Trust Assets Excluded From Cotrustee’s Gross Estate

Lester M. Chancellor passed away in 1989 and a portion of his property was placed in a trust established in his will. The cotrustees of the trust were Mr. Chancellor’s wife (Mrs. Chancellor) and a bank. The trust’s terms stated that the cotrustees were authorized to apportion trust income among Mr. Chancellor’s grandchildren, his children, and Mrs. Chancellor during Mrs. Chancellor’s life for their respective needs. The cotrustees also had the power to invade the corpus for the “necessary maintenance, education, health care, sustenance, welfare or other appropriate expenditures needed by” the above named individuals.

From the date the trust was opened and funded to the date Mrs. Chancellor died, she never received or requested any trust corpus. Mrs. Chancellor’s estate’s estate tax did not include the value of the trust assets at the time of her death. The Commissioner’s notice of deficient determined that Mrs. Chancellor’s gross estate included the trust assets because she had a general power of appointment over them.

In Estate of Chancellor v. Commissioner, United States Tax Court No. 7973-09 (July 2011), the court disagreed with the Commissioner, holding that Mrs. Chancellor’s gross estate did not include the value of the trust assets. The court stated that Section 2014 excluded the assets because the trust created an ascertainable standard that served to limit Mrs. Chancellor’s power of appointment over them.

See Associate Editor, Trust assets not includable in decedent’s gross estate, Tax Court holds, Wealth Strategies Journal, Jul. 21, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for brining this case to my attention.