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INTERESTS IN TRUSTS AS PROPERTY IN DISSOLUTION OF MARRIAGE: IDENTIFICATION AND VALUATION
Real Property, Probate and Trust Journal, Spring 2005 by Chorney, Marc A
A power of invasion or a contingency over trust principal does not, under tax law, necessarily render actuarial valuation inapplicable. If the possibility of the diversion of principal is negligible or remote, the diversionary right may be ignored. For example, if a gift to charity is dependent upon a condition or power, no estate tax charitable deduction is allowed unless the possibility that the charitable interest would not become effective is so remote as to be negligible.143 In Estate of Jack v. Commissioner,144 a widow's right to discretionary distributions of trust principal for comfort and support had no value because the widow's property and the income from the trust substantially exceeded her needs, the widow was of advanced age, no distributions of principal were made to the widow, and distributions were allowed only to maintain the widow's standard of living and only if the income of the trust was insufficient. Accordingly, the remainder's passing to charity qualified for the estate tax charitable deduction.145 In Estate of De Foucaucourt v. Commissioner,146 the ability of an elderly and disabled individual to have or adopt children also was considered so remote as to be negligible and did not disqualify the deduction for the remainder interest's passing to charity.147 In the context of dividing interests in trust in a property division, this principle would be equally applicable, and the remainder interest of a spouse should be undiminished by the diversionary rights of current trust beneficiaries in some circumstances.
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In Estate of Gokey v. Commissioner,148 the Tax Court valued two remainder interests passing to the decedent's children on the basis of the actuarial tables for estate tax purposes.149 The remainder interests were subject to the corporate trustee's power to invade income or principal for the benefit of the settlor's spouse if the trustee determined such use necessary for the spouse's care, comfort, support, or welfare.150 The trust instrument did not require the trustee to consider any of the spouse's other assets. The taxpayer argued that the remainder interests had no value because no one would buy a remainder interest subject to a spendthrift provision and power of invasion.151 The Seventh Circuit reversed the Tax Court,152 holding that the tables did not apply and that the value must be determined under the willing buyer and willing seller test because of the power of invasion.153 The Seventh Circuit also determined that the value of the remainder interest was not reduced by the spendthrift provision because the inability to sell the remainder interests was offset by the inability of creditors to reach the assets.154 On remand, the Tax Court considered the needs of the spouse for the rest of her life by reviewing her recent expenditures and the value of her other assets.155 Noting the "inherent uncertainty in any valuation case,"156 the Tax Court then valued the remainder interests at approximately twenty-four percent of the value of the interests under the tables. The opinion did not disclose how the Tax Court arrived at the values.
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