Rev. Rul. 85-35

1985-1 C.B. 328, 1985-13 I.R.B. 8.

MARITAL DEDUCTION; TRUST; POWER OF TRUSTEE TO DISTRIBUTE INCOME

Published: April 1, 1985

Section 2056.-Bequests, etc., To Surviving Spouse, 26 CFR 20. 2056(b)-5: Marital deduction; life estate with power of appointment in surviving spouse.

   Marital deduction; trust; power of trustee to distribute income. A marital deduction trust qualifies for the marital deduction if, under state law, the trustee has the power to distribute trust income to a relative or to a court appointed representative for the benefit of the spouse, or if the trustee may spend trust income directly for the benefit of the spouse, if the spouse becomes legally disabled.

ISSUE

  Does a marital deduction trust satisfy the requirements of section 2056(b)(5) of the Internal Revenue Code, if under state law the trustee has the power to distribute trust income to a relative or a court appointed representative for the benefit of the spouse, or the trustee may spend trust income directly for the benefit of the spouse, if the spouse becomes legally disabled?

FACTS

  D, a resident of State X, died of January 19, 1984, D's will provides for a marital deduction trust that gives to D's surviving spouse, A, a life income interest coupled with a testamentary general power of appointment over the trust corpus. State X has a statute that provides that the trustee has the discretion to pay any sum distributable to a beneficiary under legal disability, without liability to the trustee, by paying the sum to the beneficiary or by paying the sum for the use of the beneficiary either to a legal representative appointed by the court, or if none, to relative.

  A similar provision relating to trustee powers appeared in the trust instrument, which also specifically requires the trust income to be paid at least annually to the spouse, legal representative, or relative of the spouse. Further, the fiduciary standards imposed by state X prevent the abuse of the powers by the trustee and constrain the conduct of any third party distributee.

LAW AND ANALYSIS

  Section 2056(a) of Code provides a deduction from the gross estate equal to the value of any property interest passing from the decedent to the surviving spouse, but only to the extent that the interest is included in determining the value of the gross estate. Sec. 2056(b)(1) provides that the marital deduction is not allowed for certain interests passing to the surviving spouse that will terminate or fail on the occurrence or nonoccurrence of an event of contingency.

  However, section 2056(b)(5) of the Code provides as exception to this terminable interest rule. If surviving spouse receives a right for life to all the income from the entire property, or a specific portion of the property, payable at least annually, coupled with a power to appoint the entire property, or such specific portion, to the spouse or the estate of the spouse, then the interest will qualify for the marital deduction. There must be power in any other person to appoint any part of the interest to any person other than the surviving spouse. Further, the spouse's power of appointment, whether exercisable by will or during life, must be exercisable by the surviving spouse alone and in all events.

  Under section 20.2056(b)-5(f)(1) of the Estate Tax Regulations, if an interest is transferred in trust, the surviving spouse is entitled for life to all of the income from the entire interest (or a specific portion) provided that the effect of the trust is to give her substantially that degree of beneficial enjoyment of the trust property during her life that the principles of the law of trusts accord to a person who is unqualifiedly designated as the life beneficiary of a trust.

  Section 20.2056(b)-5(f)(4) of the regulations states that provisions granting administrative powers to the trustee will not have the effect of the disqualifying an interest passing in trust from satisfying the requirement of section 2056(b)(5) unless the grant of powers evidences the intention to deprive the surviving spouse of the requisite beneficial enjoyment required by the statute. Such an intention will not be considered to exist if the terms of the instrument are such that the local courts will impose reasonable limitations upon the exercise of the powers.

  Under section 20.2056(b)-5(f)(7) of the regulations, an interest passing in trust fails to satisfy the condition that the surviving spouse be entitled to all the income from the property, to the extent that the income may be accumulated in the discretion of any person other than the surviving spouse.

  Estate of Tingley v. Commissioner, 22 T.C. 402 (1954), affd sub. nom., Starrett v. Commissioner, 223 F.2d 163 (1st Cir. 1955), held that a trust did not satisfy the requirements of section 2056(b)(5) where, under the terms of the trust instrument, the spouse's right to trust income and to demand corpus terminated if the spouse became legally incapacitated. In that case, the restrictions placed on the spouse's enjoyment of trust property in the event of incapacity went beyond those imposed under state law and actually terminated the spouse's interest. However, the prohibition against restrictions on enjoyment and control of trust income and corpus contained in section 2056(b)(5) does not refer to reasonable restrictions imposed by state law or by will that provide for the protection of the beneficiary and for payments for the benefit of the beneficiary during a period of legal disability. See Rev. Rul. 75-350, 1975-2 C.B. 366.

  In the present case, A has the right to all trust income and has the power to appoint the entire interest in all events. See Estate of Smith v. Commissioner, 79 T.C. 974 (1982). The purpose of the state statute and facility of payment clause is to make certain that the beneficiary has the beneficial ownership of the trust income and to provide protection and assistance to the beneficiary if the beneficiary becomes legally disabled. The trust income is payable to A or, if A becomes legally disabled, to or for the benefit of A. The fiduciary standards imposed by State X and general principles of trust law prevent the abuse of the powers of the trustee, and constrain the conduct of any third party distributee, thus ensuring that all trust income will be expended for A's benefit. No amount of trust income may be paid for the benefit of a third person. Thus, the requirements of sections 20.2056(b)-5(f)(1) and (4) of the regulations are satisfied. Similarly, in the event of incapacity, A would still possess the power to appoint in all events under section 2056(b)(5).

HOLDING

  A marital deduction trust satisfies the requirements of section 2056(b)(5) of the Internal Revenue Code, if under state law the trustee has the power to distribute trust income to a relative or a court appointed representative for the benefit of the spouse, or the trustee may spend trust income directly for the benefit of the spouse, if the spouse becomes legally disabled.

Rev. Rul. 85-35, 1985-1 C.B. 328, 1985-13 I.R.B. 8.