Academic journal article Journal of Accountancy

Power to Invade Principal Meant Trust Fund Was Includable in Estate

Academic journal article Journal of Accountancy

Power to Invade Principal Meant Trust Fund Was Includable in Estate

Article excerpt

At Walter Kurz's death, his widow, Ethel, was a beneficiary of the Walter Kurz insurance trust. The trust was divided into a marital trust fund and a family trust fund. The trust instrument gave Ethel the following rights during her life with regard to the two trust funds:

* She would receive all the income from both funds.

* She could demand all the principal in the marital trust fund.

* She had the noncumulative right to demand 5% of the principal of the family trust fund during any year, but only if the marital trust fund had been exhausted.

Ethel died in 1986, when the marital fund had assets of $3.5 million and the family fund had $3.4 million. Ethel's executor included the entire value of the marital fund in her gross estate on the estate tax return but did not make any inclusion based on Ethel's right to withdraw 5% of the family fund principal.

The Internal Revenue Service claimed that 5% of the family fund's principal had to be included in Ethel's gross estate because she had a general power of appointment-the power to consume the principal-over 5% of the fund.

Under Internal Revenue Code section 2041(a)(2), property over which the decedent has a general power of appointment usually must be included in the gross estate, even if the power is never exercised. For the property to be includable, the general power must be in existence at the time of death. According to regulations section 20.2041-3(b), if a power of appointment is exercisable only when a specified event occurs and it does not occur during the decedent's life, the power does not arise during the decedent's life and the property to which it is subject is not includable. …

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