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 Rev. Rul. 79-63

1979-1 C.B. 302

Section 2041 -- Powers of Appointment

IRS Headnote

Power of appointment; jointly held; substantial adverse interest. A decedent who was the life beneficiary and a trustee of a testamentary trust could, with the consent of another trustee, one of the decedent's children, direct the trustees to distribute the trust property to anyone, including the decedent, and could direct by will that the remainder be paid to any of the decedent's children, who otherwise would receive it equally. The child's interest is not a substantial adverse interest under section 20.2041-3(c) of the regulations; the decedent consequently possessed at death a general power of appointment, of which the child was not a coholder, and the total value of the trust property is includible in the decedent's gross estate.

Full Text

Rev. Rul. 79-63

Advice has been requested as to the amount includible in a decedent's gross estate, as the value of property subject to a general power of appointment, under section 2041 of the Internal Revenue Code of 1954, in the circumstances described below.

The decedent's spouse, who died in 1972, created a testamentary trust under the terms of which the trust income was payable to the decedent for life, and the remainder was payable equally to the decedent's children or to any one of such children as the decedent might direct by will. In addition, the trust terms provided that at any time during the decedent's lifetime the decedent, with the consent of A, one of the decedent's children, could direct the trustees to distribute all or any part of the trust property to anyone, including the decedent.

Under the terms of the governing instrument, the decedent and A were trustee of the trust and they continued in that position until the decedent's death in 1977.

The question presented is whether any amount of the trust property is includible in the decedent's gross estate under section 2041 of the Code as the value of property subject to a general power of appointment, in view of the fact that the power held by the decedent was exercisable only with the consent of A.

Section 2041(a)(2) of the Code provides that the value of the gross estate shall include the value of all property with respect to which the decedent has at the time of death a general power of appointment created after October 21, 1942. For federal estate tax purposes, section 2041(b) defines a "general power of appointment," subject to certain specific exceptions as a power that is exercisable in favor of the decedent, the decedent's estate, the decedent's creditors, or the creditors of the decedent's estate.

Section 20.2041-3(c) of the Estate Tax Regulations provides the following with respect to jointly held powers of appointment created after October 21, 1942:

(2) Such power is not considered a general power of appointment if it is not exercisable by the decedent except with the consent or joinder of a person having a substantial interest in the property subject to the power which is adverse to the exercise of the power in favor of the decedent, his estate, his creditors, or the creditors of his estate . . .

A taker in default of appointment under a power has an interest which is adverse to an exercise of the power. A coholder of the power has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a coholder of a power is considered as having an adverse interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate . . .

(3) A power which is exercisable only in conjunction with another person, and which after application of the rules set forth in subparagraphs (1) and (2) of this paragraph constitutes a general power of appointment, will be treated as though the holders of the power who are permissible appointees of the property were joint owners of property subject to the power. The decedent, under this rule, will be treated as possessed of a general power of appointment over an aliquot share of the property to be determined with reference to the number of joint holders, including the decedent, who (or whose estates or creditors) are permissible appointees . . .

Under the above quoted portion of section 20.2041-3(c)(2) of the regulations, the mere status of a person as a coholder of, and permissible appointee under, a power does not elevate the coholder to a position as possessor of a substantial adverse interest. See Estate of Towle v. Commissioner, 54 T.C. 368 (1970). Unless the coholder is a taker in default of exercise of the power, the interest of the coholder is not automatically adverse under the specific rules set forth in the regulations. See Estate of Towle v. Commissioner, above cited, at 372.

Under the terms of the trust in the present case the decedent could cause the trust principal to be distributed during lifetime only with the consent of A. However, in this case, the interest held by A does not amount to a substantial interest in the property subject to the power, that is adverse to exercise of the power in favor of the decedent, for purposes of section 2041(b)(1)(c)(ii).

In this case, A is a taker in default not of the lifetime power in which A has a power of consent but rather of the testamentary power exercisable solely by the decedent. In such a situation A would not have necessarily been in a better economic position after the decedent's death by refusing to exercise the power in favor of the decedent during the decedent's lifetime. Thus, the fact that A might survive the decedent and receive an interest in the property, if the decedent failed to exercise the testamentary power in favor of persons other than A, does not elevate A's interest as a consenting party of the lifetime power to a substantial adverse interest.

Consequently, the decedent's power falls within the definition of a "general power of appointment" because A did not have a substantial interest in the property that was adverse to the exercise of the power in favor of the decedent. If, however, A had been the decedent's only child, A would have had a vested interest in the trust remainder that would have been substantially adverse to the exercise of the decedent's lifetime power of appointment. See Commissioner v. Prouty, 115 F.2d 331 (1st Cir. 1940); Newman v. Commissioner, 1 T.C. 921 (1943).

Under section 20.2041-3(c)(3) of the regulations, quoted above, the amount includible in the decedent's gross estate is the value of property subject to the general power of appointment divided by the number of holders of the power who are also permissible appointees. In the present case A was a permissible appointee but not a coholder of the decedent's general power of appointment. The requirement that A consent to the exercise of the power held by the decedent does not raise A to the status of a coholder or joint holder of such power. Compare Rev. Rul. 76-503, 1976-2 C.B. 275 where one-third of the value of trust property was includible in the gross estate of the decedent where the decedent, along with two other coholders, had a general power of appointment. Unlike Rev. Rul. 76-503, in this case A did not have a power but could only consent to the decedent's exercise of a power, and therefore, was not a coholder of a power.

Accordingly, in the present case, the total value of the trust property (as of the date of death of the decedent or appropriate alternate valuation date) is includible in the gross estate of the decedent under section 2041 of the Code as property subject to a general power of appointment.