## Facts

- A grantor transferred property to an irrevocable trust.
- The trustee held discretionary authority over distributions of income and principal under the trust terms.
- The grantor retained an unqualified power to remove the trustee and appoint a successor trustee.
- Any successor trustee had to be an individual or corporate fiduciary who was not “related or subordinate” to the grantor within the meaning of I.R.C. § 672(c).
- The question presented was whether this retained removal-and-replacement power should be treated as if the grantor retained the trustee’s discretionary distribution powers for estate and gift tax purposes.

## Issues

1. Whether a grantor’s retained power to remove a trustee and appoint a successor trustee who is not related or subordinate under § 672(c) is treated as a retained right to designate beneficial enjoyment under I.R.C. § 2036(a)(2).
2. Whether the same retained power is treated as a power to alter, amend, revoke, or terminate enjoyment under I.R.C. § 2038(a)(1).
3. Whether the retained power causes the transfer to be an incomplete gift under I.R.C. § 2511 and Treas. Reg. § 25.2511-2(c).

## Decision

- The IRS ruled that a grantor’s unqualified power to remove a trustee and appoint a successor trustee who is not related or subordinate under § 672(c) is not treated as a reservation of the trustee’s discretionary distribution powers.
- The retained power, by itself, does not cause inclusion of the trust property in the grantor’s gross estate under §§ 2036 or 2038.
- The retained power, by itself, does not render the transfer an incomplete gift for purposes of § 2511.
- The IRS revoked Rev. Rul. 79-353 and Rev. Rul. 81-51 and modified Rev. Rul. 77-182 to reflect this position.

## Legal Principles

- For §§ 2036(a)(2) and 2038(a)(1), estate inclusion can result where a decedent retains powers affecting who will possess or enjoy transferred property or the power to change enjoyment, including powers held in any capacity.
- A grantor may be treated as holding a trustee’s powers where the grantor has an unrestricted ability to remove the trustee and appoint anyone (including the grantor) as successor trustee; limiting replacements to independent fiduciaries avoids that attribution.
- A successor trustee restriction keyed to § 672(c) (excluding related or subordinate parties) is designed to ensure the trustee is independent rather than presumptively aligned with the grantor.
- Under Treas. Reg. § 25.2511-2(c), a gift is incomplete to the extent the donor retains power to reclaim beneficial title or to change beneficiaries’ interests; a power limited to replacing a trustee with an independent trustee is not treated as such a retained dispositive power.
- The ruling reflects the view that replacing a trustee with an independent trustee does not, without more, give the grantor effective control over discretionary distributions or beneficial enjoyment.

## Conclusion

Rev. Rul. 95-58 states that a grantor’s retained power to remove and replace a trustee does not, standing alone, cause estate inclusion under §§ 2036 or 2038 or make the gift incomplete under § 2511, provided the successor trustee must be an independent fiduciary who is not related or subordinate to the grantor under § 672(c).


Rev. Rul. 95-58, 1995-2 C.B. 191 (1995)