Estate of Chancellor v. Comm'r
2011 Tax Ct. Memo LEXIS 169, 2011 T.C. Memo. 172, 102 T.C.M. 70 (2011)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Section 2041(b)(1)(A) provides an exception to the general rule that a decedent's gross estate includes property over which they held a general power of appointment if the power to invade trust corpus is limited by an ascertainable standard relating solely to the decedent's health, education, support, or maintenance.
Facts:
- Lester M. Chancellor (Mr. Chancellor), Ann R. Chancellor's (decedent) husband, died in 1989.
- Mr. Chancellor's will established the Lester M. Chancellor Unified Credit Trust (the trust), intending to fund it with the maximum amount that could pass free of federal estate tax.
- Mr. Chancellor’s will designated decedent and Citizens National Bank of Meridian (the bank) as cotrustees of the trust.
- Under the trust terms, the cotrustees were authorized to apportion trust income among decedent, Mr. Chancellor’s children, and Mr. Chancellor’s grandchildren (the beneficiaries) and to invade trust corpus for their “necessary maintenance, education, health care, sustenance, welfare or other appropriate expenditures needed,” considering their accustomed standard of living and other income sources.
- On June 5, 1992, the trust was established at the bank, funded with listed stocks, and decedent and the bank began serving as cotrustees.
- From the time the trust was opened until her death, decedent never requested or received any trust corpus.
- Ann R. Chancellor died on November 16, 2004.
- At the time of decedent's death, the trust assets were valued at $1,205,034.
Procedural Posture:
- Ann R. Chancellor’s estate filed an estate tax return, which excluded the $1,205,034 value of the trust's assets from her gross estate.
- The Commissioner of Internal Revenue (Respondent) issued a notice of deficiency, determining a $716,013 Federal estate tax deficiency and contending that the trust assets should be included in decedent's gross estate because she possessed a general power of appointment over them.
- Mary Ann C. Walker, executrix of decedent's estate (Petitioner), filed a petition with the United States Tax Court challenging the Commissioner's determination.
- The parties submitted the case fully stipulated to the Tax Court pursuant to Rule 122 of the Tax Court Rules of Practice and Procedure.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a power to invade trust corpus for "necessary maintenance, education, health care, sustenance, welfare or other appropriate expenditures needed" by beneficiaries, "taking into consideration the standard of living to which they are accustomed," constitute a general power of appointment under section 2041, or does it fall within the ascertainable standard exception?
Opinions:
Majority - Thornton, Judge
No, the power to invade trust corpus for "necessary maintenance, education, health care, sustenance, welfare or other appropriate expenditures needed" by beneficiaries, considering their accustomed standard of living, falls within the ascertainable standard exception and therefore does not constitute a general power of appointment under section 2041. The Court addressed whether the terms "welfare" and "other appropriate expenditures" caused the power to fail the second requirement of the ascertainable standard exception, which requires the standard to relate solely to health, education, support, or maintenance. Respondent conceded that the phrase "taking into consideration the standard of living to which they are accustomed" satisfied the first requirement (an ascertainable standard). Looking to Mississippi law, and citing precedent like Estate of Strauss and Blodget v. Delaney (approved by the Mississippi Supreme Court), the Court reasoned that "welfare," when accompanied by "necessary" and "needed" qualifiers and linked to an "accustomed standard of living," should be construed to mean physical comfort and well-being akin to "maintenance" or "support," rather than a broad, subjective meaning like "happiness." The Court also applied the rule of ejusdem generis to interpret "other appropriate expenditures needed," concluding that it refers to expenditures of a like character to the expressly enumerated items (maintenance, education, health care, sustenance, welfare). This interpretation was supported by the testator’s stated intent to fund the trust with the maximum amount exempt from federal transfer tax, an intent that would be undermined by a broad construction of the power. The Court concluded that these phrases, especially when read in conjunction with the limiting language, "merely rounds out the standard of living concept" and restricts the power to support-related needs. Consequently, the power was limited by an ascertainable standard relating solely to health, education, support, or maintenance, preventing the inclusion of trust assets in the decedent's gross estate.
Analysis:
This case clarifies how courts interpret trust language to determine whether a power to invade corpus qualifies for the ascertainable standard exception under section 2041(b)(1)(A). It underscores that seemingly broad terms like “welfare” or “other appropriate expenditures” can be limited by surrounding contextual language, such as “necessary” or “needed” and references to an “accustomed standard of living,” to prevent a power from being classified as a general power of appointment. The decision emphasizes the importance of precise drafting in trust instruments, demonstrating that even with inclusive-sounding terms, a consistent intent to limit invasion powers to specific support-related purposes can be upheld, thereby avoiding significant estate tax liability. This ruling offers valuable guidance for estate planners in crafting trusts that qualify for federal estate tax exclusions.
