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Professor Suggests Change to Proposed Regs on Revocable Trusts and Estates

MAR. 11, 2002

Professor Suggests Change to Proposed Regs on Revocable Trusts and Estates

DATED MAR. 11, 2002
DOCUMENT ATTRIBUTES
  • Authors
    Gans, Mitchell M.
  • Institutional Authors
    Hofstra University School of Law
  • Cross-Reference
    For a summary of REG-106542-98, see Tax Notes, Dec. 25, 2000, p.

    1695; for the full text, see Doc 2000-33612 (10 original pages), 2000

    TNT 248-9 Database 'Tax Notes Today 2000', View '(Number' , or H&D, Dec. 18, 2000, p. 2651.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2002-6944 (2 original pages)
  • Tax Analysts Electronic Citation
    2002 TNT 58-16
March 11, 2002

 

CC:M&SP:RU (REG-106542-98)

 

Room 5226

 

Internal Revenue Service

 

PO Box 7604

 

Ben Franklin Station

 

Washington, D.C.

 

 

Gentlemen/Ladies:

 

 

[1] I write to comment on a particular aspect of the proposed regulations under section 645. Having only recently noticed the issue, I did not write previously. I apologize for the lateness of my submission.

[2] Under section 645, if an election is made with regard to a "qualified revocable trust," it is treated for income tax purposes as part of the grantor's estate. In the proposed regulations under the section, the term "qualified revocable trust" is defined so that the power of revocation must be held exclusively by the grantor. In other words, under the proposed regulations, if the power is held by a nonadverse party or if it is held jointly by a nonadverse party and the grantor, the trust is not a "qualified revocable trust" and the election cannot be made. See Prop. Reg. 1.645-1(b)(1). I suggest, for the reasons stated below, that the definition be altered to make the election available in the case of a jointly held power (though I agree that the language of the statute and the legislative history both make clear that the election should not be available where the power is held solely by a nonadverse party).

[3] In explaining the appropriateness of the approach taken in the proposed regulations, the preamble relies on the Conference Report, the pertinent portion of which is as follows: "a qualified revocable trust is any trust (or portion thereof) which was treated under section 676 as owned by the decedent with respect to whom the election is being made, by reason of a power in the grantor (i.e., trusts that are treated as owned by the decedent solely by reason of a power in a nonadverse party would not qualify) [emphasis supplied]." See H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. at 711 (1997). In my view, the quoted sentence lends itself more easily to a reading that would make the election available for a trust where the grantor and a nonadverse party jointly hold the power of revocation. The underlined portion of the quoted sentence suggests that any trust that was deemed to be owned by the grantor under section 676 by reason of a power in the grantor would qualify for the election. The italicized portion of the sentence then goes on to make explicit what is implicit in the underlined portion: that where the trust was subject to section 676 solely because of a power held by a nonadverse party, no election can be made. Where, in contrast, the trust was subject to section 676 because of a revocation power jointly conferred on the grantor and a nonadverse party, the italicized portion of the quote particularly the word "solely" -- strongly implies that Congress intended to make the election available.

[4] The reading I suggest is not only the more natural one, but it also makes sense in terms of the backdrop against which section 645 was enacted. Obviously, Congress was well aware of the grantor-trust rules and section 2038, intending to limit the election to those trusts deemed owned by the grantor for both income and estate tax purposes. It therefore could not make the availability of the section 645 election turn solely upon the trust's classification under section 676. For where a nonadverse party has the discretion to return the corpus to the grantor, while the trust is subject to section 676, it is not includible in the grantor's gross estate (in the absence of a (i) prearranged understanding that distributions would be made to the grantor, see Skinner's Estate v. U.S., 316 F.2d 517 (3rd Cir. 1963), or (ii) the right of the grantor's creditors to pursue trust assets as matter of state law, see Estate of Paxton v. Commissioner, 86 T.C. 785 (1986)). Intending to limit the election to trusts that are deemed owned by the grantor for both income and estate tax purposes, Congress contemplated a general rule and an exception. Under the general rule, any trust classified as a grantor trust under section 676 qualifies for the election. And under the exception, trusts that fall under section 676 solely because of a power held by a nonadverse party, which are ordinarily not included in the grantor's gross estate, do not qualify. Where, then, does the jointly held power fit under this framework? Since, in such a case, the trust is a grantor trust for income tax purposes and included in the grantor's gross estate, Congress must have anticipated that it would fall under the general rule and therefore qualify for the election.

[5] Finally, as a matter of policy, it would be preferable to permit an election in the context of a joint power. After all, the use of such an arrangement will obviously be dictated by non-tax concerns, given that no tax advantage can be secured by structuring a trust in this fashion (as indicated, such a trust is deemed a grantor trust for income tax purposes and must be included in the grantor's gross estate). Consider a grantor who is concerned about the possibility that she might eventually become incompetent. In order to protect herself from the possibility of future exploitation, she causes her revocable trust to be drafted so that her power of revocation can only be exercised with the consent of a nonadverse party. With the absence of any tax advantage, it makes no sense to adopt a regulation under section 645 that in effect discourages such self-protective planning. Indeed, at a time when protective measures are being encouraged in the estate-planning community (see ABA Model Rule 1. 14, comment 5, adopted February 2002 (suggesting the use of surrogate decisionmaking and other protective measures for clients with diminishing capacity)), it seems particularly inappropriate to adopt a restrictive tax rule that will create an incentive to draft documents that provide less of this kind of protection.

Sincerely,

 

 

Mitchell M. Gans

 

Professor of Law

 

Hofstra University

 

Hempstead, New York
DOCUMENT ATTRIBUTES
  • Authors
    Gans, Mitchell M.
  • Institutional Authors
    Hofstra University School of Law
  • Cross-Reference
    For a summary of REG-106542-98, see Tax Notes, Dec. 25, 2000, p.

    1695; for the full text, see Doc 2000-33612 (10 original pages), 2000

    TNT 248-9 Database 'Tax Notes Today 2000', View '(Number' , or H&D, Dec. 18, 2000, p. 2651.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2002-6944 (2 original pages)
  • Tax Analysts Electronic Citation
    2002 TNT 58-16
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