T.C. Memo. 2003-55
UNITED STATES TAX COURT
ESTATE OF RALPH H. DAVIS, DECEASED, EVELYN DAVIS, PERSONAL
REPRESENTATIVE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 210-02. Filed February 28, 2003.
Richard S. Calone, Robin Klomparens, and Jason W. Harrell,
for petitioners.
Kathryn K. Vetter, for respondent.
MEMORANDUM OPINION
WELLS, Chief Judge: Respondent determined a deficiency in
the Federal estate tax of the Estate of Ralph H. Davis (estate)
in the amount of $220,593. Unless otherwise indicated, all
section references are to the Internal Revenue Code in effect on
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the date of death of Ralph H. Davis (decedent), and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The issue to be decided in the instant case is whether the
interest received by decedent’s surviving spouse in certain
property qualifies for the marital deduction pursuant to section
2056.
Background
The parties submitted the instant case, fully stipulated,
without trial, pursuant to Rule 122. The parties’ stipulations
of facts are hereby incorporated by this reference and are found
as facts in the instant case.
Decedent was born on June 1, 1919, and died testate on July
14, 1997, at the age of 78, in Stockton, California. At the time
of his death, decedent was a resident of San Joaquin County,
California, and a citizen of the United States. During his
lifetime, decedent worked for 44 years as an electrical engineer
for Westinghouse Corporation.
Decedent was survived by his wife, Evelyn L. Kimball Davis
(Evelyn Davis). Evelyn Davis, who resides in Stockton,
California, is the personal representative of the estate.
Decedent was also survived by his two daughters, Carol Tawney
Pencke and Mary Martha Bennett.
On February 24, 1993, decedent executed a will (1993 will).
The 1993 will names decedent’s daughters, Carol Tawney Pencke and
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Mary Martha Bennett, as personal representatives of his estate.
In Section 1.1 of the 1993 will, decedent indicated his intent to
create another instrument which would dispose of his tangible
personal property. Except as might otherwise be provided in such
an instrument, the will left his tangible personal property to
his daughters Carol Tawney Pencke and Mary Martha Bennett.
Article One, section 1.2, of the 1993 will provides for the
care and transport of decedent’s personal property and also
provides for the disposition of insurance on such property.
Article Two, section 2.1, of the 1993 will provides:
I give all the residue of my estate, to the Trustee
under my Declaration of Trust dated the same date as
this Will or if my said Declaration of Trust is not in
existence or is not effective at the time of my death,
to be held in trust on the same terms and conditions
specified therein as it existed at the time of the
execution of this Will or if [sic] the last Codicil
hereto, with like effect as if the terms and conditions
were set forth herein verbatim.
Article Three of the 1993 will appoints decedent’s two
daughters as personal representatives under the 1993 will. In
the event that neither daughter can serve as personal
representative, decedent appointed PNC Trust Company of Florida,
N.A., to serve as the representative of his estate. Article Four
of the 1993 will provides generally and specifically for the
powers of the fiduciary or fiduciaries under the 1993 will.
Article Five of the 1993 will provides for the payment of taxes,
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to be paid by the personal representative of the estate out of
the principal of the estate.
On February 24, 1993, pursuant to a “Declaration of Trust”,
decedent established a trust (1993 trust) naming himself as
grantor, trustee, and lifetime beneficiary (grantor and decedent
being one and the same, grantor will hereinafter sometimes be
referred to as “decedent”). Section 1.1 of Article One of the
1993 trust, entitled “Distribution of Income and Principal”,
provides:
During the grantor’s lifetime, while he is serving as
trustee, he shall be entitled to all of the net income
(“Income”) from the trust estate, payable in convenient
installments, and he may withdraw such sums as he desires
from principal at any time or times.
Section 1.2 of Article One of the 1993 trust provides:
[If] at any time or times the grantor shall be unable
to manage his affairs, the successor trustee shall use
such sums from the income and principal of the trust as
the successor trustee deems necessary or advisable for
his care, support and comfort, or for any other purpose
the successor trustee considers to be for the grantor’s
best interests, adding to principal any income not so
used.
Section 3.1 of Article Three of the 1993 trust provides:
Upon the grantor’s death, the successor trustee shall
distribute the residue of the trust estate as follows:
(a) The sum of TWENTY FIVE THOUSAND DOLLARS
($25,000.00) shall be paid by the successor trustee to the
grantor’s sister, MARIAN FRANCES DAVIS, if she survives the
grantor.
(b) The rest of the Trust Estate shall be transferred
and delivered in equal shares to the grantor’s two
daughters, CAROL TAWNEY PENCKE and MARY MARTHA BENNETT, the
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share of either of them who is deceased to go to her then
living descendants, per stirpes or, if she has none, to be
added to the share of the grantor’s other daughter, or if
she is deceased, to her descendants, per stirpes.
* * * * * * *
(d) The interest of any beneficiary hereunder,
including a remainderman, in Income or principal, shall not
be subject to assignment, alienation, pledge, attachment or
claim of creditors until after payment has actually been
made by the successor trustee as hereinbefore provided.
Article Four of the 1993 trust provides for the powers of a
trustee. Article Five of the 1993 trust names decedent’s two
daughters as successor trustees, and Article Five also provides
that in the event that neither can serve as trustee, PNC Trust
Company of Florida, N.A., shall serve as the successor trustee.
Article Six of the 1993 trust provides for the grantor’s powers,
and Article Seven of the 1993 trust indicates that Florida law
governs the trust. The 1993 trust was initially funded with
securities with a total cost of $124,013 and a total market value
of $207,637.73.
Decedent later married Evelyn Davis. On April 9, 1996,
decedent executed a “First Codicil to Last Will” (codicil) and
amended the trust by executing an “Amendment to Declaration of
Trust of Ralph H. Davis” (amended trust)(the 1993 trust and the
amended trust are collectively hereinafter sometimes referred to
as the “testamentary trust”).
The codicil modified the 1993 will and provided for the
transfer of remainder of decedent’s estate to the amended trust
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upon his death.1 In the codicil, the decedent indicated that
trustee of the amended trust would receive all of the residue of
his estate. The amended trust named Evelyn Davis as the
successor trustee, whereupon surviving the decedent, she would
become trustee of the amended trust.
The first paragraph of the codicil provides:
I hereby revoke paragraph Article Two, Section 2.1 of my
Last Will and Testament dated February 24, 1993, and in its
place, substitute the following:
I give all of the rest, residue and remainder of
my estate to the trustee under my Declaration of
Trust Dated February 24, 1993 as amended April 9,
1996 or if my said declaration of trust are not in
existence or are ineffective at the date of my
death, to be held in trust on the same terms and
conditions as specified in the trust declaration
and amendment to trust declaration as they existed
at the date of execution of this Codicil to my
Last Will and Testament. [Reproduced literally.]
The second paragraph of the codicil provides that all
personal property found in decedent’s residence shall remain in
the surviving spouse’s possession for her lifetime or so long as
she uses the residence. The third paragraph of the codicil
revoked the appointment of PNC Trust Company of Florida, N.A., as
alternate representative under the will, and nominated the Bank
of Stockton, California, as the alternate representative. The
fourth paragraph confirmed and republished the provisions of the
will not changed by the codicil.
1
This arrangement is commonly referred to as a “pour-over”
trust.
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Section Two of the amended trust provides:
Life Estate to Surviving Spouse of Trustor: After the death
of trustor survived by his spouse and during the lifetime of
his surviving spouse, the trustee shall pay to or apply for
the benefit of the surviving spouse, in quarter annual or
more frequent installments, all of the net income from the
trust estate as the trustee, in the trustee’s reasonable
discretion, shall determine to be proper for the health,
education, or support, maintenance, comfort and welfare of
grantor’s surviving spouse in accordance with the surviving
spouse’s accustomed manner of living.
Section Three of the amended trust provides:
Designation of Successor Trustees: The first successor
trustee of the Ralph H. Davis Trust shall be his spouse,
Evelyn L. Davis.
In the event Evelyn L. Davis shall die, become
incapacitated or otherwise be unable to administer the trust
estate, then grantor’s daughters, Carol Tawney Pencke and
Mary Martha Bennett, or the survivor of them shall serve as
co-trustees without bond.
Section Four of the amended trust provides:
Guideline - Other Sources: Beneficiary: In making
distributions to grantor’s surviving spouse, the trustee, in
her reasonable discretion, may consider any other income or
resources of the beneficiary known to the trustee and
reasonably available.
Section Five of the amended trust provides:
Invasion of Principal for Surviving Spouse - Narrow
Standard: If the trustee shall determine that the income
from this trust and that the income and principal from the
surviving spouse’s own trust2 shall be insufficient to
maintain surviving spouse’s health, support, and
2
This trust is not directly in issue in the instant case,
and shall sometimes hereinafter be referred to as the “Evelyn L.
Davis trust”. The trust in issue is the testamentary trust.
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maintenance, the trustee may, after surviving spouse has
exhausted all assets of her own trust, invade the principal
of this trust for the benefit of surviving spouse, in the
trustee’s reasonable discretion. [Fn. ref. added.]
Section Six of the amended trust indicates that the
appropriate Superior Court of the State of California shall have
jurisdiction for all purposes over the testamentary trust.
Section Nine expressly reaffirms and ratifies the 1993 trust, to
the extent that it was not modified or amended by the amended
trust.
On October 13, 1998, the estate filed a Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return with
the Internal Revenue Service Center in Ogden, Utah. On the
Federal estate tax return, the trustee made the election under
section 2056(b)(7) for the entire trust amount.3 The taxable
estate was computed as follows:
Gross Estate
Add:
Real Estate $0
Stocks and Bonds 129,363
Mortgages, Notes, Cash 5,000
Insurance on decedent’s life 8,354
Jointly owned property 0
Other miscellaneous property 24,500
Transfers during decedent's life 554,812
Powers of Appointment 0
Annuities 458,794
3
Estate did not elect out of sec. 2056(b)(7) treatment on
Schedule M (Bequests, etc., to Surviving Spouse) of Form 706.
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Less:
Funeral expenses 6,500
Debts 1,107
Mortgages and Liens 0
Specific bequest to spouse 573,216
Total allowable deductions 580,823
Taxable Estate 600,000
The total gross estate, as reflected on the estate’s Form
706, is $1,180,823. The estate claimed a total marital deduction
of $573,216,4 and total deductions of $580,823 from the gross
estate. The marital deduction was computed on Schedule M of the
estate’s Form 706, which primarily reflected the transfer of
assets, including securities, life insurance policies, and
individual retirement accounts, from the estate to the trust.
The estate reported a gross estate tax of $192,800 and
claimed the maximum unified credit against estate tax for 1997,
$192,800. Respondent determined that the claimed marital
deduction should be reduced by $564,862, resulting in a reduction
of the marital deduction from $573,216 to $8,354. Respondent
determined that the insurance payment of $8,354 was the only item
to qualify for the marital deduction because it was paid directly
to the surviving spouse. On September 13, 2001, Respondent
determined a deficiency in the estate’s Federal estate tax of
4
Section Five of Part Four of Form 706 reports that the
testamentary trust received $586,670 from the estate.
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$220,593 and issued a statutory notice of deficiency to the
estate.
On October 1, 2001, Evelyn L. Davis filed a “NOTICE OF
IRREVOCABLE EXERCISE OF GENERAL POWER OF APPOINTMENT”, which
provides:
I, EVELYN DAVIS, the holder of the power to distribute
income under the RALPH H. DAVIS DECLARATION OF TRUST DATED
FEBRUARY 24, 1993 as amended April 9, 1996, pursuant to
Paragraph 2 of said Amendment, do hereby irrevocably
exercise my right to receive all of the income from this
trust for the balance of my life.
I do hereby exercise this instruction irrevocably, and
hereby order that all of the income [be] paid to me quarter-
annually or more frequently if necessary.
This exercise is effective as of the date of death of
my husband, RALPH H. DAVIS, pursuant to his instructions and
intent as expressed to me.
Discussion
Section 2001 imposes a tax on the transfer of the taxable
estate of all persons who are citizens or residents of the United
States at the time of death. The amount of the tax depends on
the size of the taxable estate, sec. 2001(b), which is equal to
the value of the gross estate less deductions. Sec. 2051; see
Estate of Armstrong v. Commissioner, 119 T.C. 220 (2002).
Section 2056(a) allows a marital deduction from a decedent’s
gross estate for the value of the property interests passing from
the decedent to a decedent’s surviving spouse. Estate of Clack
v. Commissioner, 106 T.C. 131, 137 (1996).
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A marital deduction generally is not allowable for a
“terminable interest”, which is a property interest that will
terminate or fail “on the lapse of time, on the occurrence of an
event or contingency, or on the failure of an event or
contingency to occur”. Sec. 2056(b)(1); see Estate of Clack v.
Commissioner, supra. An interest in the nature of a life estate
generally is not eligible for the marital deduction. Estate of
Doherty v. Commissioner, 95 T.C. 446 (1990), revd. on other
grounds 982 F.2d 450 (10th Cir. 1992); see Estate of Kyle v.
Commissioner, 94 T.C. 829 (1990); see also Estate of Nicholson v.
Commissioner, 94 T.C. 666 (1990).
Section 2056(b)(5) is an exception to the section 2056(b)(1)
terminable interest rule. Section 2056(b)(5) provides:
SEC. 2056(b) Limitation in the Case of Life Estate or Other
Terminable Interest.--
* * * * * * *
(5) 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 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–-
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(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.
To fit within the section 2056(b)(5) exception to the
section 2056(b)(1) terminable interest rule, the surviving spouse
must be entitled to all of the income from the testamentary trust
(or from a specific portion thereof) for life and also have a
general power of appointment over the testamentary trust. Sec.
2056(b)(5); see Estate of Walsh v. Commissioner, 110 T.C. 393,
398 (1998); see also Estate of Meeske v. Commissioner, 72 T.C. 73
(1979), affd. sub nom. Estate of Laurin v. Commissioner, 645 F.2d
8 (6th Cir. 1981). In Estate of Meeske v. Commissioner, supra at
78, this Court observed:
By its terms, section 2056(b)(5) provides a fivefold
test for the deductibility of life estates coupled with
powers of appointment: (1) The surviving spouse must be
entitled for life to all the income from the entire interest
or to all the income from a specific portion thereof. (2)
The income must be payable annually or at more frequent
intervals. (3) The surviving spouse must have a power to
appoint the entire interest or such specific portion to
either herself or her estate. (4) The entire interest or
the specific portion must not be subject to a power in any
other person to appoint any part to anyone other than the
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surviving spouse. (5) The power in the surviving spouse
(whether exercisable by will or during life) must be
exercisable by her alone and in all events. [Emphasis
added.]
Regulations promulgated pursuant to section 2056(b)(5)
require the surviving spouse to be entitled for life to all of
the income from either the entire interest or from a specific
portion of the entire interest.5 Sec. 20.2056(b)-5(a)(1), Estate
Tax Regs.; see Estate of Wisely v. United States, 703 F. Supp.
474, 476 (W.D. Va. 1988). Moreover, the income must be payable
to the surviving spouse annually or at more frequent intervals.
Sec. 20.2056(b)-5(a)(2), Estate Tax Regs.; see Estate of Meeske
v. Commissioner, supra at 78.
The surviving spouse’s command over the income from the
trust must be such that the income is “virtually hers”. Estate
of Wilson v. Commissioner, T.C. Memo. 1992-479, citing sec.
20.2056(b)-5(f)(8), Estate Tax Regs., which provides:
In the case of an interest passing in trust, the terms
“entitled for life” and “payable annually or at more
frequent intervals,” as used in the conditions set forth in
paragraph (a)(1) and (2) of this section, require that under
the terms of the trust the income referred to must be
currently (at least annually; see paragraph (e) of this
section) distributable to the spouse or that she may have
such command over the income that it is virtually hers.
Thus, the conditions in paragraph (a)(1) and (2) of this
section are satisfied in this respect if, under the terms of
the trust instrument, the spouse has the right exercisable
annually (or more frequently) to require distribution to
5
The estate has not contended that the surviving spouse’s
interest relates to a specific portion of the trust principal.
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herself of the trust income, and otherwise the trust income
is to be accumulated and added to corpus.
For purposes of the marital deduction and in considering the
interests passing to a surviving spouse, this Court applies the
law of jurisdiction under which the interest passes. Estate of
Bosch v. Commissioner, 387 U.S. 456 (1967); see Estate of
Nicholson v. Commissioner, supra; see also Estate of Doherty v.
Commissioner, supra; Estate of Bowling v. Commissioner, 93 T.C.
286 (1989); sec. 20.2056(b)-5(e), Estate Tax Regs. In the
instant case, the parties do not dispute that the applicable law
is that of the State of California, and we therefore apply the
law of the State of California. Lassiter v. Commissioner, T.C.
Memo. 2000-324.
In Estate of Dodge v. Stone, 491 P.2d 385, 394 (Cal. 1971)
(citing Estate of Wilson v. Doolittle, 193 P. 581 (Cal. 1920)),
the Supreme Court of California held that “The paramount rule in
the construction of wills, to which all other rules must yield,
is that a will is to be construed according to the intention of
the testator as expressed therein, and this intention will be
given effect as far as possible.” The intent of a testator is
found by examining the document as a whole. Estate of Heim v.
Commissioner, 914 F.2d 1322, 1329-1330 (9th Cir. 1990), affg.
T.C. Memo. 1988-433; see Estate of Rapp v. Commissioner, 140 F.3d
1211 (9th Cir. 1998), affg. T.C. Memo. 1996-10 (applying
California law); see also Estate of Dodge v. Stone, supra; Estate
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of Russell v. Quinn, 444 P.2d 353 (Cal. 1968). In Estate of Heim
v. Commissioner, supra at 1329-1330, the Court of Appeals for the
Ninth Circuit observed:
Furthermore, we cannot avoid the statutory directive
that a “marital deduction gift” is “a gift that is
intended to qualify for the marital deduction,” Probate
Code section 1030(d), and that “whether the will
contains a marital deduction gift depends upon the
intention of the testator at the time the will is
executed.” Prob. Code sec. 1032(a) (West 1991).6
California Probate Code section 215227 acts to conform any
“power, duty, or discretionary authority” in a testamentary
instrument to comport with the requirements of a marital
deduction, if the instrument contains a marital deduction gift.
California Probate Code section 21520 (West 1991)8 defines a
6
Cal. Prob. Code secs. 1030, 1032 (repealed) are the
predecessors to Cal. Prob. Code secs. 21520 and 21522 (West
1991). Estate of Heim v. Commissioner, 914 F.2d 1322, 1329-1330
(9th Cir. 1990), affg. T.C. Memo. 1988-433.
7
Sec. 21522. MARITAL DEDUCTION GIFTS
If an instrument contains a marital deduction gift:
(a) The provisions of the instrument, including any
power, duty, or discretionary authority given to a
fiduciary, shall be construed to comply with the marital
deduction provisions of the Internal Revenue Code.
(b) The fiduciary shall not take any action or have any
power that impairs the deduction as applied to the marital
deduction gift.
(c) The marital deduction gift may be satisfied only
with property that qualifies for the marital deduction.
8
Cal. Prob. Code sec. 21520 provides:
(continued...)
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marital deduction gift as a transfer that is intended to qualify
for the marital deduction. Accordingly, we inquire whether
decedent evinced the intention that the property transferred to
his testamentary trust would qualify for the marital deduction.
Id.; see Estate of Heim v. Commissioner, supra.
In the instant case, we must interpret Section Two of the
amended trust, which provides that the trustee shall pay:
all of the net income from the trust estate as the
trustee, in the trustee’s reasonable discretion, shall
determine to be proper for the health, education, or
support, maintenance, comfort and welfare of grantor’s
surviving spouse in accordance with the surviving
spouse’s accustomed manner of living.
Pursuant to Section Two of the amended trust, the surviving
spouse’s right to receive income is significantly restricted. In
determining the appropriate amount of income to distribute to the
surviving spouse, Section Two of the amended trust charges the
trustee to consider, in the trustee’s reasonable discretion, the
surviving spouse’s health, education, support, maintenance,
8
(...continued)
SEC. 21520. DEFINITIONS.--
* * * * * * *
(a) “Marital deduction” means the federal estate
tax deduction allowed for transfers under Section 2056
of the Internal Revenue Code or the federal gift tax
deduction allowed for transfers under Section 2523 of
the Internal Revenue Code.
(b) “Marital deduction gift” means a transfer of
property that is intended to qualify for the marital
deduction.
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comfort, and welfare, in light of her accustomed manner of
living.
The expression, “in accordance with the surviving spouse’s
accustomed manner of living” modifies and limits the expression
that precedes it: “all of the net income from the trust estate as
the trustee, in the trustee’s reasonable discretion, shall
determine to be proper for the health, education, or support,
maintenance, comfort and welfare”. In Estate of Ellingson v.
Commissioner, 964 F.2d 959, 964-965 (9th Cir. 1992), revg. 96
T.C. 760 (1991), the Court of Appeals for the Ninth Circuit, the
circuit to which any appeal of the instant case would lie, stated
that,
the language used by the Nicholson trust [in Estate of
Nicholson v. Commissioner, 94 T.C. 666 (1990)]--‘usual
and customary standard of living’--is much narrower and
more specific than that used in this
case--‘best interests.’ Interpreting the Nicholson
trust as qualifying for the QTIP deduction would have
required the Tax Court to ‘rewrite the trust
instrument.’
The “usual and customary standard of living” clause under
consideration in the instant case is analogous to the clause in
Estate of Nicholson v. Commissioner, supra, and distinguishable
from the “best interests” clause directly considered by the court
in Estate of Ellingson v. Commissioner, supra. The language in
the amended trust is more restrictive than the “best interests”
language in the trust in Estate of Ellingson v. Commissioner,
supra. The use of the word “comfort” in the amended trust is
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limited by the expression, “in accordance with the surviving
spouse’s accustomed manner of living.” Accordingly, we interpret
the language of the amended trust to mean that the surviving
spouse does not have such “command over the income that it is
virtually hers”. See sec. 20.2056(b)-5(f)(8), Estate Tax Regs.9
In the instant case, Section Four of the amended trust provides
that the trustee, in exercising reasonable discretion, may
consider “any other income or resources of the beneficiary known
to the trustee and reasonably available.”10 In the instant case,
Section Two of the amended trust limits the surviving spouse’s
entitlement to income without using the term “best interests”.
Moreover, in the instant case, the clause under consideration is
much narrower and more specific than the “best interests” clause
considered by the court in Estate of Nicholson v. Commissioner,
supra. We conclude that the foregoing limitations prevent the
surviving spouse from being entitled to the entire income from
the trust.
Moreover, the surviving spouse’s role as sole trustee under
the trust does not assure her the requisite control over the
9
The court in Estate of Ellingson v. Commissioner, 964 F.2d
959 (9th Cir. 1992), revg. 96 T.C. 260 (1991), concluded that to
effectuate the decedent’s intent, paying the surviving spouse
such amount of the income necessary for her “best interests”
meant paying her all of the trust income.
10
In the instant case, the decedent did not include in the
amended trust the “best interests” language that appeared in the
1993 trust. Article One, Sections 1.1 and 1.2 of the 1993 trust
were amended by Section Two of the amended trust.
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trust income for life, because, by the terms of the amended
trust, decedent’s daughters could become sole or cotrustees of
the trust, in the event of the surviving spouse’s resignation or
her incapacity to serve as a trustee. Estate of Ellingson v.
Commissioner, supra at 962 (citing Estate of Kyle v.
Commissioner, 94 T.C. 829 (1990)). Additionally, unlike the
“Marital Deduction Trust” in Estate of Ellingson v.
Commissioner, supra, there is no language in the amended trust
which explicitly refers to a marital deduction under section
2056. Accordingly, we conclude that the decedent did not intend
to grant the surviving spouse the entire income interest for life
from the surviving spouse’s interest in the estate.
We also consider whether the amended trust qualifies for the
section 2056(b)(5) exception to the terminable interest rule. In
order to qualify for the exception, the surviving spouse must
have the sole power to appoint her entire interest, exercisable
by her alone and at all events, with no power in any other person
to appoint any part of her interest to anyone but the surviving
spouse. Sec. 2056(b)(5); see sec. 20.2056(b)-5(g)(1) and (3),
Estate Tax Regs. Section 20.2056(b)-5(g)(3), Estate Tax Regs.,
provides:
(3) A power is not considered to be a power
exercisable by a surviving spouse alone and in all
events as required by paragraph (a)(4) of this section
if the exercise of the power in the surviving spouse to
appoint the entire interest or a specific portion of it
to herself or to her estate requires the joinder or
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consent of any other person. * * * Likewise, if there
are any restrictions, either by the terms of the
instrument or under applicable local law, on the
exercise of a power to consume property (whether or not
held in trust) for the benefit of the spouse, the power
is not exercisable in all events. Thus, if a power of
invasion is exercisable only for the spouse’s support,
or only for her limited use, the power is not
exercisable in all events. In order for a power of
invasion to be exercisable in all events, the surviving
spouse must have the unrestricted power exercisable at
any time during her life to use all or any part of the
property subject to the power, and to dispose of it in
any manner, including the power to dispose of it by
gift (whether or not she has power to dispose of it by
will). [Emphasis added.]
Section 2056(b)(5) requires the surviving spouse to “receive
an unlimited power to appoint the underlying property to himself
or to his estate.” Estate of Smith v. Commissioner, 79 T.C. 974,
977 (1982)(citing Estate of Field v. Commissioner, 40 T.C. 802
(1963)); see Estate of Meeske v. Commissioner, 72 T.C. 73 (1979);
see also Estate of May v. Commissioner, 32 T.C. 386 (1959), affd.
283 F.2d 853 (2d Cir. 1960); sec. 20.2056(b)-5(d), Estate Tax
Regs. The power must be exercisable alone and in all events.
Estate of Brantingham v. United States, 631 F.2d 542 (7th Cir.
1980); see Estate of May v. Commissioner, supra.
In deciding whether decedent’s trust created a power of
appointment over the entire interest, we must consider whether
the trust documents created a general power of appointment under
California law. Estate of Robertson v. United States, 310 F.2d
199 (5th Cir. 1962); Estate of Opal v. Commissioner, 54 T.C. 154
(1970), affd. 450 F.2d 1085 (2d Cir. 1971); Estate of Comer v.
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Commissioner, 31 T.C. 1193 (1959); Estate of Boydstun v.
Commissioner, T.C. Memo. 1984-312. Unless the language used by
the testator in creating the trust creates an unambiguous general
power of appointment, “the ascertainment of the breadth of the
trustee’s power is to be ascertained with reference to the intent
of the trust’s creator.” Estate of Smith v. Smith, 172 Cal.
Rptr. 788, 792 (Ct. App. 1981).
A power of appointment is not considered a general power of
appointment if it is limited by an ascertainable standard.
Estate of Nunn v. Beverly Hills Natl. Bank, 518 P.2d 1151 (Cal.
1974). A power of appointment that is limited by an
ascertainable standard relating to the person’s health,
education, support, or maintenance is not a general power of
appointment. Cal. Prob. sec. 611(b); see Estate of Nunn v.
Beverly Hills Natl. Bank, supra (applying a predecessor of sec.
611(a) and (b) (West 2002)); see also Estate of Smith v. Smith,
supra. Section Five of the amended trust permits invasion of the
principal of the trust only if the Evelyn L. Davis trust is
insufficient to provide for the surviving spouse’s health,
support and maintenance. In the instant case, we conclude that
the trustee may only invade the principal of the trust for the
surviving spouse’s health, support, and maintenance, as the power
to invade is predicated on those needs, and the trustee may only
appoint the principal to meet those needs. Furthermore, the
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title of Section Five of the amended trust, “Invasion of
Principal for Surviving Spouse-Narrow Standard”, indicates that
decedent did not intend to provide the surviving spouse with an
unrestricted power of appointment. We conclude that the
trustee’s power to invade the principal is not exercisable in all
events, and, accordingly, the trustee’s power is not a qualifying
power of appointment for purposes of section 2056(b)(5). See
sec. 20.2056(b)-5(g)(3), Estate Tax Regs. Consequently, we hold
that the testamentary trust fails to qualify for the section
2056(b)(5) exception to the terminable interest rule.
Petitioner contends that Section Two of the amended trust
created a general power of appointment over the income from the
testamentary trust, under section 2041 and section 20.2041-
1(c)(1) and (2), Estate Tax Regs., and that a general power of
appointment under section 2041 is sufficient to qualify the
surviving spouse’s interest income in the testamentary trust for
section 2056(b)(5) treatment, relying on Sec. Peoples Trust Co.
v. United States, 238 F. Supp. 40, 51 (W.D. Penn 1965). The
requirements of section 2041 and section 2056(b)(5) are distinct.
A power of appointment may not be broad enough to qualify under
section 2056 even though it qualifies as a general power of
appointment for purposes of section 2041. Estate of Brantingham
v. United States, supra (no indication that section 2041 and
section 2056 apply in pari materia); see Estate of May v.
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Commissioner, 283 F.2d 853 (2d Cir. 1960); see also Estate of
Duvall v. Commissioner, T.C. Memo. 1993-319; Condon Natl. Bank v.
United States, 349 F. Supp. 755 (D. Kan. 1972).
Section Two of the amended trust may have been sufficient to
create a power of appointment for purposes of section 2041,11 but
we have found that the terms of that provision, and other
provisions relevant in discerning testator’s intent, failed to
satisfy the conditions set forth in section 2056(b)(5) because
the surviving spouse is not entitled to all of the income from
the property and because her power to invade the trust corpus is
not exercisable at all events. Sec. 2056(b)(5); see also Estate
of Meeske v. Commissioner, supra; Estate of Lassiter, T.C. Memo.
2000-324.
We also consider whether the trust qualifies for the section
2056(b)(7) qualified terminable interest property exception to
the section 2056(b)(1) terminable interest rule. Section
2056(b)(7) was enacted as part of the Economic Recovery Tax Act
of 1981, Pub. L. 97-34, sec. 403(d)(1), 95 Stat. 172, 302. Prior
to 1981, a life estate without a power of appointment was
considered a terminable property. Estate of Clack v.
Commissioner, 106 T.C. 131 (1996); see Estate of Nicholson v.
Commissioner, 94 T.C. 666 (1990); see also Estate of Higgins v.
11
We do not consider whether a power of appointment was
created by the trust document, for purposes of sec. 2041,
because that issue is not directly before us.
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Commissioner, 91 T.C. 61 (1988), affd. sub nom. Manufacturers
Natl. Bank v. Commissioner, 897 F.2d 856 (6th Cir. 1990). That
result was changed by section 2056(b)(7), which provides:
(7) Election with respect to life estate for surviving
spouse.--
(A) In general.–-In the case of qualified terminable
interest property–-
(i) for purposes of subsection (a), such property
shall be treated as passing to the surviving spouse,
and
(ii) for purposes of paragraph (1)(A), no part of
such property shall be treated as passing to any person
other than the surviving spouse.
(B) Qualified terminable interest property defined.–-
For purposes of this paragraph–-
(i) In general.–-The term “qualified terminable
interest property” means property–-
(I) which passes from the decedent,
(II) in which the surviving spouse has a
qualifying income interest for life, and
(III) to which an election under this
paragraph applies.
(ii) Qualifying income interest for life.–-The
surviving spouse has a qualifying income interest for
life if–-
(I) the surviving spouse is entitled to all
the income from the property, payable annually or
at more frequent intervals, or has a usufruct
interest for life in the property, and
(II) no person has a power to appoint any
part of the property to any other person other
than the surviving spouse.
For the surviving spouse’s income interest in the trust to
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qualify as qualified terminable interest property under section
2056(b)(7)(B),12 the surviving spouse must be entitled to the
entire income interest for life in the property. Sec.
2056(b)(7)(B)(ii)(I); see Estate of Nicholson v. Commissioner,
supra. The regulations under section 20.2056(b)-5(f), Estate Tax
Regs., apply in determining whether the surviving spouse is
entitled to the entire income interest from the testamentary
trust for purposes of section 2056(b)(7)(B)(ii)(I). Lassiter v.
Commissioner, supra; see sec. 20.2056(b)-7(d)(2), Estate Tax
Regs.13 Having concluded above that the decedent’s surviving
spouse is not entitled to all of the income for life from the
amended trust, we also conclude that in the instant case the
requirements under section 2056(b)(7) have not been satisfied.
12
The parties do not dispute that a sec. 2056(b)(7) election
was made.
13
Sec. 20.2056(b)-7(d)(2), Estate Tax Regs., provides:
Entitled for life to all income. The principles
of §20.2056(b)-5(f), relating to whether the spouse is
entitled for life to all of the income from the entire
interest, or a specific portion of the entire interest,
apply in determining whether the surviving spouse is
entitled for life to all of the income from the
property regardless of whether the interest passing to
the spouse is in trust.
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Based on the foregoing, we find that the amended trust
property in the instant case does not qualify for either the
section 2056(b)(5) or the section 2056(b)(7) exception to the
section 2056(b)(1) terminable interest rule.
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, or moot.
To reflect the foregoing,
Decision will be entered
for respondent.