AMENDMENT OF FLORIDA LAW ON TRUSTS, FIDUCIARY POWERS WILL NOT TRIGGER TRANSFER TAXES.

Rev. Proc. 94-44

SECTION 1. PURPOSE

This revenue procedure provides guidance concerning certain effects on trusts, for federal estate and gift tax purposes, of the enactment of Florida Statutes Annotated (F.S.A.) section 737.402(4) (West 1993).

SECTION 2. BACKGROUND

On May 9, 1991, the State of Florida enacted F.S.A. section 737.402(4). 1991 Fla. Laws ch. 91-61, section 3. The statute was intended to provide rules of general application and was not enacted to provide relief to any specific individual or trust. Under F.S.A. section 737.402(4)(a)(1), any fiduciary power conferred upon a trustee to make discretionary distributions of either principal or income to or for the trustee's own benefit cannot be exercised by the trustee, except to provide for that trustee's health, education, maintenance, or support, as described under sections 2041 and 2514 of the Internal Revenue Code. F.S.A. sections 737.402(4)(a)(2) through (4) contain prohibitions with respect to the exercise of other fiduciary powers exercisable for the trustee's own benefit, including the power to allocate receipts and expenditures between income and corpus, and the power to distribute property in satisfaction of the trustee's legal support obligation. The prohibitions contained in F.S.A. section 737.402(4)(a) do not apply if the fiduciary power is held by the settlor of a revocable or amendable trust, or by a settlor's or decedent's spouse with respect to a trust for which a gift tax or estate tax marital deduction has been allowed.

The statute applies, inter alia, to any trust created under a document executed before July 1, 1991. However, with respect to revocable or amendable trusts executed before that date, the statute does not apply if the trust is amended by the settlor at any time to provide otherwise. With respect to trusts that are not revocable or amendable ("irrevocable trusts") executed before July 1, 1991, the statute does not apply if all parties in interest elect affirmatively not to be subject to the application of the statute. F.S.A. section 737.402(4)(b)(3). This election must be made on or before the later of July 1, 1994, or 3 years after the date on which the trust becomes irrevocable. For purposes of making the election, the parties in interest include each trustee, each income beneficiary, and each remainder beneficiary. Further, the statute does not apply to any distribution made pursuant to the exercise of a power referred to in F.S.A. section 737.402(4)(a), if the power was exercised prior to July 1, 1991.

Section 2511 provides that the gift tax applies whether the transfer is in trust or otherwise and whether the gift is direct or indirect. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that the gift tax also applies to gifts indirectly made. Thus, any transaction in which an interest in property is gratuitously passed to or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax.

Section 2514(b) provides that, for gift tax purposes, the exercise or release of a general power of appointment created after October 21, 1942, shall be deemed a transfer of property by the individual possessing the power. Section 2514(e) provides that the lapse of a power of appointment created after October 21, 1942, during the life of the individual possessing the power shall be considered a release of the power, to the extent that the property that could have been appointed by exercise of the lapsed power during the calendar year exceeds the greater of $5,000 or 5 percent of the aggregate value of the assets out of which the exercise of the lapsed powers could be satisfied.

Section 2041(a)(2) provides that the value of the gross estate includes the value of all property over which the decedent possesses, at the time of death, a general power of appointment created after October 21, 1942, or with respect to which the decedent has exercised or released a general power of appointment created after October 21, 1942, during the decedent's lifetime by a disposition that, if it were a transfer of property owned by the decedent, would be includible in the decedent's gross estate under sections 2035 through 2038. Section 2041(b)(2) provides that the lapse of a power of appointment created after October 21, 1942, during the life of the individual possessing the power is considered a release of the power, to the extent that the property that could have been appointed by exercise of the lapsed power during the calendar year exceeds the greater of $5,000 or 5 percent of the aggregate value of the assets out of which the exercise of the lapsed powers could be satisfied.

Under sections 2514(c) and 2041(b)(1), the term "general power of appointment" includes a power that is exercisable in favor of the person possessing the power. The term does not include a power to invade corpus limited by an ascertainable standard relating to the health, education, support, or maintenance of the person possessing the power.

Under section 20.2041-1(b)(2) of the Estate Tax Regulations, the term "power of appointment" does not include powers reserved by the decedent to himself under section 2036 to 2038.

If, under the applicable Florida law in effect with respect to documents executed before July 1, 1991, a trustee-beneficiary could have exercised a fiduciary power for the trustee-beneficiary's own benefit, or had a power to remove a trustee and could thereby have exercised the powers of the trustee, the statute curtailed that power. The question is raised whether the state action is sufficient to cause a lapse of that power for purposes of sections 2514 and 2041.

Further, if a party in interest (including, for example, the remainder beneficiary) of a pre-July 1, 1991 irrevocable trust elects not to be subject to the statute, the question is raised whether the election should be treated as a gift for purposes of section 2511.

SECTION 3. SCOPE

.01 Except as noted in Sec. 3.02, this revenue procedure applies to:

(1) trustee-beneficiaries of irrevocable trusts executed before July 1, 1991, that are subject to the provisions of F.S.A. section 737.402(4)(a); and

(2) all parties in interest under an irrevocable trust executed prior to July 1, 1991, who elect, under F.S.A. section 737.402(4)(b)(3), on or before the later of July 1, 1994, or 3 years after the date on which the trust becomes irrevocable, not to be subject to (and would otherwise be subject to) the application of F.S.A. section 737.402(4)(a).

.02 This revenue procedure does not apply with respect to:

(1) the estate tax consequences under section 2041 in the case of estates of trustee-beneficiaries, where the trustee- beneficiary powerholder died before July 1, 1991; or

(2) the estate and gift tax consequences under sections 2514 and 2041 in the case of a lapse (under the terms of the governing instrument) or release (by affirmative act of the powerholder) of a trustee-beneficiary's fiduciary power that occurred before July 1, 1991, even if the powerholder died on or after that date; or

(3) trusts under which the grantor retained a power that is referred to in F.S.A. sections 737.402(4)(a)(1) through (4).

SECTION 4. PROCEDURE

.01 In the case of irrevocable trusts within the express scope of this revenue procedure, the Internal Revenue Service will treat F.S.A. section 737.402(4)(a) as effective, with respect to pre-July 1, 1991 irrevocable trusts, on and after July 1, 1991. In the case of the death before July 1, 1991, of a trustee-beneficiary of an irrevocable trust within the express scope of this revenue procedure, or a lapse, release, or exercise of a power held by a trustee- beneficiary of such a trust before July 1, 1991 (regardless of whether the trustee-beneficiary dies before, on or after July 1, 1991), sections 2514 and 2041 will be applied without reference to F.S.A. section 737.402(4). In this regard, the Service will not recognize the effectiveness, for federal transfer tax purposes, of state legislation purporting to retroactively change an individual's property rights or powers after the federal tax consequences have attached.

.02 F.S.A. section 737.402(4)(a) will not be treated as causing a lapse of a power of appointment of a trustee-beneficiary under an irrevocable trust within the express scope of this revenue procedure for purposes of sections 2041(b)(2) and 2514(e).

.03 Any party in interest under an irrevocable trust within the express scope of this revenue procedure who, within the applicable period, elects under F.S.A. section 737.402(4)(b)(3) not to be subject to F.S.A. section 737.402(4)(a), will not be treated as making a gift for purposes of section 2511. If the trust is excluded from F.S.A. section 737.402(4)(a) by reason of an election under F.S.A. section 737.402(4)(b)(3), sections 2041 and 2514 will apply to the power, and to any lapse, release, or exercise of the power, to the extent the power may be exercised under applicable Florida law as applied to an irrevocable trust for which such an election is in effect, effective as of the date the written declaration required under F.S.A. section 737.402(4)(d) is delivered to the trustee.

DRAFTING INFORMATION

The principal author of this revenue procedure is James F. Hogan of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information on this ruling, contact Mr. Hogan on (202) 622-3090 (not a toll-free call).