"Although Tax Court awarded the taxpayer a victory in Estate of Levine, its reasoning handed the IRS a heretofore unidentified and potentially potent weapon. The IRS argued in Levine that the decedent, merely by appointing the same individual as both her attorney-in-fact and as the independent fiduciary of an irrevocable trust intended to pass outside of her estate, retained de facto a taxable power over the trust property. Although the Court might have been expected to make short work of the IRS's argument, it instead rejected it only after engaging in a fact-sensitive inquiry into the extent of the fiduciary's obligations. In an otherwise similar case but involving different a set of fiduciary duties, Levine implies, the Court may hold for the IRS. Thanks to Levine, all wealthy individuals should consider steps to neutralize a novel threat to their estate plans. We call that threat the theory of linked attribution.

Austin Bramwell and Jessica Soojian provide members with timely and important commentary that examines the fallout from Estate of Levine and what they refer to as the theory of "linked attribution."

Austin Bramwell is a partner in the Trusts & Estates Group of Milbank LLP and an Adjunct Professor of Law at New York University School of Law. The views expressed herein are his own.

Jessica D. Soojian is a partner in the Trusts & Estates Group of Milbank LLP. The views expressed herein are her own.

Here is their commentary:

EXECUTIVE SUMMARY:

Although Tax Court awarded the taxpayer a victory in Estate of Levine, its reasoning handed the IRS a heretofore unidentified and potentially potent weapon. The IRS argued in Levine that the decedent, merely by appointing the same individual as both her attorney-in-fact and as the independent fiduciary of an irrevocable trust intended to pass outside of her estate, retained de facto a taxable power over the trust property. Although the Court might have been expected to make short work of the IRS's argument, it instead rejected it only after engaging in a fact-sensitive inquiry into the extent of the fiduciary's obligations. In an otherwise similar case but involving different a set of fiduciary duties, Levine implies, the Court may hold for the IRS. Thanks to Levine, all wealthy individuals should consider steps to neutralize a novel threat to their estate plans. We call that threat the theory of linked attribution

FACTS:

Suppose that a wealthy patriarch, in an effort to reduce his estate tax burden, creates an irrevocable "dynasty" trust for his descendants. By funding the trust, he hopes to use up his gift and GST tax exemption amounts, and also to fix value today so that future appreciation can pass free of estate tax at death. Accordingly, he retains none of the powers described in sections 2036, 2038, or 2042 of the Internal Revenue Code that can cause property transferred during lifetime to be included in his gross estate at death. In fact, he is so cautious that he retains no powers over the trust whatsoever, not even to make investment decisions or to appoint (or remove) trustees. He instead appoints an independent trustee to administer the trust, who conscientiously carries out all of the duties of a trustee.

Under these circumstances, the trust should be invulnerable to estate tax, right? Not so fast. According to Estate of Levine v. Comm'r, 158 T.C. 2 (2022), the analysis does not necessarily end there. For suppose, in addition, that the grantor-patriarch has appointed the same individual as both his attorney-in-fact and as the independent trustee of the dynasty trust. In that case, as in Levine, the IRS may argue that the patriarch has retained or possessed, after all, a taxable power under section 2036 or 2038. The taxable power exists, the IRS may argue, because the independent trustee's powers must be attributed back to the grantor through the trustee's dual service as grantor's attorney-in-fact.

Unfortunately, the Tax Court in Levine gave this "linked" attribution theory a surprisingly respectful hearing. The theory did not simply fail because the grantor did not personally retain or possess a taxable power, whether through an attorney-in-fact or otherwise. Rather, Judge Holmes only rejected linked attribution because he found, under the particular facts and circumstances, that the independent trustee's fiduciary duties were sufficiently rigorous to prevent the decedent from being deemed to have a taxable power.

The Tax Court's opinion thus leaves open the possibility that under a different set of circumstances, the linked attribution theory will prevail and cause trust assets that otherwise would be shielded from estate tax to be included in a decedent's gross estate.

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