Administrative Powers (Portfolio 820)

Description

Tax Management Portfolio, Administrative Powers, No. 820, describes and analyzes the development of the law with regard to the estate and gift tax consequences of various administrative powers granted to trustees; reserved by a settlor or a decedent; or held by an executor, custodian, or others, including third parties such as trust protectors. For many years, individuals have attempted to reduce their income tax burden and their ultimate estate tax liability by means of lifetime transfers of property in trust. In many instances, the transferor has attempted to give away the property to achieve the tax benefit while, at the same time, retaining some degree of control over the transferred property by means of reserving, or granting to a trustee or others, certain discretionary and administrative powers.

Administrative powers, an essential element in all trusts, are, for purposes of this Portfolio, defined as powers that are not obviously substantive or dispositive, but rather are more ministerial or incidental to the basic terms of the transfer of the property to the trustee or to the use or disposition of the property after the transfer. The context of the definition is that of estate and gift taxes rather than income taxes.

The Portfolio discusses the estate and gift tax questions that arise from the inclusion in trust instruments of specific administrative powers, normally used to provide flexibility to a trustee, to effectuate the intention of the settlor/decedent without the need of seeking court approval. Local law controls the interpretation of the governing instruments, and is of importance with regard to the federal estate or gift tax effect of the creation, existence or exercise of an administrative power. Federal courts have tried to give effect to the settlor’s intention and to determine whether or not the holder of the power is limited in its use of the power by a local court. In most instances, if the power is found to be subject to such control, the federal courts have held the powers to have little or no estate or gift tax consequences.

Table of Contents

I. Introduction
II. General Estate and Gift Tax Implications
III. Definition of Administrative Powers
IV. Creation of Administrative Powers
V. Power of Settlor to Act as Trustee or to Appoint Trustees
VI. Estate Tax Statutory Concepts
VII. Gift Tax Statutory Concepts
VIII. Effect of State Law
IX. Specific Administrative Powers