Donor power to remove trustee approved.

Gift planners should welcome the Tax Court's disapproval of Rev. Rul. 79-353 in Est. of TC No. 21 (1993). Rev. Rul. 79-353 addressed gift trust arrangements in which a donor reserved the power to replace the trustee. Even though the donor's substitution power was limited to appointing an independent corporate (successor) trustee, the IRS reasoned that for estate tax purposes, the donor reserved practical control over the trust, since the donor could at least theoretically replace trustees repeatedly until a compliant trustee was found. Accordingly, the gift trust would be included in the donor's estate for estate tax purposes.

This ruling created considerable consternation and in Rev. Rul. 81-51 the Service agreed that the practical control principle would not apply to pre-Oct. 29, 1979 transfers. More recently, in Letter Ruling 9316025, the IRS concluded that a donor could avoid application of Rev. Ruls. 73-211 and 77-182 when the donor released the power to appoint a successor trustee when the release occurred more than three years before the donor's death. Rev. Rul. 79-353 was not mentioned.

In addition, in Est. of Vak, 973 F2d 409 (8th Cir. 1992), rev'g TC Memo 1991-503, the Eighth Circuit held that a donor's power to remove and replace an independent trustee did not prevent a completed gift. Again no mention was made of Rev. Rul. 79-353 in the decision.

Rev. Rul. 79-353 had always been doubtful because it did not conform to the estate tax regulations under Secs. 2036 and 2038, which specify that the trust is included in the donor's estate if the decedent had the unrestricted power to remove a trustee and appoint himself as trustee. In addition, it disregarded the fiduciary responsibility of any successor trustee and local law regulation of trusts.

It appears that, pending future developments (such as a possible amendment of the Sec. 2036 and 2038 regulations), a donor can reserve the power to remove and replace an independent trustee, and to appoint a successor trustee on the resignation of a trustee. Rev. Rul. 79-353 seems to have suffered the same fate as Rev. Rul. 67-463, which continued administratively the premium payment test of pre-1955 law for inclusion of insurance proceeds. This ruling was later revoked in Rev. Rul. 71-497. The IRS should also revoke Rev. Rul. 79-353.

In the meantime, the Wall decision provides authority for an estate tax return reporting position that the retention by a grantor of an unrestricted power to replace a trustee with an independent corporate trustee does not require inclusion of the trust corpus in the grantor's gross estate. Specifically, the case is substantial authority to prevent application of the Sec. 6662 negligence penalty.