Rev. Rul. 75-550

The Internal Revenue Service has been requested to illustrate the correct method of valuing property transferred from a prior decedent that qualifies in the present decedent's estate for the credit under section 2013 of the Internal Revenue Code of 1954, in the circumstances described below.

A (the transferor-decedent) died testate on January 10, 1970. Under A's will two trusts were established: a marital deduction trust for the benefit of B (the transferee-decedent); and a residuary trust for the lifetime benefit of B with the remainder to pass to the children of A and B, or to the children's heirs. The marital deduction trust was valued at $2,000,000 and the residuary trust was valued at $1,344,127.

Under the terms of the residuary trust, the trustee was granted the discretionary power to invade the trust corpus in such amount as the trustee deemed necessary "for the comfort, support, hospital or medical expenses" of either B or the children, or any or all of them. The trustee was empowered to invade the corpus without taking into account the independent sources of income to B or the children. However, no withdrawals for the benefit of B could be made until and unless the corpus of the marital deduction trust was exhausted.

At the date of A's death, B was aged 58 years and the income from the marital deduction trust was more than adequate to meet B's needs and to maintain B's then accustomed standard of living. On the other hand, the aggregate economic needs of the children (for medical, hospital and family support purposes) totaled $100,000 a year at that time and A had frequently assisted the children in meeting such needs.

B died on August 19, 1975, and the representative of the estate has requested assistance in computing the value of the interest in the residuary trust that A transferred to B.

Section 2013 of the Code provides that the tax imposed by section 2001 shall be credited with all or a part of the amount of the Federal estate tax paid with respect to the transfer of an interest in property to the decedent (designated as a transferee) from a person (designated as a transferor) who died within ten years before, or within two years after, the decedent's death. The amount of the credit for tax paid on prior transfers is based upon the value of the transferred property as used in the transferor's estate for the purpose of determining the transferor's Federal estate tax liability.

It is not necessary that the property transferred be identified in, or traced through, the transferee's estate. A life estate or a remainder or otherwise limited interest in property included in the transferor's gross estate qualifies for the credit, even though it is not includible in the gross estate of the transferee. Rev. Rul. 59-9, 1959-1 C.B. 232. The value of such an interest is determined as of the date of the transferor's death on the basis of recognized valuation principles. Section 20.2013-4 of the Estate Tax Regulations.

In arriving at the value of the interest transferred, the governing principles are analogous to those applicable to the valuation of property interests transferred for public, charitable, or religious uses. See Rev. Rul. 70-292, 1970-1 C.B. 187. Section 20.2055-2(a) of the regulations provides that a deduction may be allowed for the value of a limited interest in property transferred to charity only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. Where a transfer of an income or remainder interest is subject to a power of diversion or invasion for noncharitable purposes, the exercise of such power must be limited to a definitely ascertainable standard. If the words used in describing the power do not create such a standard, no deduction whatever is allowable. Merchants National Bank of Boston v. Commissioner, 320 U.S. 256 (1943), 1943 C.B. 1123.

An ascertainable standard has been inferred where the language of the instrument relates to the beneficiary's accustomed manner of living. Ithaca Trust Company v. United States, 279 U.S. 151 (1929), VIII-1 C.B. 313. If the instrument does not specifically limit the power of invasion to the accustomed standard of living of the beneficiary, such a restriction will be implied where the power is limited by such words as "comfort and support" or "hospital or medical expenses." Such an interpretation will be made if it is consistent with applicable local law and other language of the instrument does not require a different construction. Rev. Rul. 54-285, 1954-2 C.B. 302.

The issue of valuation of a life estate subject to a power of invasion has arisen most frequently in the area of transfers for public charitable, or religious use. Although recent amendments to the Internal Revenue Code, Public Law 91-172 (the Tax Reform Act of 1969) in particular, have modified the type of limited interests that qualify for a deduction under section 2055 of the Code, the principles discussed in the cases previously decided under section 2055 are still valid under section 2013.

In this case, the trustee's discretionary power to invade corpus of the residuary trust for the benefit of B and the children can occur only if such diversion is necessary for their "comfort, support, hospital or medical expenses." Thus, the power of invasion is impliedly limited by a definite standard. Rev. Rul. 70-292, cited above. In addition, as of the date of transferor A's death, the likelihood of any invasion of the trust corpus on behalf of the children was not so remote as to be negligible.

Accordingly, B's life estate in the residuary trust ($1,344,127) was capable of valuation at A's death by taking into account the estimated amount of all possible invasions from the corpus on a year-to-year basis as follows:

 Year   Maximum   Remaining   Income        Actuarial  Present Value