and obsolescence.

8. With respect to interest-bearing bonds and like obligations, to amortize or not to amortize both premium and discount.

The exercise of these powers or the execution of these directions may in some instances be authorized by State law. In other instances there may be no State law authorizing such powers or directions. In still other instances State law may deny such powers or directions except insofar as such powers or directions are set forth in the governing instrument.

The governing instrument contains no provision directing the fiduciary to favor other beneficiaries of the trust over the surviving spouse.

Example 2

The governing instrument confers upon the fiduciary a general power to determine the manner in which receipts and expenditures shall be allocated or apportioned to or between income and principal. Under applicable State law the fiduciary's determination must be made so as to balance fairly the interests of the income beneficiary and the remainderman.

Example 3

The governing instrument does not contain any provisions pertaining to the allocation or apportionment of receipts and expenditures to or between income and principal.

Example 4

The governing instrument confers upon the fiduciary the following administrative powers not pertaining to the allocation or apportionment of receipts and expenditures:

1. To retain cash included in any trust fund without investment thereof for such period of time as the fiduciary shall deem advisable, whenever he shall determine that it is inadvisable to invest such cash.

2. To make distributions in cash, or in kind at current values, or partly in each, allocating specific assets to particular distributees, and for such purposes to make reasonable determinations of current values.

The provisions of the governing instrument do not preclude the local court having jurisdiction from imposing reasonable limitations upon the exercise of such powers in order to protect the interest transferred to the spouse.

Directions to, or powers conferred upon, a fiduciary by the governing instrument do not result in the disallowance or diminution of the marital deduction for estate and gift tax purposes unless the execution of such directions would or the exercise of such powers could, cause the spouse to have less than substantially full beneficial enjoyment of the particular interest transferred. See section 20.2056(b)-5(f)(1) of the Estate Tax Regulations and section 25.2523(e)-1(f)(4) of the Gift Tax Regulations. The application of this principle to the four examples described results in the conclusions set forth below.

In Example 1, consideration was given to a governing instrument conferring various powers or directions upon a fiduciary relating to the allocation or apportionment of receipts and expenditures to or between income and principal, or between successive beneficial interests. These powers or directions are within the general scope of, and analogous to, the powers specifically referred to in sections 20.2056(b)-5(f)(2), (3), and (4) of the Estate Tax Regulations and sections 25.2523(e)-1(f)(2), (3) and (4) of the Gift Tax Regulations. As provided in these regulations, such powers or directions do not evidence an intention to deprive the surviving spouse of the beneficial enjoyment required by the statute. This is so regardless of whether such powers or directions would be authorized by State law if not set forth in the governing instrument. Accordingly, it is held that the inclusion of such powers or directions in the governing instrument does not result in the disallowance or diminution of the marital deduction.

In Example 2, a general power conferred upon a fiduciary to determine the manner in which receipts and expenditures should be allocated or apportioned to or between income and principal was considered. This power is substantially the same as the power granted by paragraph (n) of the instrument discussed in  Revenue Ruling 66-39, C.B. 1966-1, 223. That ruling reflected a situation where applicable State law required that the trustees apply reasonable accounting principles in allocating receipts and disbursements between principal and income. In Example 2 of the instant ruling, applicable State law requires that the fiduciary's determination must be made so as to balance fairly the interests of the income beneficiary and the remainderman. In both instances, the applicable State law illustrates the general limitation imposed by the law of trusts upon the exercise of such a power, namely, that all exercises of discretion by the fiduciary are to be made solely in a fiduciary capacity in accordance with the general standards of trust administration imposed upon fiduciaries. Rev. Rul. 66-39. This general limitation under State law brings the instant power within the scope of the general power to allocate or apportion receipts and disbursements set forth in section 20.2056(b)-5(f)(4) of the Estate Tax Regulations and section 25.2523(e)-1(f)(4) of the Gift Tax Regulations. Accordingly, it is held that the grant of such power in and of itself does not evidence the intention to deprive the surviving spouse of the beneficial enjoyment required by the statute, and does not result in the disallowance or diminution of the marital deduction.

In Example 3, the governing instrument contains no provisions as to the allocation or apportionment of receipts and expenditures to or between income and principal. Thus, the fiduciary is required to make such allocation and apportionment in the manner provided by State law. Section 20.2056(b)-5(f)(2) of the Estate Tax Regulations provides that if the overall effect of a trust is to give to the surviving spouse such enforceable rights as will preserve to her the degree of enjoyment which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life beneficiary of a trust, it is immaterial whether that result is effected by rules specifically stated in the trust instrument, or, in their absence, by the rules for the management of the trust property and the allocation of receipts and expenditures supplied by the State law. Similar provisions are contained in section 25.2523(e)-1(f)(2) of the Gift Tax Regulations. Accordingly, it is held that the fact of reliance solely upon such State law to guide the fiduciary in the management of the trust property does not result in the disallowance or diminution of the marital deduction.

In Example 4, consideration was given to two powers not pertaining to the allocation or apportionment of receipts and expenditures. The first of these powers, relating to the power to retain cash without investment thereof is substantially the same as the power granted by paragraph (e) of the instrument discussed in Revenue Ruling 66-39, the principles and conclusion of which apply for gift tax purposes as well as for estate tax purposes. The second power is a power conferred upon the fiduciary to make distribution and to make determinations of value as of the date of distribution. Where, as here, the governing instrument does not preclude the local court having jurisdiction from imposing reasonable limitations on the exercise of the power in order to protect the interest transferred to the spouse, such a power does not cause the spouse to have less than substantially full beneficial enjoyment of the interest transferred. Therefore, it is held that the inclusion in the governing instrument of either or both of the administrative powers enumerated in Example 4 does not result in the disallowance or diminution of the marital deduction.