Estate of Ruth B. Regester, Deceased, Charles Regester, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent, 83 T. C. 1 (1984)

The exercise of a special power of appointment over trust corpus constitutes a taxable gift of the life income interest if the donee also possesses that interest.

Summary

In Estate of Regester, the Tax Court held that when Ruth B. Regester exercised her special power of appointment over the corpus of a trust, she also made a taxable gift of her life estate in the trust’s income. The court rejected the argument that her life estate was extinguished rather than transferred, distinguishing this case from prior rulings and upholding the validity of the applicable gift tax regulation. This decision clarified that a life tenant’s transfer of the underlying trust property via a special power of appointment triggers gift tax on the life estate, impacting estate planning strategies involving powers of appointment.

Facts

George L. Bignell’s will established a trust (Bignell trust) providing Ruth B. Regester with a life estate in the trust’s income and a special power of appointment over the corpus. In 1974, Regester exercised this power, transferring the entire corpus to a new trust (Regester trust) for her grandchildren’s benefit. No income or principal was ever distributed to Regester from the Bignell trust. The Commissioner determined that this transfer constituted a taxable gift of Regester’s life estate, valued at $100,474, triggering a gift tax of $18,362.

Procedural History

The Commissioner issued a notice of deficiency in 1981, asserting that Regester’s exercise of the special power of appointment resulted in a taxable gift of her life estate. The Estate of Regester filed a petition with the U. S. Tax Court, challenging the deficiency. The case was submitted fully stipulated, and the Tax Court upheld the Commissioner’s position, entering a decision for the respondent.

Issue(s)

1. Whether the exercise of a special power of appointment over trust corpus by a life tenant constitutes a taxable gift of the life estate in the trust’s income.

Holding

1. Yes, because when Regester transferred the trust corpus, she also transferred her life estate in the income, which constituted a taxable gift under sections 2501(a) and 2511(a) of the Internal Revenue Code.

Court’s Reasoning

The Tax Court reasoned that Regester’s life estate in the income was separate from the corpus and that her absolute control over the life estate allowed her to make a taxable gift when she transferred the corpus. The court distinguished this case from Walston v. Commissioner and Self v. United States, noting that in those cases, the income interest was not absolute or was subject to specific conditions. The court upheld the validity of section 25. 2514-1(b)(2) of the Gift Tax Regulations, which states that the power to dispose of one’s own property interest constitutes a taxable gift. The court emphasized that Regester’s transfer of the corpus necessarily included the transfer of her life estate, as the income follows the corpus, and rejected the argument that the life estate was extinguished rather than transferred. The court also noted that the IRS had consistently maintained this position in regulations and revenue rulings.

Practical Implications

This decision has significant implications for estate planning involving trusts with life estates and powers of appointment. Attorneys must advise clients that exercising a special power of appointment over trust corpus may trigger gift tax on the life estate, even if the life estate has not yet been enjoyed. This ruling underscores the importance of considering tax consequences when structuring trusts and exercising powers of appointment. It also highlights the need for clear drafting of trust instruments to specify the nature of the life tenant’s interest and any powers of appointment. Subsequent cases, such as those involving similar trust structures, have applied this ruling, reinforcing its impact on estate planning practices.