Fundamentals of DING Type Trusts: No Gift Not a Grantor Trust

April 2014
Volume 26, Number 4
EDITORS
Howard M. Zaritsky
Rapidan, Virginia
www.howardzaritsky.com
S. Alan Medlin
University of South Carolina
School of Law
Columbia, South Carolina
F. Ladson Boyle
University of South Carolina
School of Law
Columbia, South Carolina
IN THIS ISSUE
Probate Report . . . . . . . . . . . . . . . . .
12
Statute Does Not Override Lack of Residuary Clause
POA Confidential Relationship Affects Ownership of
Bank Accounts
Adopted Child Does Not Inherit from Biological Father
Tax Report . . . . . . . . . . . . . . . . . . . .
14
Administration’s 2015 Budget Includes New Estate
Planning Related Proposals
No Advance Estate Tax Deduction of Pending
Malpractice Claim
10th Circuit Supports Highest and Best Use of Easement
Property and Denies $2.25 Million in Deductions
No Deduction for Bargain Sale of Conservation
Easement: State Law Prevents Perpetual Easement
Transfers Under Premarital Agreement Qualify for
Marital Deduction
April 2014
Fundamentals of DING Type Trusts:
No Gift Not a Grantor Trust
By Jonathan G. Blattmachr and William D. Lipkind
Introduction
The initial reaction and, in some quarters, the continuing
reaction of many practitioners is that it is not possible to have
lifetime transfers made to a trust be incomplete for federal gift
tax purposes and have the trust not be a grantor trust for federal
income tax purposes. However, the Internal Revenue Service
has issued several private letter rulings that reach the conclusion
that such a result can be achieved.
The apparent purpose of using such a structure is to attempt
to avoid state and local income taxes on taxable income
generated on the assets transferred in such an arrangement,
although, at least some states are considering legislation that
would attempt to foil such a result. New York recently enacted
such legislation.
A Brief History of Gift and Grantor Trust Rules
The current gift tax provisions in the Internal Revenue Code
of 1986, as amended, have their origin in 1932 after the gift tax
enacted in 1924 was repealed in 1926. It was not enacted or
reenacted primarily as a revenue source for the federal
government but to prevent avoidance of income and estate taxes.
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The grantor trust rules, under which the income,
deductions, and credits against tax of the trust are
attributed to the trust’s grantor (and, in one instance,
to a beneficiary who is not the grantor) for federal
income tax purposes, were first issued as regulations
in 1946 under the gross income section of the Internal
Revenue Code of 1939 to prevent taxpayers from
shifting income to trusts as separate taxpayers and
thereby reduce overall income taxation by such
income “splitting.” These rules were codified,
essentially with little change, as subpart E of part 1 of
subchapter J of chapter 1 of subtitle A of the Internal
Revenue Code of 1954 and are now comprised in
sections 671-679 of the Internal Revenue Code of
1986 as amended. Today, the opportunities to reduce
federal income taxes by shifting income to a nongrantor trust are so limited that it has been suggested
that the grantor trust rules be repealed. See Ascher,
The Grantor Trust Rules Should Be Repealed, 96
IOWA LAW REVIEW 885 (2011). Single individuals
reach the top federal income tax bracket of 39.6
percent on income a little above $400,000 and for
married couples filing jointly a little above $450,000.
These taxpayers reach the 3.9% net investment
income tax bracket at, respectively, $200,000 and
$250,000. Non-grantor trusts reach these top brackets
at about $12,000 of income.
As a general rule, an individual taxpayer, subject
to state (or state and local) income tax may create a
non-grantor trust, the income of which avoids such
state (or state and local) income taxation. For
example, an income tax resident of New York City
and State, both of which impose income taxes, may
transfer property during his or her lifetime to a trust
that is not a grantor trust so that the income avoids
such state and local taxes. (As many states do, New
York defines a “resident trust” as one created by a
New Yorker and imposes its income tax on such
resident trusts. See N.Y. Tax Law § 605. However,
no tax is imposed if the trust has no New York trustee,
no New York source income, and no asset situated in
New York.) The basis upon which a state may seek to
impose its income tax on income of a non-grantor
trust varies significantly from jurisdiction to
jurisdiction. (Under California law, for example, the
state income tax is imposed if there is a California
trustee or a California beneficiary. See Cal. Rev. &
Tax Code §17742. The tax residence of the grantor of
the trust is not a factor in determining whether
California will seek to impose its income tax.) But
there seem to be constitutional limitations on the
ability of a state to impose its income tax merely on
the ground that the trust was created by an income tax
resident of the state.
Although creating a non-grantor trust can avoid
state and local income taxes, there are at least two
reasons why that has not been widely done. First, it
has been perceived that neither the individual taxpayer
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April 2014
Probate Practice Reporter
who creates the trust nor his or her spouse may be a
trust beneficiary because, as widely believed, if either
is a trust beneficiary, the trust will be a grantor trust,
meaning the income will be attributed back to the
individual taxpayer and, thereby, be subject to the
state and local income taxes that would be imposed
upon the taxpayer if he or she had directly earned the
income. That is because almost all state and local
jurisdictions impose their income taxes based
essentially, but subject to exceptions and special rules,
on the taxpayer’s federal income. Income attributed
to the grantor under the grantor trust rules, therefore,
would continue to be taxed under the same state and
local taxes as would all other income reportable by the
grantor. Although by excluding the grantor and the
grantor’s spouse as beneficiaries means a non-grantor
trust may readily be created, many taxpayers do not
want to lose access to the property transferred to a
trust as well as the income the property thereafter
produces.
The second “limitation” is that it is generally
perceived that any transfer of property to a nongrantor trust will be a completed gift for federal gift
tax purposes resulting in the use of the taxpayer’s
lifetime gift tax exemption and, to the extent the gift
exceeds the available exemption, resulting in the
payment of gift tax. Many taxpayers wish to preserve
their exemptions, especially if they anticipate
receiving all or a portion of the gifted property back.
Moreover, as a general rule, taxpayers wish to avoid
paying gift tax.
Initial Private Letter Rulings
Beginning in the early 2000s, the Service began
issuing private letter rulings holding that the transfer
of assets to a specifically designed trust would not be
a completed gift and the trust would not be a grantor
trust even though all the property might be returned to
the grantor. See, for example, Private Letter Rulings
April 2014
200247013, 200502014, 200612002, 200647001,
200715005 and 200731019. Although under section
6110(k)(3), these private rulings could not be cited or
used as precedent, there were so many and so
consistent that several practitioners created such
arrangements for clients without private letter rulings.
The trusts began being called “DING trusts” for
“Delaware Incomplete Non-Grantor” trusts, although
most of the private letter rulings were issued with
respect to trusts governed by Alaska law.
The structure of the trusts in these rulings was
essentially the same. The trusts were irrevocable and
the trustee had no authority to make distributions to
any beneficiary during the grantor’s lifetime but only
at the direction of a group of individuals, who were
beneficiaries in addition to the grantor, and called the
“Distribution Committee” either by their unanimous
direction or by the direction of the grantor and a
member of the Distribution Committee. The grantor
also retained a testamentary special power of
appointment and, in default of its effectual exercise,
the trust remainder would pass to the grantor’s
descendants or, if not, to alternate remainder
beneficiaries (e.g., charitable organizations). Under
this structure, the IRS consistently held that the
transfer to the trust was not a completed gift and the
trust was not a grantor trust.
Eventually, taxpayers began asking for another
ruling: that the taxpayers who held the power, in a
non-fiduciary capacity, to require the trustee to make
distributions (and who comprise the Distribution
Committee) would not be treated as making a gift for
federal gift tax purposes by directing the trustee to
make distributions to a beneficiary other than
themselves because the members of the Committee
did not hold general powers of appointment described
in section 2514. See, for example, Private Letter
Ruling 200502014.
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IRS Release 2007-127
ruling will not be sought.
On July 9, 2007, the IRS issued Release 2007-127
(the “Release”) in which the Chief Counsel of the IRS
requested comments on whether the private letter
rulings holding that no member of the Distribution
Committees held general powers of appointment were
consistent with Rev. Rul. 76-503, 1976-2 C.B. 275,
and Rev. Rul. 77-158, 1977-1 C.B. 285. Many
professional organizations submitted comments with
the great number concluding no member of a
Distribution Committee held a general power of
appointment.
Grantor Trust Issues
To date, the IRS has not issued any guidance on its
position with respect to the issue raised in the Release.
But beginning last year, the IRS began again issuing
private letter rulings addressing all three issues
involving a somewhat different structure that appears
to obviate the issue addressed in the Release. The
first was Private Letter Ruling 201310002. See also
Private Letter Rulings 201310003 — 201310006 and
Private Letter Rulings 201410001 — 2014100010.
This article examines these rulings and provides a
discussion of the reasoning of them on the questions
of whether a transfer to such a trust is a completed
gift, whether the trust is a grantor trust, and whether
any member of the Distribution Committee holds a
general power of appointment. It will explain how
drafters can navigate around the grantor trust rules and
also prevent transfers to the trust from being
completed gifts. Many critical aspects of these trusts
do not appear from the rulings themselves but can
only be derived from the requests for the rulings and
the experience of the practitioners who have acquired
them. (Co-author Jonathan Blattmachr received most
of the pre-Release PLRs. Co-author William Lipkind
received the first post-Release PLR and several of the
others that have been issued since then.) It will also
provide some additional guidance if a private letter
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A trust may be a grantor trust for one of several
reasons, including when it is a foreign trust with an
American beneficiary as described in section 679,
when certain administrative powers described in
section 675 are present, or when certain borrowing of
trust property has occurred within the meaning of
section 675(3). In each trust that is the subject of one
of the private letters rulings, provisions essentially
prohibit the trust from being a foreign trust and, to
avoid section 677(a)(3), prohibit using income of the
trust to pay premiums on a policy insuring the life of
the grantor or the grantor’s spouse. Because no
beneficiary may unilaterally withdraw all income or
corpus from a trust, no trust could be a grantor trust
with respect to a beneficiary under section 678. See,
generally, Blattmachr, Gans & Lo, A Beneficiary as
Trust Owner: Decoding Section 678, 35 ACTEC
JOURNAL 35 (Fall 2009). As a general rule, careful
drafting of the trust document and administration of
the trust may avoid these grantor trust rules.
However, other circumstances when grantor trust
status is sought to be avoided may be more difficult to
find such as when the grantor or the grantor’s spouse
holds certain powers over or have interests in the
trust. For example, if the grantor (or the grantor’s
spouse) holds a reversionary interest in the trust
described in section 673, it will be a grantor trust.
Similarly, if the grantor (or the grantor’s spouse)
holds certain powers to control the beneficial
enjoyment of trust property as described in section
674, it will be a grantor trust. Moreover, if income or
corpus must or may be distributed to or for the grantor
(or the grantor’s spouse) as described in section 676
or 677, it will be a grantor trust. Hence, for the trust
not to be a grantor trust (one of the results sought in
the private letter rulings), these provisions must be
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avoided.
To begin, it is appropriate to note that many of the
powers or interests that would make a trust a grantor
trust do not apply if these powers or interests are
exercisable or enjoyable only with the consent of an
“adverse party.” Section 672(a) defines “adverse
party” as any person having a substantial beneficial
interest in the trust which would be adversely affected
by the exercise or non-exercise of the power which he
possesses respecting the trust. Whether an interest is
substantial and whether it is adverse are, in general,
questions of fact. This is discussed in detail in Boyle
& Blattmachr, BLATTMACHR ON INCOME TAXATION
OF ESTATES AND TRUSTS (PLI 2014) at 4:2.4[A].
The IRS apparently has concluded that, because the
members of the Distribution Committee have absolute
discretion to direct distributions from income and
principal among themselves, each of the members of
the Distribution Committee has a substantial interest
in both the income and principal of the trust that
would be adversely affected by any decision to
accumulate income in the trust rather than distribute
the income currently among the members. (Although
the current beneficiaries in each of the post-Release
PLRs were also the default remainder beneficiaries of
the trust, the grantor could appoint the remainder to
others pursuant to the testamentary power of
appointment.) Because the question of whether an
interest is substantial and adverse is one of fact, it is
not possible to conclude with certainty that the
conclusion of the Service is correct, but it does not
seem to be unreasonable.
In any case, this
determination by the IRS seems critical to the
conclusion that the trusts involved in the rulings were
not grantor trusts, as discussed below.
Section 673. A trust is a grantor trust if the grantor
(or the grantor’s spouse) has a reversionary interest in
the corpus or income of the trust that, at the trust’s
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inception, has a value of more than five percent of the
value of the corpus or income. It does not seem that
the grantor (or the grantor’s spouse) has any
reversionary interest in the type of trust that has been
the subject of the private letter rulings. The trust
agreement never provides for a distribution by its
trustee to the grantor; the grantor’s testamentary
power of appointment cannot be exercised in favor of
the grantor, the grantor’s creditors or estate, or the
creditors of the grantor’s estate; and, to the extent the
power of appointment is not effectually exercised, the
trust property passes to other default takers, which do
not include the grantor or the grantor’s estate.
Perhaps, more critically, a reversion under section
673 apparently can arise only in situations involving
a traditional reversion under property law. Under the
traditional definition, a reversion arises when a person
having a vested estate transfers a lesser vested estate
to another. There seems to be no authority, holding,
or commentary suggesting that a trustee’s
discretionary power to distribute principal or income
to the transferor, with the consent of an adverse party,
constitutes a reversionary interest under section 673.
The IRS itself has acknowledged that “a
reversionary interest is the interest a transferor has
when less than his entire interest in property is
transferred to a trust and which will become
possessory at some future date.” TAM 8127004.
Similarly, in GCM 36,410, when comparing a
possibility of reverter under section 676(a) with a
reversion, the Service defined a reversion as “the
residue left in the grantor on determination of a
particular estate” and stated that “the reversionary
interest arises only when the transferor transfers an
estate of lesser quantum than he owns.”
As
mentioned above, the trusts that are the subject of the
ruling provide for alternative remainder beneficiaries
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so no portion of the trust may ever revert to the
grantor or the grantor’s estate.
Hence, the IRS seems correct in concluding in the
ruling that section 673 does not apply to cause these
trusts to be grantor trusts.
Section 674. Section 674(a) provides that a trust
will be a grantor trust if the beneficial enjoyment of its
corpus or the income is subject to a power of
disposition, exercisable by the grantor or a nonadverse
party, or both, without the approval or consent of any
adverse party. The real scope of section 674 is
determined by the many exceptions it contains. Some
powers of disposition may be held by anyone
(including the grantor or the grantor’s spouse) without
causing the trust to be a grantor trust. Others may be
held only by persons other than the grantor (or the
grantor’s spouse) and certain others without causing
the trust to be a grantor trust. Still others may be held
by anyone other than the grantor (or the grantor’s
spouse) without triggering grantor trust status.
As mentioned, the only powers retained by the
grantor in the trusts were (i) a power to appoint
principal exercisable by will, (ii) a power to appoint
income (accumulated with the consent of the
Distribution Committee, the members of which are
adverse parties) exercisable by will, and (iii) a nonfiduciary power to distribute principal limited by a
reasonably definite standard.
Power to Appoint Corpus and Accumulated
Income by Will. Under section 674(b)(3), a trust is
not a grantor trust merely because someone (including
the grantor) holds a power exercisable only by will,
other than a power in the grantor to appoint by will
the income of the trust when the income is
accumulated for such disposition by the grantor or
may be so accumulated in the discretion of the grantor
or a nonadverse party, or both, without the approval or
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consent of any adverse party. Under the trusts
involved in the rulings, the grantor has a testamentary
power of appointment not just over the original corpus
of the trust but accumulated income as well.
However, as mentioned above, accumulation of
income may occur under the trust only essentially
with the consent of at least one member of the
Distribution Committee (as the grantor may direct the
distribution of trust property only with the consent of
at least one member of the committee, each of whom
the Service concluded is an adverse party). Hence,
accumulation of income may occur only with the
consent of an adverse party. Therefore, the section
674(b)(3) exception to the general rule of section
674(a) applies and, as a result, the testamentary power
does not trigger grantor trust status.
Power to Distribute Principal Pursuant to a
Standard. Under section 674(b)(5), a trust is not a
grantor trust merely because someone (including the
grantor) holds a power to distribute corpus to or for a
beneficiary or beneficiaries or to or for a class of
beneficiaries (whether or not income beneficiaries)
provided that the power is limited by a reasonably
definite standard set forth in the trust instrument.
(Note that a power does not fall within the powers
described in section 674(b)(5) if any person has a
power to add to the beneficiary or beneficiaries or to
a class of beneficiaries designated to receive the
income or corpus, except where such action is to
provide for after-born or after-adopted children.)
Such a standard is broader than the familiar
ascertainable standard relating to health, education,
maintenance, and support (HEMS) commonly used to
avoid the powerholder from being treated as holding
a general power of appointment under sections 2514
and 2041 for gift and estate tax purposes. In any case,
a HEMS standard falls within the reasonably definite
standard under section 674(b)(3). Hence, the
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Probate Practice Reporter
retention of the power by the grantor to appoint the
principal of the trust among the beneficiaries (other
than the grantor) does not cause a trust to be a grantor
trust.
Some powers trigger grantor trust status only if
held in a non-fiduciary capacity. However, it seems
that the “exception” contained in section 674(b)(5)
applies whether the power to distribute is held in a
fiduciary or non-fiduciary capacity. The reason the
section 674(b)(5) power in the post-Release PLRs is
held in a non-fiduciary capacity relates to the
incomplete gift aspect of the rulings, as discussed
below.
Sections 676 and 677. Section 676 provides that
a trust is a grantor trust when it provides for the
possible return to the grantor of the corpus of a trust
but only if it does not require the consent of an
adverse party. Section 677 triggers grantor trust status
in a situation in which the income of a trust may be
distributed to or used for the benefit of the grantor or
accumulated for the grantor (or the grantor’s spouse)
but only if it does not require the consent of an
adverse party.
Under the terms of the trusts that are the subject of
the private letter rulings, all of the income and corpus
may be returned to the grantor but only with the
consent of at least one member of the Distribution
Committee. (In the later rulings, it requires the
consent of a majority of the members of the
committee with that of the grantor.) As discussed
above, the Service has concluded that each member of
the Distribution Committee is an adverse party.
Hence, the grantor’s power to direct the distribution of
income and principal to himself or herself does not
cause either section 676 or 677 to apply because that
may occur only with the consent of one or more
adverse parties.
Importance of State Law. As indicated earlier, it
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seems that all of the pre-Release PLRs deal with trusts
formed under the laws of Alaska or Delaware. (These
trusts are commonly referred to as “AKINGs” or
“DINGs,” respectively.) Although not discussed in the
rulings, the laws of those states were used because,
even though the assets in the trust could be distributed
to the grantor, the governing law did not permit
creditors to attach the trust assets. If the grantor’s
creditors could attach trust property in satisfaction of
the grantor’s debts, the trust would be a grantor trust.
See Rev. Rul. 54-516, 1954-2 C.B. 54. It is at least
arguable that a DING-type trust is not subject to
claims of creditors. Although the law in most states
essentially provides that a trust a person creates or
settles for himself or herself (a so-called “Self-Settled
Trust”) is permanently subject to the claims of the
settlor’s creditors (see, for example, N.Y. EPTL § 73.1 and RESTATEMENT (THIRD) OF TRUSTS § 60), it
seems somewhat uncertain what constitutes a selfsettled trust. For example, under N.Y. EPTL § 7-3.1,
a self-settled trust is void with respect to creditors of
the settlor. In Herzog v. Commissioner, 116 F. 2d 591
(2d Cir. 1941) with what some view as America’s
greatest three-judge panel (Judge Learned Hand,
Judge Augustus Hand, and Judge Chase) held that the
trust was not subject to the claims of creditors of the
settlor because the trustee could distribute income and
corpus to persons other than the settlor. Later New
York state case law suggests that Herzog was
incorrectly decided. See, for example, Vandervilt
Credit Corp. v. Chase Manhattan Bank, 100 A.D.2d
544 (1984). The post-Release PLRs have all dealt
with trusts formed under Nevada law and are
commonly referred to as “NINGs.”
Like Alaska and Delaware, Nevada law, as well as
several other states, permits individuals to create
trusts that are not subject to the claims of the creditors
of the grantor. Some states provide this protection
only in limited circumstances. For example, in
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Arizona and Florida, the assets in an inter vivos QTIP
trust are not deemed contributions by the surviving
settlor even if the settlor has some interest in the trust
after the death of the settlor’s spouse. See, for
example, S.C. Code Ann. § 62-7-505(b)(2); see also
ACTEC Comparison of the Domestic Asset
Protection Trust Statutes, edited by David G. Shaftel,
http://www.actec.org/public/Documents/Studies/Sh
aftel_DAPT_CHART_06_30_2012.pdf. It is at least
arguable that a NING-type trust may be created under
the law of any state because a self-settled trust (that is,
a trust the assets of which may be attached by the
creditors of the settlor) includes only one from which
the trustee must or may distribute assets to the settlor.
As explained earlier, the trustee of the trusts that were
the subject of the private letter rulings did not hold the
power to distribute trust property to the grantor.
However, the grantor could distribute trust property to
himself or herself, which would make it subject to the
claims of his or her creditors under the law of virtually
all states. However, some states continue to protect
the trust’s assets when the grantor’s power of
revocation is held only with the consent of an adverse
party.
See, for example, Alaska Stat. §
34.40.110(b)(2). Thus, the conclusion is that the trust
should be formed under the law of a state that protects
the trust assets from claims of the creditors of the
grantor.
A taxpayer makes a gift for federal gift tax
purposes to the extent the value of what the taxpayer
transfers exceeds the value of what the taxpayer
receives in exchange. A gift is complete (and,
therefore, potentially subject to gift tax) to the extent
the taxpayer has so parted with dominion and control
as to leave in him or her no power to change its
disposition, whether for his or her own benefit or for
the benefit of another.
Treas. Reg. § 25.25112(b)(first sentence). See, generally, Zeydel, "When Is
a Gift to a Trust Complete: Did CCA 201208026 Get
It Right?," JOURNAL OF TAXATION ( September 2012).
For example, a gift is incomplete if and to the extent
that a reserved power gives the taxpayer the power to
name new beneficiaries or to change the interests of
the beneficiaries as between themselves, unless the
power is a fiduciary power limited by a fixed or
ascertainable standard.
Treas. Reg. § 25.25112(c)(second sentence).
However, Nevada law was chosen over the laws of
other states (for example, Alaska or Delaware)
because in the ruling process after the Release the IRS
insisted that the grantor hold a power described in
section 674(b)(5), which is the power to distribute
corpus to the beneficiaries pursuant to a reasonably
definite standard set forth in the instrument. At the
time the original post-Release request for ruling was
filed with the Service, only Nevada law expressly
permitted a grantor to hold a lifetime special power of
appointment without exposing the trust assets to
The implication is that if the taxpayer retains a
power to distribute property pursuant to a fixed or
ascertainable standard (such as a HEMS standard)
held in a non-fiduciary capacity, the power renders the
gift incomplete. So the section 675(b)(5) power to
distribute corpus, which does not trigger grantor trust
status whether retained in a fiduciary or non-fiduciary
capacity, was retained in the trusts that are the subject
of the post-Release PLRs in a non-fiduciary capacity
so this power prevented the entire gift with respect to
both corpus and accumulated income from being
8
claims of creditors of the grantor. Alaska, Delaware,
and other states permit the grantor to hold a
testamentary special power of appointment without
such exposure but not a lifetime power, although the
laws of some states (for example, Alaska and
Delaware) have since been amended to permit lifetime
powers as well.
Gift Tax Issues
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Probate Practice Reporter
complete.
There is a second power retained by the grantor in
all the trusts that are the subject of the private letter
rulings and that renders at least part of the transfers to
the trust as incomplete for federal gift tax purposes:
the testamentary special power of appointment.
Although this power could not be exercised in favor
of the grantor, the grantor’s creditors or estate, or
creditors of the grantor’s estate, such a power may
render a gift incomplete. As mentioned above, a gift
is incomplete if and to the extent that a reserved
power gives the taxpayer the power to name new
beneficiaries or to change the interests of the
beneficiaries as between themselves (unless the power
is a fiduciary power limited by a fixed or ascertainable
standard). This regulation seems to reflect the
Supreme Court’s decision in Estate of Sanford v.
Commissioner, 308 U.S. 39 (1939). In that case, the
taxpayer created a trust for the benefit of named
beneficiaries, reserving the power to revoke the trust
in whole or in part and to designate new beneficiaries
other than himself. Six years later, the taxpayer
relinquished his power to revoke the trust. However,
the taxpayer continued to retain his rights to change
the beneficiaries. The taxpayer relinquished his right
to change the beneficiaries. The Court held that a
donor’s gift is not complete, for purposes of the gift
tax, until the donor relinquishes the power to
determine those who would ultimately receive the
property.
Accordingly, the retention of the special power of
appointment exercisable by will (falling under the
section 674(b)(3) grantor trust exception) together
with lifetime power (falling under the section
674(b)(5) grantor trust exception), held in a nonfiduciary capacity, to distribute corpus pursuant to the
HEMS standard renders the gifts to the trusts
incomplete. Nonetheless, these powers will cause the
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trust to be included in the grantor’s gross estate under
sections 2036(a)(2) and 2038. However, avoiding
estate tax is not the goal of these trusts which, as
mentioned, seems to be to provide a way in which
state and local income taxes may be avoided.
Under Regulations section 25.2511-2(e), a
taxpayer is considered as having a power that would
render any gift incomplete even if it is exercisable by
the taxpayer in conjunction with any person not
having a substantial adverse interest in the disposition
of the transferred property or the income therefrom.
The Distribution Committee members are not takers
in default for purposes of Regulations section
25.2514-3(b)(2). They are merely coholders of the
power to distribute to the beneficiaries including the
grantor. The Distribution Committee ceases to exist
upon the death of Grantor. Under Regulations section
25.2514-3(b)(2), a coholder of a power is only
considered as having an adverse interest when he or
she may hold the power after the death of the current
possessor of the power and the coholder may then
exercise it in favor of himself or herself, his or her
estate or creditors, or the creditors of his or her estate.
The Service concurred in Rev. Rul. 79-63, 1979-1
C.B. 302: “In this case, A is a taker in default not of
the lifetime power in which A has a power of consent
but rather of the testamentary power exercisable solely
by the decedent. In such a situation A would not have
necessarily been in a better economic position after
the decedent's death by refusing to exercise the power
in favor of the decedent during the decedent's lifetime.
Thus, the fact that A might survive the decedent and
receive an interest in the property, if the decedent
failed to exercise the testamentary power in favor of
persons other than A, does not elevate A's interest as
a consenting party of the lifetime power to a
substantial adverse interest.”
In the situations involved in the PLRs, the
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Probate Practice Reporter
Distribution Committee ceased to exist upon Grantor's
death. Accordingly, the Distribution Committee
members do not have interests adverse to the Grantor
under Regulations section 25.2514-3(b)(2) and for
purposes of section 25.2511-2(e). Therefore, the
Grantor is considered as possessing the power to
distribute income and principal to any beneficiary
himself or herself because he or she retained the
power to distribute the trust property (with the consent
of a majority of the members of the Distribution
Committee). The retention of these powers causes
the transfer of property to the trust to be wholly
incomplete for federal gift tax purposes. The grantor
also retained the power described in section 674(b)(5)
over the principal of trust. The grantor retains
dominion and control over the income and principal
of the trust unless and until the Distribution
Committee members exercise their power, which, if
the grantor does not consent, must be exercised
unanimously to make distributions. This power held
by the Distribution Committee does not appear to
cause the transfer of property to be complete for
federal gift tax purposes. See Goldstein v.
Commissioner, 37 T.C. 897 (1962); Estate of Goelet
v. Commissioner, 51 T.C. 352 (1968).
General Power of Appointment Issue
As indicated above, in most of the pre-Release
PLRs, the IRS held that no member of the
Distribution Committees held general powers of
appointment, but in the Release Chief Counsel to the
IRS asked for comments of whether those holdings
were consistent with Rev. Rul. 76-503 and Rev. Rul.
77-158.
The apparent concern of the IRS was whether the
powers held by members of the Distribution
Committee to distribute corpus to themselves (as well
as to the grantor and, perhaps, other beneficiaries)
constituted a general power deemed held by each such
10
member.
S ections 2514(c)(3)(B) and
2041(b)(1)(C)(ii) essentially provide that an
individual is not treated as holding a general power of
appointment that is exercisable in his or her own favor
if it is only exercisable with the consent of someone
with a substantial interest that is adverse to such
exercise. Rev. Rul. 76-503 and Rev. Rul. 77-158
(which amplified the 1976 ruling) appear to hold that
persons who hold a “joint” power to distribute
property to themselves are not adverse to the exercise
of the power by the others when surviving
powerholders must continue to share the power with
someone who succeeds to the joint power when one of
the original powerholders dies. A taxpayer is not
treated as a general powerholder if it is exercisable
only with the consent of the person who granted the
power. Sections 2514(c)(3)(A) and 2041(b)(1)(C)(I).
As mentioned, one of the powers a member of the
Distribution Committee holds is to exercise the power
with the consent of the grantor. Hence, that power
held by members of the Distribution Committee is not
a general power of appointment for gift or estate tax
purposes.
As mentioned above, almost all of the professional
organizations that submitted comments concluded that
no member of the Distribution Committees held a
general power of appointment. However, the IRS has
not issued any official or unofficial statement as to
that matter. Nonetheless, the trusts that are the
subject of the post-Release PLRs avoid the issue by
providing that, at all times, the power of the
Distribution Committee to direct distributions (other
than with the consent of the grantor) must be
exercised unanimously and, although initially there
were more than two Distribution Committee
members, the trust agreements require that, at all
times, there must be at least two individuals (other
than the grantor) who are members of the Distribution
Committee. Accordingly, the Service has ruled in
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Probate Practice Reporter
these post-Release PLRs that the members do not hold
a general power of appointment. If trust property is
distributed back to the grantor, neither the
Distribution Committee members nor the grantor will
be deemed to have made a gift but, to the extent any
property is distributed to anyone else (even by
direction of the Distribution Committee and without
the participation by the grantor), the grantor, but not
the members of the Distribution Committee, will be
deemed to have made a completed gift.
Practice Pointers
Requesting a ruling is a time consuming and
expensive undertaking.
Some practitioners and
clients may feel that the reasoning expressed in the
post-Release PLRs is sufficiently accurate and the
rulings so consistent that it is not imprudent to adopt
such an arrangement without a ruling. However, no
one but the taxpayer who obtained a private letter
ruling may rely upon it. Even though practitioners
may view the risk of the IRS taking a contrary
position, other than on a prospective basis, it may be
wise to consider that it could be happen. As indicated
above, some practitioners seem to be of the view that
it is not possible to create a trust so that gifts to it are
incomplete for federal gift tax purposes and for the
trust not to be a grantor trust.
As a general rule, a trust instrument must be
construed to carry out the grantor’s intent, and it
appears tax courts will follow that intent in
determining the tax effects of the trust. See, for
example, Lepore Est., 128 Misc. 2d 250; 492
N.Y.S.2d 689 (Surr. Ct. Kings Cty 1985); compare
Reid Est. v. Comm’r, T.C. Memo 1982-532.
Accordingly, it seems appropriate to have the trust
April 2014
recite that the grantor intends no gift made to the trust
be complete for federal gift tax purposes and for the
trust not to be a grantor trust, and to direct that the
trust instrument be construed to achieve those
intentions but, if it is not possible to achieve both, that
it be construed so no gift to the trust is a completed
gift. If the trust is found to be a grantor trust, the
grantor is in the same position as if the transfer had
not been made. But if the gift is complete, the result,
especially if considerable value has been transferred
to the trust, could be viewed as quite adverse.
Summary and Conclusions
The IRS has consistently ruled that a taxpayer may
structure a trust in an appropriate jurisdiction in a
manner so that no gift to the trust is complete for
federal gift tax purposes and the trust is not a grantor
trust. This may provide an opportunity to avoid state
and local income taxes. The design of the trust
should follow carefully those on which the IRS has
issued favorable rulings. Not all of the terms of the
trust are recited by the Service in the rulings, so a
drafter must be extremely cautious in proceeding to
create one.
Jonathan Blattmachr is a nationally-renowned
expert who writes and lectures extensively on estate
and trust taxation and charitable giving. He has
authored or co-authored five books and over 500
articles on estate planning topics. Bill Lipkind is a
founding member of Lampf, Lipkind, Prupis &
Petigrow, specializing in taxation and estate
planning. Both Jonathan and Bill have obtained a
number of the private letter rulings discussed in the
article.
11
Probate Practice Reporter
Probate Report
 Statute Does Not Override Lack of Residuary
Clause
In Aldrich v. Basie, __ So. 3d __ (Fla. 2014), (2014
Westlaw 1240073), the testator used an “E-Z Legal
Form” as her will. The will made specific devises to
her sister and alternatively to her brother if her sister
predeceased her. The will contained no residuary
clause. The testator’s sister predeceased her and
devised property to the testator. Although the testator
apparently tried to execute a codicil on a document
titled “Just a Note,” the note did not attain
testamentary validity because it lacked the requisite
number of witnesses. The attempted codicil cited the
property devised to her by her sister and confirmed
that her brother was to receive all her probate assets.
However, because the attempted codicil was
ineffective, the testator’s estate plan still lacked a
residuary disposition. The brother contended that he
was entitled to the entire estate. The testator’s nieces
through a predeceased brother contended that the
residue passed by partial intestacy.
The brother cited the state probate code statute
providing that a will passes all property owned by a
testator at death, even if the property is acquired after
the execution of the will, unless the testator indicates
a contrary intent. He argued that the statute
compensated for the lack of a residuary clause and
passed all the testator’s probate estate to him,
including the property inherited by the testator from
their sister, because she acquired the property after the
execution of the will.
Noting that the state probate code’s definition of
intestacy included all probate property “not effectively
disposed of by will,” the court concluded that the
statute cited by the brother was not intended to
12
override the lack of a residuary clause. Rather, the
statute would include as part of a devised residue any
property owned by the testator at death, even if
acquired after execution of the will, but that presumed
that the will included a residuary clause. However,
the statute would not serve as a substitute for the lack
of a residuary devise. Although the testator’s will
devised all of the property described therein to her
brother, the court observed that the testator “did not
explicitly state that her identified beneficiaries were to
receive all of the property that she owned at her death,
only the property that she listed in her will.” The
court concluded that the testator’s lack of a residuary
clause effectively indicated her intent to devise only
the listed property to her brother and would not allow
the statute to override that intent.
Editors’ Comment: As emphasized in a concurring
opinion, the use of a legal form without legal counsel
thwarted what the testator apparently meant to do:
leave all of her probate assets to her brother. The
object lesson of the concurring opinion is that courts
have limited tools to fix mistakes made by testators in
their wills and, when they make mistakes, particularly
by failing to seek legal counsel, statutes not intended
for that purpose cannot be used as a patch. Every
probate practitioner knows to include a residuary
devise in a will, yet this basic device was scuttled by
the testator’s uninformed use of a legal form that,
according to the concurring opinion, did not contain
preprinted residuary language and even lacked the
space to write in a residuary devise.
Recognizing the obvious dangers of testators
making wills without legal advice, the Real Property,
Probate and Trust Law Section of the Florida Bar filed
an amicus brief supporting the position taken by the
court.
April 2014
Probate Practice Reporter
 POA Confidential Relationship
Ownership of Bank Accounts
Affects
In In re Boatwright, 980 N.Y.S.2d 554 (App. Div
2014), the decedent died in 1998, survived by a son
and a daughter as her only intestate heirs. The son
was appointed as administrator and brought an action
to discover assets of the estate, including bank
accounts and real estate. The daughter successfully
contended that the son had released his interest in the
real estate in exchange for $55,000. The Surrogate
concluded that the estate owned the bank accounts
being held by the daughter and ordered her to turn
over half the funds to the son.
The appellate court upheld the Surrogate’s ruling
that the daughter wrongfully withheld over $100,000
in the bank accounts because she unduly influenced
the decedent. The appellate court observed that,
although the burden of proof for undue influence
generally rests with the party asserting undue
influence, the burden shifts to the beneficiary if the
beneficiary is in a confidential relationship with the
transferor. In that case, the beneficiary must prove by
clear and convincing evidence that the transaction was
voluntary, knowing, and fair.
Because the daughter was the decedent’s attorneyin-fact, the appellate court concluded that a
confidential relationship existed. She failed to meet
the burden of proof necessary to demonstrate that the
decedent intended to make gifts to her upon the
creation of the bank accounts.
Editors’ Comment: The daughter’s failure to meet
the clear and convincing evidentiary standard was not
helped by her explanations, which the Surrogate found
to be “evasive, dissembling, and incredible.”
The appellate court did overrule the Surrogate’s
determination that the daughter should transfer half
the bank account funds directly to the son. The funds
April 2014
belonged to the estate, and the son sought the
discovery of those funds as the administrator of the
estate. Although the son may eventually end up with
the bank account proceeds, those assets are subject to
administration and may be fair game for others with
a higher priority in estate assets, such as creditors,
before he receives the distribution.
Boatwright serves as a reminder that a power of
attorney creates a fiduciary relationship, which can
impact decisions about the validity of lifetime
transfers.
 Adopted Child Does Not Inherit from Biological
Father
In In re Brockmire, __ S.W.3d __ (Mo. 2014)
(2014 Westlaw 946963), the decedent died in 2011,
survived by his brother, his only biological child — a
daughter — and the daughter’s daughter, the
“granddaughter.” When the granddaughter was eight
weeks old, the daughter was adopted by her stepfather
before the decedent died. The applicable state statutes
precluded the daughter from inheriting because she
was adopted before the decedent’s death. However,
the daughter, acting as guardian for the granddaughter,
argued that the statutes effectively treated her as
predeceasing the decedent and did not preclude the
granddaughter from taking by representation.
The court concluded that the statutes clearly
contradicted the granddaughter’s position. The court
observed that the daughter was alive and the statute
did not treat her as predeceased, but rather deemed her
not to be the decedent’s child for intestacy purposes
because she was adopted by her stepfather. Moreover,
the court concluded that, even if the daughter were
treated as predeceasing the decedent, the
granddaughter’s right to inherit would flow from and
through the daughter, who by statute was not a child
of the decedent for intestacy. The granddaughter
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Probate Practice Reporter
could not bootstrap her claim to the daughter because
the daughter had no claim.
Editors’ Comment: The court clearly was not
impressed by the granddaughter’s tortuous statutory
argument. But Brockmire demonstrates the impact of
adoption on a child’s right to inherit. Commonly,
intestacy statutes provide that an adopted child is
treated for inheritance purposes as the child of the
adoptive parent and not of the biological parent. An
exception is the so-called stepchild adoption case
when, for example, the biological mother marries the
adoptive father. The adopted child could inherit from
the adoptive father and from the biological mother.
Tax Report
 Administration’s 2015 Budget Includes New
Estate Planning Related Proposals
The Administration’s 2015 Budget includes
several proposals of significance to estate planners.
Most of these were included in the 2014 budget,
discussed in the May 2013 issue of the REPORTER,
and can, therefore, be dealt with rather quickly below,
but three were new proposals. Dept. of Treas.
“General Explanations of the Administration’s Fiscal
Year 2015 Revenue Proposals” (March 2014)
(“General Explanations”).
New Proposals
The 2015 budget includes three new proposals of
interest to estate planners.
Limiting the Annual Exclusion. The 2015 budget
would eliminate the present interest requirement for a
new category of gifts, so that they qualified for the gift
tax annual exclusion without regard to the existence
of withdrawal or put rights, but subject to a $50,000
per donor annual limit. Under this proposal, a donor’s
gifts in this new category in a single year above
$50,000 would be taxable, even if the total gifts to
each individual donee were under $14,000.
The new category would include transfers in trust
(other than to a trust described in section 2642(c)(2)),
transfers of interests in passthrough entities, transfers
14
of interests subject to a prohibition on sale, and other
transfers of property that, without regard to
withdrawal, put, or other such rights in the donee,
cannot immediately be liquidated by the donee.
The proposal would be effective for gifts made
after the year of enactment.
Expanding the Term “Executor.” The 2015
budget would expand the definition of "executor" to
apply for all tax purposes, rather than just for estate,
gift, and generation-skipping transfer tax purposes.
The proposal would thus empower an authorized party
to act on behalf of the decedent in all matters relating
to the decedent’s tax liability, and also authorize an
executor to do anything on behalf of the decedent in
connection with the decedent’s pre-death tax
liabilities or obligations that the decedent could have
done if still living. It would also grant regulatory
authority to adopt rules to resolve conflicts among
multiple executors authorized by this provision. This
proposal would apply upon enactment, regardless of
a decedent’s date of death.
Make Permanent Certain Incentives for Gifts of
Conservation Easements. The 2015 budget would
make permanent the increases in the percentage-ofincome limitation for gifts of conservation easements
enacted as part of the Pension Protection Act of 2006,
and the extension of the carryover for such deductions
April 2014
Probate Practice Reporter
to 15 years. These provisions have been previously
extended three times, but they were allowed to expire
on December 31, 2013.
decedents dying and taxable transfers made after
2017. General Explanations, at 158.
Require that Basis Be Based on Transfer Tax
Values. As in the 2009 – 2014 budget proposals, the
2015 proposal would require that taxpayers who
receive property by gift or from a decedent use the
relevant gift or estate tax value as their basis, even if
they disagree with the valuation reported for gift or
estate tax purposes. General Explanations, at 160.
Sales, Exchanges, and Similar Transfers to
Grantor Trusts. As in the 2013 and 2014 proposals,
the 2015 budget would include in the gross estate of
a person deemed to own a trust under the grantor trust
rules that portion of the trust attributable to a sale,
exchange, or “comparable transaction” between the
grantor and the trust, if that transaction was
disregarded for income tax purposes. The trust assets
would be subject to gift tax when grantor trust status
ended, or when the trust made distributions to another
person (except in discharge of the deemed owner’s
obligation to the distributee) during the life of the
deemed owner. General Explanations, at 166.
Eliminate Zero-Gift and Short-Term GRATs As it
has in the 2010 through 2014 budgets, the
Administration’s 2015 budget would: (a) require that
all GRATs last for at least 10 years; (b) set a
maximum GRAT term of the grantor’s life expectancy
plus 10 years; © require that all GRATs have some
minimum remainder interest; and (d) preclude
decreasing GRAT annuity payments. General
Explanations, at 162.
GST Tax Treatment of Health and Education
Exclusion Trusts (HEETs). As in the 2014 proposals,
the 2015 budget would “clarify” that the GST tax
exclusion for payments for medical care or tuition
applies only to a direct payment by a donor to the
provider of medical care or to the school in payment
of tuition, and not to trust distributions, even if the
distributions are made for those same purposes. See
I.R.C. § 2611(b)(1). General Explanations, at 169.
90-Year Limit on GST Inclusion Ratio. As in the
2012 through 2014 budget proposals, the 2015
proposals would provide that an allocation of GST
exemption to a transfer protects that transfer from
GST tax for no more than 90 years. General
Explanations, at 164.
Extend the Lien on Estate Tax Deferrals Provided
under Section 6166. As in the 2013 and 2014
proposals, the 2015 budget would extend the special
lien imposed under section 6324(a)(1) for taxes
deferred under section 6166, from ten years to the
entire 15-year period of the tax deferral under that
section. General Explanations, at 168.
Old Friends
The following proposals were repeated from the
2014 budget, sometimes with very small technical
changes.
Reinstate the 2009 Tax Rates and Exemptions. As
in the 2011 through 2014 budget proposals, the 2015
proposals would return the estate, gift, and GST rates
and exemptions to their 2009 levels (top estate and
gift tax rate and sole GST tax rate of 45 percent; $3.5
million estate tax applicable exclusion amount and
GST exemption, and $1 million gift tax exemption).
This proposal would apply with respect to estates of
April 2014
Sales of Life Insurance Contracts. As in the 2010
through 2014 proposals, the 2015 budget would
require a person who buys an interest in an existing
life insurance contract with a death benefit equal to at
least $500,000 to report to the IRS, the insurer, and
the seller, the purchase price, and the buyer's and
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Probate Practice Reporter
seller's taxpayer identification numbers (TINs). The
proposal would also modify the transfer-for-value rule
to ensure that exceptions to that rule would not apply
to buyers of policies. General Explanations, at 69.
listed in the National Register to comply with the
same special rules currently applicable to buildings in
a registered historic district. General Explanations, at
196.
Eliminating Stretch IRAs. As in the 2014
proposals, the 2015 budget would require that nonspouse beneficiaries of retirement plans and IRAs
must take distributions over no more than five years,
with an exception for “eligible beneficiaries,”
including any beneficiary who, as of the date of death,
is disabled, a chronically ill individual, an individual
who is not more than 10 years younger than the
participant or IRA owner, or a child who has not
reached the age of majority. Eligible beneficiaries
could take distributions over their life expectancy,
beginning in the year following the year of the death
of the participant or owner. General Explanations, at
179.
Editors’ Comment: The aging stalemate in
Congress with respect to most tax matters is unlikely
to permit the passage of these proposals, but should
the Democrats obtain a majority in both houses and
keep the presidency, these proposals will be seriously
considered.
Limiting Total Accrual of Tax-Favored Retirement
Benefits. As in the 2014 proposals, the 2015 budget
would provide that a taxpayer who has accumulated
amounts within an IRA or qualified plan or other taxfavored retirement plan in excess of the amount
necessary to provide the maximum annuity permitted
for a tax-qualified defined benefit plan (currently $3.4
million, calculated as $205,000 per year payable as
lifetime joint and 100-percent survivor benefit
commencing at age 62) could not make additional
contributions or receive additional accruals, though
the taxpayer’s account balance could continue to grow
to reflect earnings and appreciation. General
Explanations, at 181.
Contributions of Historic Easements Consistent.
As in the 2014 proposals, the 2015 budget would: (a)
deny the deduction for gifts of a façade easement with
respect to any value associated with forgone upward
development above a historic building; and (b) require
contributions of conservation easements on buildings
16
 No Advance Estate Tax Deduction of Pending
Malpractice Claim
In Estate of Saunders v. Commissioner, ___ F. 3d
___ (9th Cir. March 12, 2014) (2014 Westlaw
949246), aff’g 136 T.C. 406 (2011), the decedent’s
late husband was an attorney who represented a client
in some extensive tax litigation. After 10 years of
litigation, the client sued the decedent’s husband and,
later, his estate, for malpractice, breach of confidence,
breach of duty of loyalty, and fraudulent concealment,
seeking over $90 million in compensatory damages,
plus additional punitive damages. A jury held that the
decedent’s husband had breached his fiduciary duty
and his duties of confidentiality and undivided loyalty,
but found no damages. On appeal, the litigation was
settled for $250,000. The decedents estate deducted
$30 million for the value of the claim outstanding on
the date of death, based on an independent
professional appraisal.
The Tax Court (Judge Cohen) held that the estate
could deduct only the amounts it actually paid. See
the discussion in the June 2011 issue of the
REPORTER.
The Ninth Circuit (Judge Smith)
affirmed, agreeing that, at the decedent’s death, there
was no way to ascertain the value of the ongoing
lawsuit with reasonable certainty. The court also held
that the IRS properly allowed the estate eventually to
April 2014
Probate Practice Reporter
deduct $250,000 — the amount the case ultimately
settled for. The court stated that case law established
a framework for classifying claims as “certain and
enforceable” or “disputed or contingent,” and that the
consideration of post-death events would be affected
by how the claim was classified.
 Tenth Circuit Supports Tax Court Finding of
“Highest and Best Use” of Easement Property
and Denies $2.27 Million in Deductions
In Esgar Corp. v. Commissioner, ___ F.3d ___
(10th Cir. March 7, 2014) (2014 Westlaw 889614),
aff’g T.C. Memo. 2012-35, a corporation and two
married couples donated to charity a conservation
easement on certain property and claimed deductions
of $2.27 million. The properties were zoned irrigatedagricultural and had historically been used as irrigated
and non-irrigated farmland. There was physical
access to all three properties, but only one had legal
access. The properties were not zoned for mining, but
the parties stipulated that, absent the donations,
permits to mine could have been obtained. The
conservation easements specifically prohibited mining
or mineral extraction. A report of a geotechnical
engineering firm determined significant potential sand
and gravel resources, and an appraiser determined
that, absent the easements, the best use of the land
would have been for gravel extraction and that this
resulted in the deductions claimed.
The Tax Court (Judge Wherry) held that the best
use of the property was agricultural, rather than
mining, and that the appraisal had overstated the
unencumbered value of the property. The court noted
that the use to which the land is currently being put is
presumed to be the highest and best use, absent proof
to the contrary, and that a hypothetical willing buyer
would not have been willing to wait the period
required for the markets to align with the new gravel
source and to make the property valuable as a gravel
April 2014
mine. The court, however, declined to sustain
substantial overvaluation or income understatement
penalties, finding that the taxpayers reasonably relied
on their long-time CPA to put together the
transaction, and they obtained a core sampling report
of the underlying valuable gravel reserves and a
qualified appraisal from a qualified appraiser.
The Tenth Circuit (Judge Kelly) affirmed, stating
that the Tax Court committed no clear error when it
concluded that the highest and best use of the land
was agricultural, rather than gravel mining. The
court rejected the argument that the Tax Court had
improperly applied eminent domain principles in its
decision, finding no way in which those principles had
tainted the assessment of the properties. The court
also affirmed the Tax Court’s decision in a related
case holding that state tax credits they received and
then sold in connection with the easements had not
been held long enough to qualify for long-term capital
gains treatment. Tempel v. Comm'r, 136 T.C. 341
(2011).
 No Deduction Allowed for Bargain Sale of
Conservation Easement Because State Law
Prevented Easement From Being Perpetual
In Wachter v. Commissioner, 142 T.C. 7 (March
11, 2014), the Tax Court held that two couples were
not entitled to charitable deductions on a bargain sale
of conservation easements because the easements
were not qualified interests under tax law. The
taxpayers owned interests in two partnerships that
made $485,650 in cash charitable contributions and a
bargain sale of conservation easements to a charity
pursuant to a federal program. The taxpayers
deducted $759,050 — the difference between the
appraised value of the encumbered parcels as “rural
residential sites” and their value as agricultural
property under the easements, less the bargain sale
price.
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Probate Practice Reporter
The Tax Court (Judge Buch) granted the IRS a
partial summary judgment on the deductibility of the
conservation easement, noting that North Dakota
uniquely limits by statute the duration of real property
easements to 99 years. N.D. Cent. Code § 45-07-02.1.
The tax law allows a deduction for a conservation
easement only if the interest is granted in perpetuity,
and the North Dakota law prevents the easement from
being perpetual. See I.R.C. § 170(h)(2)©. The
taxpayers argued that the possibility of reversion of
the property interest to the donors was so remote that
it should be ignored, but the court held that the
possibility of reversion was not remote, but rather
inevitable.
The court refused to grant a partial summary
judgment regarding whether the couples satisfied the
requirement of a contemporaneous written
acknowledgment for their cash gifts. The taxpayers
argued that checks and letters sent to them in the years
of the gifts, together, satisfied the requirements for a
contemporaneous written acknowledgment. See Irby
v. Commissioner, 139 T.C. 371 (2012) (a series of
documents may constitute a contemporaneous written
acknowledgment). The court stated that the taxpayers
might be able to authenticate disputed documents and
provide additional documents to supplement those
they have included with the stipulation of facts, and
thus refused to grant summary judgment on this issue.
 Transfers Under Premarital Agreement Qualify
for Marital Deduction
In Private Letter Ruling 201410011 (March 7,
2014), Taxpayer and Spouse executed a premarital
agreement under which each waived their respective
right of election to take against the other’s will. The
agreement provides that upon Taxpayer’s death, if
Spouse survives him and if they are then married and
living together, Spouse will receive an outright
payment of $w, free and net of any and all estate,
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transfer, and income taxes, or, if Taxpayer and Spouse
were married and living together for at least 10 years
when he dies, Spouse will receive a QTIP marital trust
with at least x percent of Taxpayer’s taxable estate,
before deducting amounts due for federal estate tax
purposes under the premarital agreement. Taxpayer
established a revocable trust to carry out the
provisions of the premarital agreement, providing that
if Spouse makes a timely election to waive elective
share, the trustee will allocate and make distributions
to Spouse as provided in the premarital agreement.
The trust provides that the trustee can satisfy the
payments under the premarital agreement with
preferred non-voting units of LLC. Taxpayer, as
trustee of the revocable trust, holds voting and nonvoting common units of LLC and all of the preferred
units.
The IRS stated that Spouse’s right to elect under
the premarital agreement and the revocable trust is not
a “contingency” that would disqualify the transfers for
the estate tax marital deduction, under section
2056(b)(1). The revocable trust property actually
distributed outright to Spouse and to marital trust will
be property “passing from the decedent to his
surviving spouse” for marital deduction purposes.
The IRS discussed several precedents. In Rev. Rul.
54-446, 1954-2 C.B. 303, a couple signed a premarital
agreement under which each spouse renounced rights
in the other’s estate. The husband died, and his will
left the wife more than was required by the premarital
agreement, and specified that the dispositions were in
lieu of any rights she might have under the premarital
agreement. The IRS ruled that the amount left to the
wife under the will “passed from the decedent to his
surviving spouse” and qualified for the estate tax
marital deduction. In Rev. Rul. 68-271, 1968-1 C.B.
409, a wife renounced her marital rights by signing a
premarital agreement, in return for a promise of a
stated sum from husband’s estate, if she survived him.
April 2014
Probate Practice Reporter
The husband died and his will made no provision
for the wife. The wife put in a claim against the
husband’s estate and the estate paid the required sum
to the wife. The ruling stated that the interest passing
to the wife pursuant to the premarital agreement
“passed from the decedent to his surviving spouse”
and qualified for the estate tax marital deduction. In
Estate of Tompkins v. Commissioner, 68 T.C. 912
(1977), acq., 1982-1 C.B. 1, a decedent gave his
widow a life estate in trust, and by codicil provided
that she could elect to take an outright cash bequest in
lieu of the life estate. To elect the cash bequest, the
widow had to file an election with the executor within
60 days after his qualification. The widow elected the
cash bequest and the court held that the procedural
requirement did not prevent the disposition from
qualifying for the estate tax marital deduction and that
the cash bequest was a nonterminable interest. In Rev.
Rul. 82-184, 1982-2 C.B. 215, the IRS considered a
situation similar to that in Tompkins and reached the
same conclusion. In the ruling, the IRS stated that the
180-day requirement for Spouse to claim the interests
promised by the premarital agreement did not
interfere with the estate tax marital deduction and that
the QTIP interest would be deductible.
The IRS also noted that the terms of the QTIP trust
directed the trustee to distribute all net income at least
quarter-annually and that the fact the bequest was
satisfied by LLC preferred units did not prevent
allowance of the marital deduction. The IRS noted
that the sale of LLC preferred units was not
unreasonably restricted by the LLC agreement, which
allowed a member to transfer units to (a) another
member, (b) a q ualified institutional transferee, and
(c) the husband, his children, and/or any affiliate,
without obtaining the prior written consent of a
majority in interest of the members.
Probate Index
Florida
Aldrich v. Basie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Missouri
In re Brockmire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
New York
In re Boatwright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Tax Index
Administration’s 2015 Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Esgar Corp. v. Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Estate of Saunders v. Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Private Letter Ruling 201410011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Wachter v. Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
April 2014
19
Probate Practice Reporter
ISSN 1044-7423
The Law Center
Greene and Main Streets
Columbia, SC 29208
20
Columbia, SC 29292
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Probate Practice Reporter
April 2014