Estate of Wall v. Commissioner
101 T.C. 300, 1993 U.S. Tax Ct. LEXIS 62, 101 T.C. No. 21 (1993)
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Rule of Law:
The mere retention by a grantor of the power to remove an independent corporate trustee and appoint a successor independent corporate trustee, where the trustee has broad discretionary powers, does not cause the trust property to be includable in the grantor's gross estate under I.R.C. §§ 2036(a)(2) or 2038(a)(1) because such a power is not considered an 'ascertainable and legally enforceable power' to affect beneficial enjoyment, given the trustee's fiduciary duties.
Facts:
- Helen S. Wall (Mrs. Wall) died on October 7, 1987.
- On December 19, 1979, Mrs. Wall executed three irrevocable trust instruments, establishing the Kathryn Barth Trust, the Sarah Ann Barth Trust, and the Amy Elizabeth Barth Trust, for the benefit of her daughter and granddaughters.
- Mrs. Wall transferred additional assets to these trusts in 1980, 1984, and 1986, and filed Federal gift tax returns reporting these transfers.
- The trust agreements for all three trusts allowed Mrs. Wall to remove the initial corporate trustee, First Wisconsin Trust Co., and appoint a successor corporate trustee, provided the successor was 'completely independent from the Grantor' and 'other than the Grantor or any firm or corporation in which the Grantor has an interest.'
- Mrs. Wall never had the power to appoint herself as trustee of any of the three trusts, nor did she ever attempt to remove or change First Wisconsin Trust Co. during her lifetime.
- The corporate trustee of each trust was granted 'sole discretion' to expend principal and income to or for the benefit of the respective beneficiaries, essentially unrestrained by ascertainable standards.
Procedural Posture:
- Kathryn H. Barth, as personal representative of the Estate of Helen S. Wall (petitioner), filed Federal estate tax returns (Form 706 and a corrected Form 706) which did not include the assets of three inter vivos trusts in Mrs. Wall's gross estate.
- The Commissioner of Internal Revenue (respondent) determined a $44,948 deficiency in Federal estate tax due from the Estate of Helen S. Wall.
- The petitioner filed a petition with the United States Tax Court challenging the determined deficiency.
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Issue:
Does a grantor's retained power to remove an independent corporate trustee and appoint a successor independent corporate trustee, where the trustee possesses discretionary powers to distribute principal and income unrestrained by an ascertainable standard, cause the trust property to be includable in the grantor’s gross estate under I.R.C. §§ 2036(a)(2) or 2038(a)(1)?
Opinions:
Majority - NlMS, Judge
No, Mrs. Wall's retained power to remove an independent corporate trustee and appoint a successor independent corporate trustee, where the trustee possesses discretionary powers to distribute principal and income unrestrained by an ascertainable standard, does not cause the trust property to be includable in her gross estate under I.R.C. §§ 2036(a)(2) or 2038(a)(1). The court rejected the Commissioner's argument, which relied on Rev. Rul. 79-353, asserting that a grantor's power to remove and appoint a successor independent corporate trustee is equivalent to retaining the trustee's discretionary powers over distributions. The court found that the precedents cited by the IRS (Corning and Van Beuren) either involved a settlor's power to appoint themselves as trustee or were income tax cases under prior law, which are not directly applicable or binding for estate tax purposes. The court emphasized the Supreme Court's definition of a 'right' under I.R.C. § 2036(a)(2) from United States v. Byrum as an 'ascertainable and legally enforceable power.' The Commissioner's contention that Mrs. Wall could indirectly control the trustee through threats of removal was deemed mere speculation, implying a fraudulent side agreement that the court was disinclined to infer. Under established principles of trust law, a corporate trustee has a fundamental fiduciary duty to administer the trust solely in the interest of the beneficiaries, not the settlor. Any action taken by a trustee at the settlor's direction that violates this duty would constitute a breach of fiduciary duty. Since Mrs. Wall could only appoint another independent corporate trustee, she did not retain an ascertainable and legally enforceable power to affect the beneficial enjoyment of the trust property. Therefore, neither I.R.C. § 2036(a)(2) nor § 2038(a)(1) applies.
Analysis:
This case significantly clarifies the application of I.R.C. §§ 2036(a)(2) and 2038(a)(1) by rejecting the broad interpretation of grantor retained powers advocated by the IRS in Rev. Rul. 79-353. By distinguishing between the power to appoint oneself as trustee and the power to remove and replace an independent corporate trustee, the Tax Court affirmed that the latter does not automatically trigger estate tax inclusion. The decision reinforces the importance of the 'ascertainable and legally enforceable power' standard from Byrum and underscores the protective role of a corporate trustee's fiduciary duties, providing grantors with greater certainty in structuring irrevocable trusts with removal powers without incurring adverse estate tax consequences, provided the successor trustee must be genuinely independent.
