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Grantor's power to change trustee did not bring trust assets into gross estate.

Helen Wall created three irrevocable inter vivos trusts for the benefit of family members. All three trusts had the same trustee, the First Wisconsin Trust Co.

Wall retained the right to remove the corporate trustee and substitute another one. She did not have the right to appoint herself as trustee; the new trustee had to be an independent and qualified corporate trustee. Mrs. Wall also retained the right to contribute additional assets to the trusts. Otherwise, she retained no power, right or interest in the trusts.

The trustee was given broad discretionary powers to distribute or accumulate trust income and principal. Its discretion was not limited by any ascertainable standard.

Mrs. Wall did not change the corporate trustee during her life. Further, she had no financial interest in First Wisconsin.

After Mrs. Wall's death, the trust assets were not included in her gross estate when an estate tax return was filed. However, the Internal Revenue Service argued that Internal Revenue Code sections 2036 or 2038 required that these assets be included in her estate.

Under these sections, if a grantor retains either a power to change the beneficiary (section 2036) or a power to affect the enjoyment of the trust property (section 2038), the trust assets must be included in the grantor's gross estate for estate tax purposes. The regulations say retention of the power (whether or not exercised) to remove the trustee and appoint oneself as trustee results in inclusion of the trust assets for estate tax purposes.

To support its position, the IRS relied on revenue ruling 79-353, which says "reservation by the settlor [Mrs. Wall] of the power to remove the trustee at will and appoint another trustee is equivalent to reservation of the trustee's powers." Thus, under the IRS argument, Mrs. Wall was deemed to reserve for herself the same unfettered powers over the property the trustee had, which would bring the property into her gross estate under sections 2036 and 2038.

The estate agreed that if a settlor retains the power to appoint herself trustee and the trustee has broad discretionary powers, sections 2036 and 2038 apply. But it argued the revenue ruling went too far: Retaining the right to designate another corporate trustee should not be equated with reserving the trustee's powers to oneself

Result: For Wall's estate. The trust assets need not be included in the estate. The power Mrs. Wall retained is not the type contemplated by either section of the statute.

* Wall Est. 101 TC no. 21.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jan 1, 1994
Words:416
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