A Discussion Forum for the Mississippi Estate Planning Community
Estate of Chancellor v. Commissioner Tests Ascertainable Standard.
A Mississippi case recently upheld the petitioner’s claim that language permitting the apportionment of income and the invasion of corpus among the beneficiaries of a Credit Shelter Trust satisfies the requirements of The Ascertainable Requirement Exception to Sec. 2041(a)(2). Section 2041(b)(1).
A power to consume, invade, or appropriate trust income, corpus, or both by a deceased beneficiary, is not deemed a general power of appointment (and therefore excluded from the deceased’s taxable estate) if it was “limited by an ascertainable standard relating to the health, education, support, or maintenance of the deceased”. Sec. 2041(b)(1)(A); 5*5 sec. 20.2041-1(c)(2), Estate Tax Regs. This exception entails two requirements: First, the power of appointment must be limited by an ascertainable standard; and second, that standard must relate solely to the deceased beneficiary’s health, education, support, or maintenance.
In the notice of deficiency, the IRS determined that decedent’s gross estate includes the fair market value of the trust’s assets as of the date of her death because decedent had a general power of appointment over them. In fact, the trust language did allow the decedent during her lifetime to…
invade trust corpus for “necessary maintenance, education, health care, sustenance, welfare or other appropriate expenditures needed by * * * [Mr. Chancellor's] wife and the other beneficiaries * * * taking into consideration the standard of living to which they are accustomed”.
At the core of the IRS’s argument was the phrase “or other appropriate expenditures needed by…” which it claimed fails the second requirement of section 2041(b)(1)(A) because the terms “welfare or other appropriate expenditures” fall outside the scope of the requisite purposes.
The Tax Court disagreed, stating in part,
In the final analysis, we believe that the phrase “welfare or other appropriate expenditures needed by * * * [the beneficiaries] taking into account the standard of living to which they are accustomed”, preceded as it is by a list of “necessary” support-related items, “merely rounds out the standard of living concept”.
Accordingly, we conclude and hold that decedent’s power of appointment was limited by an ascertainable standard relating solely to her health, education, support, or maintenance so as to meet the exception of section 2041(b)(1)(A). Consequently, decedent’s gross estate does not include the value of the trust assets.
This case underscores the importance of good draftsmanship so as to avoid successful challenges by the IRS (see, Doyle v. United States, 358 F. Supp. 300, 308 (E.D. Pa. 1973). It also presents a reminder for we professional fiduciaries, to explain to clients and their spouses how the ascertainable standard might operate in real life. As Doyleillustrates, there must be sufficient strings attached, and carefully drafted language to preserve the intended tax benefits a trust might provide.