Rev. Rul. 67-370

Advice has been requested whether a certain remainder interest in trust which may be terminated at the will of another is an interest in property within the meaning of section 2033 of the Internal Revenue Code of 1954.

Under the terms of an inter vivos trust, controlled by New York law, the decedent or his estate was to receive the principal upon the death of the settlor. The settlor had reserved the right to modify, alter, or revoke the trust during her lifetime. Subsequent to the decedent's death, the settlor modified the trust and extinguished the estate's defeasible remainder interest.

Section 2033 of the Code provides as follows:

The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.

Section 20.2033-1(a) of the Estate Tax Regulations provides, in part, as follows:

In general . The gross estate of a decedent * * * includes under section 2033 the value of all property, whether real or personal, tangible or intangible, and wherever situated, beneficially owned by the decedent at the time of his death.

Where a decedent's right to receive benefits under a trust is so conditioned as to terminate at his death, such interest does not constitute an includible interest in property for the purpose of section 2033 of the Code. Revenue Ruling 55-438, C.B. 1955-2, 601. A contrary result will naturally obtain, however, in case the decedent owns any beneficial interest in a trust which survives his death, whether or not such interest is subject to being lawfully curtailed or cut off at any time thereafter. The decedent's interest in the trust involved in the subject case is thus an includible interest. It was clearly `descendible, devisable, and alienable' as a matter of New York law, for example, and would undoubtedly have resulted in the receipt of substantial assets by decedent's estate if the settlor had not proceeded to revoke the same. In re: Hornblower's Estate , 180 N.Y. Misc. 517, 40 N.Y.S.2d 712 (1943).

In providing that the value of the gross estate shall include the value of `all' property to the extent of the interest therein of the decedent at the time of his death, section 2033 is not affected by formal legal distinctions of nomenclature under state law. Therefore, it is not relevant to the application of section 2033 that a particular interest in property which survives the decedent's death may be either defeasible or indefeasible.

Any determination of what would be the fair market value of a particular remainder interest like that under consideration herein would be affected by its possible curtailment or complete divestment at some point after decedent's death, in accordance with the general rules for the valuation of property which are set forth in section 20.2031-1(b) of the Estate Tax Regulations. See Estate of Waldo G. Bryant v. Commissioner , 36 B.T.A. 669 (1937), affirmed 104 F.2d 1011 (1939), affirmed sub nom. Helvering v. Hallock , 309 U.S. 106 (1940), Ct. D. 1440, C.B. 1940-1, 223. See also Smith v. Shaughnessy , 318 U.S. 176, 180 (1943), Ct. D. 1575, C.B. 1943, 1144. The mere presence of these possibilities does not warrant the assignment of a merely nominal value to such a defeasible interest in any case where there is still a reasonable probability that the estate will actually acquire possession of at least some substantial portion of the property in question. See In re: Hornblower's Estate , above.

It is accordingly held that if a defeasible interest in property survives the decedent's death, its fair market value is includible in the decedent's gross estate.