Stock Held under Testamentary GPA Must Be Aggregated with Stock Decedent Owned Outright

Fand D were husband and wife. Prior to D's death, they owned, as community property, all of the stock of the L Co. D's will divided her estate into two trusts, each consisting of L stock, for which F was trustee. During his life, F had no power to control a distribution of the trusts' assets, but had a testamentary general power of appointment (GPA) over one of the trust's assets. (This arrangement allowed D to receive a marital deduction.)

In 1996, F died. At his death, he owned 50% of the L stock outright and 44% through the trust. His estate tax return reported both blocks of L stock, valuing each separately. The IRS questioned this treatment, contending that F's testamentary GPA was essentially equivalent to outright ownership and that the L stock should be valued as one 94% block. F challenged this treatment, but the Tax Court (opinion Foley, J.) holds for the Service.

The value of property includible in a decedent's gross estate is generally the fair market value (FMV) of such property on his date of death. For transfer tax purposes, the FMV is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

A marital deduction is generally not allowed for a property interest passing to a surviving spouse if, on lapse of time or occurrence or failure of an event or contingency, such interest will terminate or fail (the terminable-interest rule). Sec. 2056(b)(7) provides an exception to this general rule and allows a marital deduction for qualified terminable interest property (QTIP), even though the surviving spouse receives only an income interest and has no control over the property's ultimate disposition.

The value of a QTIP is included in a surviving spouse's estate under Sec. 2044(a). In the legislative history accompanying the enactment of Secs. 2044 and 2056(b)(7), the House Ways and Means Committee noted that prior to enactment, "the marital deduction [was] available only with respect to property passing outright to the spouse or in specified forms which [gave] the spouse control over the transferred property." The House Ways and Means Committee concluded that "a deduction should be permitted for certain terminable interests," but "property subject to terminable interests qualifying for the marital deduction should be taxable...upon the death of the second spouse." Thus, under Sec. 2044(c), property subject to a Sec. 2056(b)(7) election "shall be treated as property passing from the decedent" (emphasis added), despite the fact that the surviving spouse does not control the ultimate disposition of the property.

GPA Trusts

Property in which a surviving spouse has a life interest might also qualify for an exception to the terminable-interest rule, and thus for the marital deduction, if under Sec. 2056(b)(5), the surviving spouse has a GPA as to such property. Sec. 2041(a) generally requires that the value of all property over which the decedent had a GPA at death must be included in his estate.

Historically, a GPA has been equated with outright ownership of property; the powerholder (i.e., the decedent) can appoint the property to his estate and thus dispose of it as his own. In fact, the legislative history to Section 402(e) of the Revenue Act of 1918 (the predecessor to Sec. 2041) states:

A person having a general power of appointment is, with respect to disposition of the property at his death, in a position not unlike that of its owner. The possessor of the power has full authority to dispose of the property at his death, and there seems to be no reason why the privilege which he exercises should not be taxed in the same degree as other property over which he exercises the same authority.

In Est. of Mellinger, 112 TC 26 (1999), we reasoned that although Sec. 2044 required that property held by the QTIP trust must be included in the surviving spouse's gross estate, the property "[did] not actually pass to or from" her, and that she "at no time" possessed "control" or had "any power of disposition over" the property. In this case, however, F possessed a testamentary GPA, which allowed him to control the stock's ultimate disposition. Thus, pursuant to the GPA, F, at the moment of death (i.e., the critical moment for estate tax valuation purposes), had control and power of disposition over the property. Accordingly, the L stock subject to F's testamentary GPA must be aggregated with L stock he owned outright.

Est. of Aldo Fontana, 118 TC No. 16