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 Rev. Rul. 77-30

1977-1 C.B. 291

Section 2056 -- Marital Deduction

IRS Headnote

Marital deduction; life estate with power to use and dispose of; Virginia. A bequest of a life estate, not in trust, in favor of the surviving spouse coupled with the unrestricted power to consume and dispose of the property, with any remainder at the death of the spouse passing to others specified in the will, is an unrestricted power of appointment under Virginia law and the estate is entitled to a marital deduction under section 2056(b)(5) of the Code for the value of the bequest.

Full Text

Rev. Rul. 77-30

Advice has been requested whether a bequest to decedent's surviving spouse of a life estate (not in trust) coupled with an unrestricted power to consume and dispose of the property falls within the scope of section 2056(b)(5) of the Internal Revenue Code of 1954, under the circumstances described below.

The decedent, A, a lifelong resident of Virginia, died testate on March 10, 1975, survived by a spouse, B, and two children, C and D. A's will contained the following pertinent provision:

I devise and bequeath all my personal estate, both tangible and intangible, to my spouse, B, for life with the full power and right of B to sell, use and dispose of as much of the corpus of said personal estate as well as the income therefrom as B may desire, and whatever remains of my said personal estate after the death of my said spouse, B, the same shall go to my two children, C and D, equally, share and share alike.

Section 2056(b)(1) of the Code excludes terminable interests from the benefits of the marital deduction provided by section 2056(a). Section 2056(b)(5) provides an exception to section 2056(b)(1) as follows:

Life Estate with Power of Appointment in Surviving Spouse.--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, or all the income from a specific portion thereof, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire interest or such specific portion (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the interest, or such specific portion, to any person other than the surviving spouse--

(A) the interest or such portion thereof so passing shall, for purposes of subsection (a), be considered as passing to the surviving spouse, and

(B) no part of the interest so passing shall, for purposes of paragraph (1)(A), be considered as passing to any person other than the surviving spouse.

This paragraph shall apply only if such power in the surviving spouse to appoint the entire interest, or such specific portion thereof, whether exercisable by will or during life, is exercisable by such spouse alone and in all events.

Five requirements that must be met before a bequest can qualify for a marital deduction under section 2056(b)(5) of the Code have been extracted from that section and formalized in section 20.2056(b)-5(a) of the Estate Tax Regulations. Of relevance to the instant case are the third and fourth requirements, that specify:

(3) The surviving spouse must have the power to appoint the entire interest or the specific portion to either herself or her estate.

(4) The power in the surviving spouse must be exercisable by her alone and (whether exercisable by will or during life) must be exercisable in all events.

Section 20.2056(b)-5(g)(2) of the regulations elaborates on the quantum of power that is needed to satisfy the third requirement. It reads, in part:

The power of the surviving spouse must be a power to appoint the entire interest or a specific portion of it as unqualified owner (and free of the trust if a trust is involved or free of the joint tenancy if a joint tenancy is involved) or to appoint the entire interest or a specific portion of it as a part of her estate (and free of the trust if a trust is involved) that is, in effect, to dispose of it to whomever she pleases * * *

Furthermore, section 20.2056(b)-5(g)(3) of the regulations states:

* * * In order for a power of invasion to be exercisable in all events, the surviving spouse must have the unrestricted power exercisable at any time during her life to use all or any part of the property subject to the power, and to dispose of it in any manner, including the power to dispose of it by gift (whether or not she has power to dispose of it by will).

In determining whether the above conditions are satisfied, section 20.2056(b)-5(e) of the regulations provides that "regard is to be had to the applicable provisions of the law of the jurisdiction under which the interest passes * * *." As pointed out in Morgan v. Commissioner, 309 U.S. 78 (1940), 1940-1 C.B. 229: "State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed." Thus, since A's will was executed and probated in Virginia, the law of Virginia determines the nature and extent of the property interest passing to B under the will.

At common law, under the doctrine of May v. Joynes, 61 Va. (20 Gratt.) 692 (1871), when property is devised or bequeathed to a person for life with a subsequent limitation over of what remains at the first taker's death, and afterward there is given to the first taker an unlimited and unrestricted power of absolute disposal, the devise or bequest to the first taker is construed to pass a fee. The intent of the testator is thus ignored, and any remainder over is considered void. To abrogate the May v. Joynes decision, the Virginia legislature added section 5147 to the 1919 Code of Virginia, now section 55-7 of the 1950 Code. That section provides as follows:

55-7. Power of disposal in life tenant not to defeat remainder unless exercised.--If any interest in or claim to real estate or personal property be disposed of by deed or will for life, with a limitation in remainder over, and in the same instrument there be conferred expressly or by implication a power upon the life tenant in his lifetime or by will to dispose absolutely of such property, the limitation in remainder over shall not fail, or be defeated, except to the extent that the life tenant shall have lawfully exercised such power of disposal. A deed of trust or mortgage executed by the life tenant shall not be construed to be an absolute disposition of the estate thereby conveyed, unless there be a sale thereunder. (Code 1919, sec. 5147.)

The effect of this statute is to validate the remainder to the extent that the life tenant has not disposed of it. It in no way restricts the power of disposal of the life tenant. Christian v. Wilson, 153 Va. 614, 151 S.E. 300 (1930), Southworth v. Sullivan, 162 Va. 325, 173 S.E. 524 (1934). Now, the gift over is validated where the first taker is given an express estate for life, coupled with the power of absolute disposition. Borum v. National Valley Bank of Staunton, 195 Va. 899, 80 S.E. 2d 594 (1954). In Borum the court stated that under section 55-7, Code of Virginia, "* * * that which was void for repugnancy and uncertainty under the doctrine of May v. Joynes*** is made valid."

In Borum, a codicil to the decedent's will provided, "I will, bequeath and devise all of my property, personal, real and mixed to my wife for and during her natural life with full power and authority to consume or dispose or sell and convey all or any of said property as she may see fit in her sole discretion and any of said property real or personal that may remain in her possession at the time of her death, I will * * * [to other named individuals]." In construing the intent of the decedent, the court stated that the language of the codicil pointed--

* * * unerringly to the intention of the testator, not to vest in his widow the fee simple and absolute ownership in his estate, but to give her a life estate only, coupled with the absolute power of disposal. The limitation over failed only "to the extent that the life tenant lawfully exercised" her power of disposal. The property which remained at her death constituted a gift to his heirs, validated under section 55-7. To construe the will otherwise would destroy the testator's whole plan and purpose.

In Rawlings v. Briscoe, 214 Va. 44, 197 S.E. 2d 211 (1973), the court considered a different problem under similar will language. In Rawlings, the decedent's will provided, "All the rest and residue of my property * * * I give, devise and bequeath unto my beloved mother * * * for and during her natural lifetime, and upon her death * * * I give, devise and bequeath the remainder thereof [to named individuals]." The will further provided, "In the event my said mother should survive me and be entitled to a life estate, * * * I authorize and empower her to sell any or all of the said residue at her discretion and use any part of the principal that may be necessary for her care and maintenance." Subsequently, the life tenant gave a substantial portion of the property to her grandchild. At the death of the life tenant, the gift was challenged on the ground that the life tenant was empowered to sell the property and use the proceeds only if necessary for her care and maintenance. The Supreme Court of Virginia, in upholding the gift to the grandchild, ruled that the life tenant's authority to sell the property at her discretion gave "her absolute dominion over the subject property with full power of disposition." The court added that the language concerning her "care and maintenance" merely expressed a motive for the devise and did not limit her power to dispose of the property.

In First Virginia Bank v. United States, 490 F. 2d 532 (4th Cir. 1974), the Fourth Circuit Court of Appeals came to the same conclusion in construing Virginia law as it applies to a power of appointment. In this case, the court held, with respect to a bequest of stock with the "right to dispose, sell, trade or use during her lifetime for her comfort and care as she may see fit," that the life tenant's power to consume the proceeds from the sale of the stock" was not limited by state law to an ascertainable standard relating to her health, support, or maintenance." 490 F.2d, at 535.

Thus, in the instant case, under Virginia law, the dispositive provision in A's will granted to B a life estate (not in trust) in all of A's personal property, coupled with the unrestricted power to consume, sell, and give away as much of the property as B may desire. Accordingly, A's estate is entitled to a marital deduction for the value of the bequest to B under the provisions of section 2056(b)(5) of the Code and the regulations thereunder. See Horner v. United States, Civil No. 75-40-D (S.D. Iowa, June 8, 1976); McGehee v. Commissioner, 260 F. 2d 818 (5th Cir. 1958) (on rehearing). Cf. Rev. Rul. 55-518, 1955-2 C.B. 384, involving a life estate in trust with an unrestricted power to use, consume, and dispose of the trust property.

Further, the value of any unconsumed portion of the property at B's death is includible in B's gross estate under section 2041 of the Code. Rev. Rul. 69-342, 1969-1 C.B. 221.