April 20, 2016
Re: Request for Ruling: Fiduciary Income Tax
Dear *****:
This will reply to your request for reconsideration of the Department's ruling, Public Document (P.D.) 15-12 (1/12/2015), issued to you regarding the filing requirements of a testamentary trust.
FACTS
In P.D. 15-12, an individual (the "Decedent") was a resident of Virginia at his death in 2011. He had been the beneficiary of a trust established by the will of his father, a resident of ***** (State A). The father's will gave the Decedent a power of appointment, exercisable in the Decedent's will, to distribute the assets of the trust to his descendants outright or hold the assets in further trust for their benefit. The Decedent could also choose to distribute the net income of any assets remaining in trust to his spouse.
In his will, the Decedent exercised the power of appointment to establish a trust (the "Trust") for the benefit of his spouse and descendants. The Department ruled that the Trust was a Virginia resident trust because it was a new trust created by the will of an individual who died as a domiciliary resident of Virginia. You request that the Department reconsider this ruling.
RULING
In P.D. 15-12, the Department observed that a trust may be created by the exercise of a power of appointment in favor of a trustee pursuant to Va. Code § 64.2-719. The Department reasoned that because the Decedent exercised a power of appointment in his will to establish the Trust and the will contained all of the terms and conditions governing the administration of the Trust, it was a trust created by will of a decedent who at his death was domiciled in the Commonwealth and therefore a resident trust. See Va. Code § 58.1-302. In addition, the Department rejected the argument that the Trust should not be considered a resident trust because the trust assets were not includable in the Decedent's estate for federal estate tax purposes or in his probate estate for probate tax purposes. The Department noted that Va. Code § 58.1-302 contains no requirement that the assets of a testamentary trust must have been subject to estate or probate tax for the trust to be classified as a resident trust.
Although the Department could find no Virginia case directly on point, several cases from other jurisdictions support the conclusion that a new trust is formed when a power of appointment is exercised over an existing trust and the assets are held in further trust. In In re Sinkler's Trust, 3 Pa. D. & C.2d 241, 1955 WL 5275 (1954), the settlor, the testator's mother, established a trust for the benefit of the testator and his children. She also gave the testator a testamentary power to appoint some or all of the income to his surviving spouse for life or for a shorter period and the principal to his children in such shares and for such purposes as he wished. The testator exercised the limited power of appointment in his will and directed the trustees to hold the assets in further trust for the benefit of his surviving spouse and children. The court in Sinkler appears to have treated the trust as a new trust created by the exercise of the power of appointment, even though the assets continued to be held in the mother's estate. The court rejected the argument that exercising the power of appointment merely continued the mother's trust, and it awarded a commission to the trustee that was normally granted at a trust's termination.
Similarly, in In re Estate of Lynch, 493 N.Y.S.2d 742, 129 Misc.2d 679 (1985), the testator had a testamentary power to appoint the principal remaining in a testamentary trust her deceased husband had created. She chose to appoint the principal in further trust for the children, but she had also had the power to distribute the principal to them outright. The court held that she had created new trusts and thus the trustee of the testamentary trust created by her husband, who continued to be the trustee of the children's trusts she created, was entitled to paying-out commissions.
Although the question before the court in each of these cases was whether the trustee was entitled to commission, the Department believes that they support the conclusion in this case that the Decedent created a new trust by exercising the power of appointment over his father's trust, even though the trust assets remained in his father's estate. This conclusion is further supported by the observation of the Supreme Court of Virginia that a power of appointment is not an estate but is an authority to create an estate or interest. See Commonwealth v. Davis, 200 Va. 308, 313, 105 S.E.2d 819, 823 (1958). Accordingly, the Department affirms its ruling in P.D. 15-12 that the Trust is a Virginia resident trust because it was created by the will of a decedent domiciled in Virginia at his death. As a resident trust, the Trust is entitled to a credit for income tax paid to any other state to the extent permitted by Va. Code § 58.1-371.
This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this response, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6095761636.M