1979 U.S. Tax Ct. LEXIS 141">*141
Decedent created an inter vivos trust into which he transferred a substantial portion of his assets. He retained the right to income for life and to invade the corpus for his own benefit. The trust agreement also provided for a division of the trust corpus at the death of the settlor into a marital portion and a residual portion. The allocation was made by an "equalization clause" designed to produce the lowest potential aggregate estate taxes on the combined estates of the decedent and his surviving spouse. The amounts were then placed into separate marital and residual trusts. The surviving spouse received all income for life from the marital trust and a general testamentary power to appoint its entire corpus.
72 T.C. 73">*74 OPINION
Respondent determined a deficiency in the estate tax of the Estate of Fritz L. Meeske in the amount of $ 136,033.55. The issue is whether the estate1979 U.S. Tax Ct. LEXIS 141">*143 is entitled to a marital deduction under
The facts have been fully stipulated pursuant to
Decedent Fritz L. Meeske died on August 22, 1970. Prior to his death, by agreement dated July 22, 1970, the decedent established a revocable inter vivos trust. Petitioner Hackley Bank & Trust, N.A., is a trustee of the trust and the executor of the decedent's estate. Petitioner's principal office was located in Muskegon, Mich., when it filed its petition. The estate's Federal estate tax return was filed timely with the office of the District Director, Internal Revenue Service, in Detroit, Mich.
As stated above, the decedent1979 U.S. Tax Ct. LEXIS 141">*144 created a revocable trust into which he transferred a substantial portion of his assets. He retained the right to income for life and to invade the corpus for his own benefit. At the settlor's death, the trust corpus was divided into two portions, a marital portion and a residual portion. The division was made pursuant to a marital deduction "equalization clause." The clause is designed to produce the 72 T.C. 73">*75 lowest potential aggregate estate taxes on the estates of the decedent and his surviving spouse. It does this by allocating to the marital portion enough assets to equalize the value of the decedent's estate and his surviving spouse's estate (assuming she died immediately after the decedent), with the valuation made on the date of death and the alternate valuation date. The valuation that produces the lowest aggregate estate taxes is the one used to make the allocation.
In this regard, the trust agreement provided as follows:
(b) BALANCE OF TRUST FUND - Upon the death of Settlor, if his wife survives him, corpus (including additions, but excluding properties set aside pursuant to Article I hereof from Trust 31A and excluding property added to or allocated to a separate 1979 U.S. Tax Ct. LEXIS 141">*145 asset account for any reason) shall be divided into two portions; one of which shall be called the Marital Portion and the other of which shall be called the Residual Portion.
(i) There shall first be allocated to the Residual Portion any asset or the proceeds of any asset (or interest therein) with respect to which the marital deduction would not be allowed if allocated to the Marital Portion.
(ii) AA. There shall then be allocated to the Marital Portion that percentage interest in the balance of the assets constituting the trust estate which shall, when taken together with all other interests and property that shall have passed to Settlor's spouse under other provisions of this trust or otherwise, obtain for Settlor's estate a marital deduction which would result in the lowest Federal estate taxes in Settlor's estate and his spouse's estate, on the assumption Settlor's spouse died after him, but on the date of his death and that his spouse's estate were valued as of the date on (and in the manner in) which Settlor's estate is valued for Federal estate tax purposes; Settlor's purpose is to equalize, insofar as possible, his and his spouse's estates for Federal estate tax purposes, 1979 U.S. Tax Ct. LEXIS 141">*146 based upon said assumptions.
BB. In the event that at the time of Settlor's death there is no provision of the Federal Internal Revenue Code having substantially the same effect as the provision for the marital deduction contained in the Code at the date of execution of this trust, or in the event Settlor's spouse shall not survive Settlor, or in the event that Settlor's gross estate for Federal estate tax purposes shall not be of a size sufficient to require the filing of a Federal estate tax return, the provisions of the foregoing paragraph (ii) AA of this Article shall be of no effect, and the property otherwise allocable to the Marital Portion hereunder shall be allocated to the Residual Portion.
(iii) There shall finally be allocated to the Residual Portion the remaining percentage interest in the balance of the assets constituting Settlor's estate.
(iv) The percentage interest of the Marital and Residual Portions shall be determined and fixed by using asset values for all such purposes as finally established for Federal estate tax purposes. In selecting a valuation date for the purpose of the Federal estate tax, Settlor directs Trustee to select the date which will result 1979 U.S. Tax Ct. LEXIS 141">*147 in the greatest tax benefit to Settlor's and his spouse's 72 T.C. 73">*76 estates, regardless of the effect this selection may have on the amount provided by this Article for Settlor's spouse.
Settlor also authorizes Trustee to make such elections as it shall deem proper including (without limitation intended) the election as to whether certain expenses shall be taken as deductions against estate tax or income tax, regardless of the effect on the pattern of allocation.
The fixed percentage of Settlor's estate allocated to each portion shall, for distribution purposes, be applied to the assets distributed valued at their fair market value at the time of distribution.
(v) The Marital Portion shall be held as hereinafter provided in the section of this Article entitled "Marital Trust."
(vi) The Residual Portion shall be held as hereinafter provided in the section of this Article entitled "Residual Trust."
All property allocated to the marital portion was, under the terms of the trust agreement, placed into a segregated marital trust. The marital portion was then held, administered, and distributed pursuant to the terms of the marital trust. Thus, after the initial allocation of corpus between1979 U.S. Tax Ct. LEXIS 141">*148 the marital and residual portions, the corpus of each portion was segregated from the other and increased or diminished without regard to the other. All net income from the marital trust was to be paid to the settlor's wife for life, and the trustee was given a discretionary power to invade the corpus for the wife's maintenance and support. The wife also possessed a special power of appointment by deed and a general power of appointment by will. The powers were exercisable over the entire corpus of the marital trust, but in default of the exercise of the powers, the corpus would be added to the residual portion and pass under the terms of the "residual trust." The residual trust, to which the residual portion of the trust estate was also distributed, basically provided for the distribution of corpus upon the death of the settlor's wife to the decedent's heirs. 2
1979 U.S. Tax Ct. LEXIS 141">*149 Pursuant to the terms of the equalization clause, the trustee allocated $ 258,855.26 to the marital portion of the decedent's trust. This amount thus became the corpus of the marital trust. The estate deducted the amount so allocated under
The facts in this case are in all material respects identical to those in
Respondent's second reason for disallowing the deduction here is that the interest passing to the surviving spouse fails to meet the requirements of
(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 -- (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 1979 U.S. Tax Ct. LEXIS 141">*153 purposes of paragraph (1)(A), be considered as passing to any person other than the surviving spouse.
By its terms,
There is no dispute here about whether the interest passing 72 T.C. 73">*79 under 1979 U.S. Tax Ct. LEXIS 141">*154 the marital trust satisfies requirements (2) and (4). Thus respondent argues on brief only that the interest does not satisfy requirements (1), (3), and (5).
With respect to requirements (1) and (3), respondent contends that the surviving spouse does not have an income interest in or a power of appointment over a "specific portion" of the trust estate. This argument is inapposite. The trust agreement clearly provides that the trust corpus be divided at the settlor's death into a marital portion and a residual portion. The marital portion is to be placed in a marital trust and the residual portion placed in a residual trust. Once the allocations were made, they would be treated separately for all purposes. All income earned by the marital trust would be payable to the spouse without regard to the income earned by the residual trust. Her power of appointment would be over the entire marital trust corpus without regard to the disposition of the residual trust corpus, and each trust's corpus would increase or diminish without regard to the other. Thus the surviving spouse clearly received an income interest in and a power of appointment over the
Respondent's reliance on section 20.2056(b)-5(c), Estate Tax Regs., and
With respect to requirement (5), respondent contends that the surviving spouse could not exercise her general power of appointment in all events. He argues first that the power must be exercisable at any time during the surviving spouse's life. This is clearly incorrect.
Alternatively, respondent argues that the power could not be exercised effectively by the decedent's spouse before the allocation of the assets between the marital portion and the residual portion and thus was not exercisable in all events. Certainly, if a power cannot be exercised effectively before an allocation or distribution of assets after the death of the decedent, it is not exercisable in all events. See sec. 20.2056(b)-5(g)(4), Estate Tax Regs. But an interest will not be disqualified merely because, in the event that the power is exercised during the administration of the estate, distribution of the property to the appointees will be delayed for the period of administration. Sec. 20.2056(b)-5(g)4, Estate Tax Regs.
There is nothing in the record indicating that the surviving spouse's general testamentary power could not be exercised effectively before allocation1979 U.S. Tax Ct. LEXIS 141">*158 or distribution of the decedent's assets. On the contrary, her power was exercisable at any time without any restriction. Although she had to wait until the alternate valuation date to know the value of the trust corpus over which she had a power of appointment, the decedent's wife 72 T.C. 73">*81 was not thereby prevented from exercising the power immediately after her husband's death. 3 Perhaps this would have delayed distribution of the property to the appointees. But as already explained, this alone is insufficient to disqualify the interest under
We therefore hold that the transfer at issue has satisfied the requirements of
1. Unless otherwise stated, all section references are to the Internal Revenue Code of 1954, as in effect for the taxable years in issue.↩
2. Although the residual trust contained other provisions by which some of its corpus may have been distributed, they are irrelevant to our determination here.↩
3. If, for example, she had died before the alternate valuation date, any exercise of the power in her will would still have been effective.↩
