Opinion ID: 379557
Heading Depth: 2
Heading Rank: 2

Heading: Powers as Designated Trustee

Text: 28 Appellees contend that any incidents of ownership Lloyd may have possessed as designated trustee of the testamentary trust are irrelevant and need not be examined. This contention is based on the fact that none of Hazle's probate estate had been distributed at the time of Lloyd's death, and consequently Lloyd had not yet become the trustee of Hazle's residuary estate. 29 The district court concluded it must examine Lloyd's powers as potential trustee: 30 Although Lloyd died before assuming the position of trustee of the testamentary trust, as executor he controlled the time and manner of distribution of the residuary estate assets to the trust. Therefore, although this Court has determined that as executor he did not possess the requisite incidents of ownership, his powers as potential trustee must also be examined. 31 Hunter v. United States, supra, 474 F.Supp. at 770. The district court acknowledged that under Missouri law it is well settled that 32 the offices of executor and trustee do not merge, although they may be conferred upon and the powers of such offices be exercised by the same person    But bequests of personalty go into the hands of the executor and do not become subject to any control by the trustee until there has been a legal separation of the funds. Until such separation the acts done in respect thereto are in the capacity of executor and not as trustee. 33 Id. at 766-67 (quoting In re Jackson's Will, 291 S.W.2d 214, 223 (Mo.App.1956)). Nevertheless, the court felt that Estate of Fruehauf v. Commissioner, supra, 427 F.2d at 85-86, required an examination of the powers held as trustee even though Lloyd had not yet been appointed. The district court quoted Fruehauf which had stated that under Michigan law 34 Decedent here had the power to become both trustee and life income beneficiary of the testamentary trust through the exercise of his powers as executor of the will. We believe that it is the existence of that power, not its exercise, which is determinative. Merely because decedent had not performed certain acts necessary to enable him to become trustee-beneficiary of the trust does not detract from his power to do so. 35 Estate of Fruehauf v. Commissioner, supra, 427 F.2d at 85, quoted in Hunter v. United States, supra, 474 F.Supp. at 767. 36 It appears that Missouri law differs from the Michigan law applied in Fruehauf, however. Apparently Lloyd could not, solely through his exercise of powers as executor, become trustee of the testamentary trust. Appellees argue that under Missouri law no distribution can be made by the executor except pursuant to an order from the probate court. See Mo.Rev.Stat. §§ 473.613, .617; see also Bohan v. United States, 456 F.2d 851 (8th Cir. 1972), aff'g, 326 F.Supp. 1356 (W.D.Mo.1971). In the instant case Lloyd had not petitioned for, nor the probate court ordered, distribution of the assets of Hazle's estate before Lloyd's death. If the assumption of powers as trustee was contingent on court order, then we agree that Lloyd was not trustee at his death, nor did he have the power to effect his appointment as trustee either alone or in conjunction with any other person, the probate court not satisfying the definition for person. 6 37 We need not rest our decision on this interpretation of state law, however. 7 An examination of Lloyd's capacity as potential trustee leads us to conclude the fiduciary powers possessed by Lloyd at death do not constitute an incident of ownership under section 2042(2). 38 The government acknowledges that the fiduciary powers possessed by Lloyd as trustee would permit him to affect only the time and manner of enjoyment, and would not permit him to enjoy the economic benefits of the policies. It argues that this court should follow the approach of the Fifth Circuit, which has held that the insurance policies are nevertheless includable in the gross estate under Treas.Reg. (26 C.F.R.) § 20.2042-1(c)(4), 8 even though the decedent could not enjoy the economic benefits of the policies, but only the time and manner of enjoyment. See Terriberry v. United States, 517 F.2d 286 (5th Cir. 1975), cert. denied, 424 U.S. 977, 96 S.Ct. 1484, 47 L.Ed.2d 748 (1976); Rose v. United States, 511 F.2d 259 (5th Cir. 1975); Estate of Lumpkin v. Commissioner, 474 F.2d 1092 (5th Cir. 1973). 39 The district court relied on cases which held that concerning the possession of fiduciary powers transferred to decedent after he had previously transferred all interest in policies on his life the decedent must be able to enjoy economic benefits of the policies in order for them to be included in the decedent's gross estate under section 2042(2). Estate of Connelly v. United States, 551 F.2d 545 (3d Cir. 1977); Estate of Skifter v. Commissioner, 468 F.2d 699 (2d Cir. 1972); Estate of Fruehauf v. Commissioner, 427 F.2d 80 (6th Cir. 1970). 9 40 We have examined these cases and the wealth of published comment concerning this issue, and find ourselves in complete agreement with the district court that the right to the economic benefits of a policy is necessary under these facts for inclusion in the gross estate. We therefore adopt the analysis and reasoning of the district court concerning this issue, see Hunter v. United States, supra, 474 F.Supp. 770-72. 41 Affirmed.