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 Rev. Rul. 79-86

1979-1 C.B. 311

Section 2056 -- Marital Deduction

IRS Headnote

Marital deduction; trust; income to surviving spouse and parent. A decedent created a testamentary trust for the benefit of the decedent's only living parent and the surviving spouse, who was given a general power of appointment over the trust remainder and all the annual income of the trust, with the exception of amounts considered advisable by the trustee to maintain the parent in the parent's customary standard of living. The spouse has an unqualified right to the income of no specific portion of the trust and no marital deduction is allowable.

Full Text

Rev. Rul. 79-86

Advice has been requested whether the testamentary trust described below provides a decedent's surviving spouse with a life estate and power of appointment which qualifies for the marital deduction, as described in section 2056(b)(5) of the Internal Revenue Code of 1954.

The decedent's will provided for the transfer of $500,000 into a testamentary trust (hereinafter named Trust A), for the benefit of B, the decedent's only living parent, and C, the decedent's surviving spouse. Under the terms of the trust, all trust income is to be paid to C during C's lifetime. However, during C's lifetime, the trustee is required to pay from trust income such amounts as the trustee considers advisable to provide for the support of B, in B's customary standard of living in the same manner as the decedent provided during the decedent's lifetime. Under the terms of the trust, this direction to pay income for B's benefit supersedes the general direction to pay income to C.

Upon C's death, the trust corpus is to be distributed to whomever C appoints by will. C's power of appointment is exercisable by C alone, and in all events.

Under applicable state law, the amount of trust income that could be diverted to B under the terms of Trust A would be limited to amounts needed to support B in B's accustomed standard of living. The estate's representative has established that over the past fifteen years, the decedent provided varying amounts averaging $10,000 annually to support B in B's accustomed standard of living.

The question presented is whether, in view of the decedent's direction that the Trustee pay out of the income from Trust A whatever may be required to support B in B's accustomed standard of living, Trust A meets the requirements of section 2056(b)(5) of the Code by providing the surviving spouse with all the income, payable annually or at more frequent intervals, and a general power of appointment over a "specific portion" of Trust A.

Section 2056(a) of the Code provides for a marital deduction with respect to property passing to a decedent's surviving spouse. Section 2056(b)(1) contains, however, a general rule that certain terminable interests as defined in that section that pass to a surviving spouse cannot qualify for the marital deduction. Under certain exceptions to the terminable interest rule, a marital deduction may nevertheless be allowable with respect to a terminable interest passing to a surviving spouse. One of those exceptions is set forth in section 2056(b)(5) 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 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. (Emphasis added.)

Section 20.2056(b)-5(a) of the regulations provides five conditions which must be met for a property interest to qualify as a deductible interest under section 2056(b)(5) of the Code. The first such condition is as follows:

(1) The surviving spouse must be entitled for life to all of the income from the entire interest or a specific portion of the entire interest, or to a specific portion of all the income from the entire interest.

In Northeastern Pennsylvania National Bank and Trust Co. v. United States, 387 U.S. 213 (1967), 1967-2 C.B. 343, the surviving spouse was to receive an annuity from a trust created under the will in the amount of $300.00 per month, until the decedent's youngest child reached age 18, and $350.00 per month thereafter for life. The annuity was payable from income, but, if income was insufficient, corpus could be invaded to make the specified payment. Any excess income was to be accumulated. The court held that under these circumstances, a specific portion of corpus in which the spouse has an "income interest" can be computed by determining the amount of corpus required to produce the fixed minimum monthly stipend. Thus, the portion of corpus required to produce $300 per month, the fixed minimum monthly stipend, was eligible for the marital deduction under section 2056(b)(5) of the Code.

In the instant case, the trustee's discretion to pay income to B is limited under the terms of the trust, and applicable state law, to amounts needed to support B in B's accustomed standard of living. The terms of the trust limit the purpose for which income is to be paid to B. However, the terms of the trust do not limit the amount that can be paid. Thus, although the estate's executor has established that expenditures for B's support would average $10,000 per year, the trustee would be required to pay all trust income to B, if because of an emergency situation, B needed these funds for support.

Under these circumstances, the surviving spouse does not have an unqualified right to income from trust corpus comparable to the fixed minimum monthly stipend provided in Northeastern since all trust income can be paid to B and thus diverted from the surviving spouse. Therefore, unlike the situation presented in Northeastern, it is not possible to determine any "specific portion" to which the income right of the surviving spouse relates. See also, Rev. Rul. 77-444, 1977-2 C.B. 341.

Accordingly, because no specific portion can be found over which the surviving spouse has an unqualified right to the income, the trust does not provide the surviving spouse with a life estate and power of appointment as described in section 2056(b)(5) and no marital deduction is allowable.