Lafferty v. Comm'r of Internal Revenue (In re Estate of Vissering)

• Decision Date: 23 May 1991
• Docket Number: Docket No. 1525-89.
• Citation: 96 T.C. No. 33,96 T.C. 749
• Parties: ESTATE OF NORMAN H. VISSERING, DECEASED, ELIZABETH L. LAFFERTY, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

96 T.C. 749

96 T.C. No. 33

ESTATE OF NORMAN H. VISSERING, DECEASED, ELIZABETH L. LAFFERTY, EXECUTRIX, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1525-89.

United States Tax Court

Filed May 23, 1991.

Decedent, a cotrustee of a family trust established by his mother, was a beneficiary of the trust under a provision that allowed an invasion of the trust principal as “required for [his] continued comfort, support, maintenance, or education.” Decedent was incapacitated, and Decedent's daughter was appointed as guardian of his person and as conservator of his estate. HELD: Decedent possessed at his death a general power of appointment over the principal of the trust within the meaning of sec. 2041(a)(2), so that the value of the trust principal is includable in the value of Decedent's gross estate. Patricia Tucker, for the petitioner.

Thomas F. Eagan and Harry Beckhoff, for the respondent.

OPINION

HALPERN, JUDGE:^*

By notice of deficiency dated November 17, 1988, respondent determined a deficiency in petitioner's Federal estate tax in the amount of $708,320.07. The value of certain shares of stock having been agreed to previously by the parties, the only issue presented for decision is whether the decedent, Norman H. Vissering (Decedent), possessed at his death a general power of appointment over the principal of a family trust. If Decedent possessed such power, then the value of that principal must be included in the value of the gross estate. The Parties have agreed that, if includable in the gross estate, the principal of the family trust had a value of $1,516,187.

The parties have submitted this case fully stipulated, and the facts so stipulated are found accordingly. By this reference, the stipulation of facts and its attached exhibits are incorporated into this opinion. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 as amended and in effect as of the date of Decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure. We summarize below the pertinent facts.

BACKGROUND

Petitioner is the Estate of Norman H. Vissering, Deceased, Elizabeth L. Lafferty, Executrix. At the time the petition in this case was filed, Elizabeth L. Lafferty maintained her legal residence in Hanover, New Mexico. Ms. Lafferty is Decedent's only daughter.

On November 14, 1953, Grace Hayden Vissering, Decedent's mother (Trustor), executed a revocable trust agreement, which was amended on October 5, 1954, and again on November 5, 1964 (as amended, the Trust Agreement). The Trust Agreement provided that such agreement and the trust created thereby were to be governed by Florida law. Trustor died on November 20, 1965, and Decedent on March 31, 1985. In the Trust Agreement, Trustor appointed as cotrustees of the trust Decedent and The Exchange National Bank of Tampa, Florida, the latter of which is known now as NCNB National Bank. Although Decedent had previously resigned and subsequently been reappointed as cotrustee, after 1964 neither Decedent nor anyone acting on Decedent's behalf tendered Decedent's resignation as cotrustee, and no suit was instituted to remove Decedent as cotrustee.

In establishing the powers and duties of the cotrustees, the Trust Agreement states that:

Except wherein this instrument expressly provides that the trust powers shall be executed by one Trustee, or except where such is the reasonable interpretation of this instrument, all trust powers provided for hereunder shall be exercised jointly.

Regarding successor trustees, the Trust Agreement states that:

Upon the death of Trustor's son, NORMAN H. VISSERING, or upon his resignation as Trustee, he shall not be succeeded by any individual Trustee, but, instead Trustor's corporate Trustee shall continue to serve and shall succeed to all the powers, duties and obligations set forth for Trustor's individual Trustee. Upon the resignation of Trustor's corporate Trustee, if Trustor's son, NORMAN H. VISSERING, be then living, he shall designate its successor. If there be no individual Trustee then serving, the successor Trustee to a corporate Trustee who resigns shall be selected by the court of appropriate jurisdiction in Orange County, Florida.

Following Trustor's death in 1965, the trust became known as the Grace Hayden Vissering Family Trust (the Family Trust). The assets of the Family Trust were held for the benefit of designated family members, including Decedent, Decedent's wife, son and daughter, and the daughter's three children. Following Trustor's death, Decedent was both a beneficiary and one of the cotrustees of the Family Trust.

The Family Trust was to continue until the later of (a) the death of the survivor of Decedent, Decedent's wife, and Decedent's daughter or (b) the time at which the youngest child of Decedent's daughter living at Trustor's death attained the age of 21. Prior to Decedent's death on March 31, 1985, Decedent's wife died, and all three children of Decedent's daughter reached the age of 21. Since Decedent's daughter survived Decedent, the Family Trust continued after Decedent's death.

At the time of his death, Decedent was receiving all of the net income of the Family Trust. Following his death, one-half of the corpus of the Trust was distributed outright to Decedent's son and the remaining half continued in trust for the benefit of Decedent's daughter and the daughter's three children.

The Trust Agreement granted the cotrustees certain powers, including the following:

During the term of the GRACE HAYDEN VISSERING FAMILY TRUST, the Trustees shall further be authorized to pay over or to use or expend for the direct or indirect benefit of any of the aforesaid beneficiaries, whatever amount or amounts of the principal of this Trust as may, in the discretion of the Trustees, be required for the continued comfort, support, maintenance, or education of said beneficiary.

Decedent developed Alzheimer's disease. In May 1984, Decedent's daughter took Decedent from his home in Orlando, Florida, to live in El Paso, Texas. Later in 1984, Decedent and his daughter moved from El Paso to Silver City, New Mexico, where they both resided until Decedent's death in March 1985.

Due to Decedent's deteriorated mental condition and advancing disease, in January 1985 Decedent's daughter petitioned the appropriate New Mexico State court for a finding that Decedent was incapacitated and for her appointment under New Mexico law as guardian of Decedent and as conservator of Decedent's estate. The State court issued an order dated January 31, 1985, making the requested appointment; and Decedent's daughter executed, on February 1, 1985, Letters of Acceptance of Guardianship and Conservatorship. Accordingly, at the time of Decedent's death on March 31, 1985, Decedent had been found to be an incapacitated person.

As executrix of his estate, Decedent's daughter timely filed a U.S. Estate Tax Return, Form 706. An audit of that return gave rise to the notice of deficiency dated November 17, 1988, in response to which the petition in this case was filed.

DISCUSSION

The facts of this case are not in dispute; we are faced here only with a question of law. That question is whether Decedent possessed at his death a general power of appointment within the meaning of section 2041(a)(2).

A GENERAL POWER OF APPOINTMENT

Section 2041(a)(2) provides that the value of a decedent's gross estate includes the value of all property to the extent of any property with respect to which the decedent had at the time of death a general power of appointment created after October 21, 1942.

With certain exceptions, section 2041(b)(1) defines a general power of appointment to mean a power exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. The regulations specifically contemplate that a beneficiary may possess a power of appointment with regard to trust property. See sec. 20.2041-1(b)(1), Estate Tax Regs. Thus, if a trust instrument provides that the beneficiary may appropriate or consume the principal of the trust, the power to consume or appropriate is a power of appointment. Id. The fact that a decedent holds the power in a fiduciary capacity as a trustee or that a decedent can only exercise the power jointly with another does not prevent the power from being a general power of appointment. Maytag v. United States, 493 F.2d 995, 997 (10th Cir. 1974); Estate of Jones v. Commissioner, 56 T.C. 35, 41 (1971), affd. without published opinion 474 F.2d 1338 (3d Cir. 1973); Estate of Lanigan v. Commissioner, 45 T.C. 247, 251 (1965).

EXCEPTIONS

Under section 2041(b)(1)(C)(ii), a power of appointment does not constitute a general power of appointment if the power is exercisable by a decedent only in conjunction with a person having a substantial interest in the property subject to the power, which interest is adverse to exercise of the power in favor of a decedent. Here, Decedent and a bank were cotrustees of the Family Trust, and the Trust Agreement allowed the cotrustees of the Family Trust to invade principal for the benefit of any of the beneficiaries, including Decedent. However, a coholder of a discretionary power to distribute trust assets, such as the bank here, has no adverse interest merely because of its joint possession of the power. Sec. 20.2041-3(c)(2), Estate Tax Regs.; Estate of Jones v. Commissioner, supra at 41-42. Further, the exception found in section 2O41(b)(l)(C)(ii) is limited to cases where, in addition to its status as a cotrustee and its entitlement to incidental compensation as such, the cotrustee has a substantial interest in the property which is adverse to the beneficiary. Miller v. United States, 387 F.2d 866, 870 (3d Cir. 1968). The record includes no evidence that the bank had any such substantial interest in any asset of the Family Trust. Thus, the exception found in section 2041(b)(1)(C)(ii) is inapplicable.

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