Opinion ID: 382100
Heading Depth: 1
Heading Rank: 2

Heading: the reid case

Text: The Incompetence Question 25 This case, although governed by a different section of the Revenue Code than Gilchrist, raises similar questions regarding the inclusion in a gross estate of property in which an incompetent had held incidents of ownership at the time of death. 26 In 1955 Mrs. Reid established an irrevocable trust which required the trustee to establish separate special trusts for the benefit of Mrs. Reid's issue. The trust instrument allowed the trustee discretion to accumulate or distribute income from each separate trust and to invade the corpus of the trusts for distribution among its beneficiaries. 27 Under the terms of the trust, set forth in part in the margin, 4 Mrs. Reid as settlor reserved the right to appoint a successor to any resigning trustee. The trust instrument did not explicitly bar the settlor from naming herself successor trustee in the event of a trustee's resignation. Several years after the creation of the trust, the original trustee, a Dallas bank, did resign and was replaced by one George Smith. 28 In January of 1972 Mrs. Reid was declared mentally incompetent by a Texas Court; in November of that year she died. This case raises the question whether the property subject to the 1955 trust was includable in Mrs. Reid's gross estate under I.R.C. § 2036. This section provides in pertinent part that a decedent's gross estate shall include the value of property transferred by a trust under which the decedent retained the right ... to designate the persons who shall possess or enjoy the property or the income therefrom. Id. § 2036(a)(2). A settlor's retention of the power to accumulate or distribute trust income and corpus at his or her discretion results, by virtue of § 2036, in the inclusion of the trust property in the settlor's gross estate. United States v. O'Malley, 383 U.S. 627, 631-32, 86 S.Ct. 1123, 1126, 16 L.Ed.2d 145 (1966); Struthers v. Kelm, 218 F.2d 810, 813-14 (8th Cir. 1955) (both decided under I.R.C. § 811 (1939), predecessor of the present § 2036). 29 The Tax Court, following its decision in Gilchrist, held that Mrs. Reid's incompetence effectively barred her and her guardian under local law from naming themselves trustee in the event of a trustee's resignation, thus removing the trust property from § 2036's requirement of inclusion in the gross estate. 71 T.C. 816, 822-23 (1979). The Tax Court therefore did not reach the questions whether Mrs. Reid had in fact intended to reserve the power to appoint herself trustee, and (as preliminary to that determination of fact) whether the trust indenture was so ambiguous that extrinsic evidence of the settlor's intent was admissible. 30 Under Treasury Regulation § 20.2036-1(b)(3), 23 Fed.Reg. 4529, 4552 (1958), as amended 25 Fed.Reg. 10869 (1960), it is immaterial to the question of the existence of a decedent's taxable § 2036 power whether the power was exercisable only in conjunction with another person. The capacity in which the decedent or such other person could exercise the power is likewise irrelevant under the regulation. As noted in the Gilchrist case, statutory interpretations contained in Treasury Regulations of such comparatively ancient provenance are accorded great weight. The utilitarian considerations undergirding such clear-cut rules have been outlined above and need not be repeated here. Parenthetically, we note that only this final aspect of the Gilchrist opinion has application in Reid. 31 Adhering to the language of the regulation reduces the relevant legal question to this one: did Mrs. Reid's putative power of self-appointment survive her adjudication of incompetence? Or more specifically, was the power exercisable in any capacity by Mrs. Reid or by her guardian? Answering this question requires reference to state law. This is simply an application of the rule noted in Gilchrist -that state law creates property interests which are taxed according to federal law. 32 In its exploration of relevant state law, the Tax Court cited Weatherly v. Byrd, 566 S.W.2d 292 (Tex.1978), for the proposition that the discretionary right to appoint oneself as successor trustee ... is a personal right which does not vest in a guardian upon his appointment. 71 T.C. at 823. The cited Texas case dealt with a guardian's power to revoke a revocable trust in a settlor-ward's stead. The Texas Court did hold that such a personal power does not vest in a guardian, but further held that such a power was exercisable by a guardian acting with the authorization of a court of competent jurisdiction. 556 S.W.2d at 293. 33 Weatherly is the Texas case most analogous to the present one and suggests that Mrs. Reid's guardian could have appointed himself trustee of the 1955 trust property. 5 The only other pertinent Texas case cited by the Tax Court is In re Guardianship of Estate of Neal, 406 S.W.2d 496 (Tex.Civ.App.) writ of error refused, n. r. e., 407 S.W.2d 770 (Tex.1966). Estate of Neal dealt with the power of a guardian under Texas law to make gifts from the estate of his or her ward. The case has little relevance to the question of a guardian's capacity to exercise a power of self-appointment as trustee of a trust established by a ward: the trustee's discretion, unlike that of the would-be donor-guardian, is limited by the terms of the settlor's own trust indenture. In short, this Court has been directed to no Texas statute or case which barred Mrs. Reid's guardian from exercising any power of self-appointment which Mrs. Reid as settlor might have reserved. If that power was reserved it continued to exist under Texas law, at least as existence of a power is determined for federal estate-tax purposes. 34 The Tax Court has noted an exception to § 2036(a)(2)'s rule of inclusion: if the right to designate who shall enjoy property or the income from it is subject to an ascertainable standard of exercise, that property is not includable in the estate of the holder of the right. Estate of Cutter, 62 T.C. 351, 354 (1974). This ascertainable standard exception is not statutory, as is the similarly-styled exception to § 2041 noted in Gilchrist ; it is not necessary to consider whether the limits of that exception noted in Gilchrist are applicable here. For although it could be said that Texas law imposes some standards on a guardian's exercise of a ward's power of self-appointment as trustee of a trust, those standards govern the validity of the appointment ; they do not affect the scope of the trustee's powers to accumulate or distribute property once appointed. Those powers are in this case set by the terms of the trust, and are not limited by any standards ascertainable within that instrument or imposed by state law. Questions of Fact 35 The Tax Court, basing its decision on Mrs. Reid's incompetence to serve as trustee at the time of her death, did not reach the question whether Mrs. Reid had actually reserved the power to name herself trustee of the 1955 trust. To iterate: Mrs. Reid did not expressly reserve or renounce the power to name herself successor trustee under the 1955 trust. Her estate contends that it was her intent to eschew any such power. 36 Whether the settlor of a trust has in fact reserved any of the powers enumerated in § 2036 is determined by the law governing the trust. Durst v. United States, 559 F.2d 910, 911 (3d Cir. 1977). Under Texas law, extrinsic evidence is admissible to construe an ambiguous trust instrument by ascertaining the settlor's true intent. E. g., Coffee v. William Marsh Rice Univ., 408 S.W.2d 269, 273 (Tex.Civ.App.1966), writ of error ref., n. r. e. The Commissioner argues that under a federal rule of law, a trust indenture is not ambiguous in describing the settlor's right to serve as trustee, if the indenture does not expressly bar such service. The Commissioner relies on Mathey v. United States, 491 F.2d 481 (3d Cir. 1974) (en banc). Mathey does not support this reliance; in Mathey the settlor of the subject trust had retained the power to change trustees. In such a case, silence on the settlor's power of self-appointment is more telling than is Mrs. Reid's in the present case. 37 The ambiguity of the 1955 trust instrument is such that a Texas court would be likely to admit extrinsic evidence of the settlor's intent concerning powers of self-appointment. The Tax Court heard much extrinsic evidence on this matter but did not rule on its admissibility, weight, or credibility. The Tax Court's judgment is reversed and remanded for such rulings, and for the determination whether Mrs. Reid had reserved a power of self-appointment as trustee of the 1955 trust. 38 REVERSED and REMANDED.