4.5 Ascertainable Standards and Estate Planning
Many trusts, of course, with an eye on the estate tax exclusionary rules, provide the corpus distributions (or, for that matter, income distributions) are to be governed by an “ascertainable standard.” Indeed, by tying trustee discretion to an ascertainable standard, married couples can engage in estate planning without imposing on the surviving spouse a third party trustee. It permits the surviving spouse to be his or her own trustee which often is the recommended estate planning technique:
In terms of the marital planning endeavor, the most common form of marital and non-marital Trust drafting entails a relatively simple structure that we all know well. The non-marital Trust receives the largest amount of a married decedent’s gross estate that can pass with the least amount of federal estate tax (with a potential state death tax cost in some “decoupled” jurisdictions – that part of this planning has not yet been resolved by most planners). In 2008 this means the first $2 million goes into the non-marital Trust. The balance of the estate typically qualifies for the marital deduction.
* * *[M]y default recommendation (all other things being equal) would be (to the extent the client is willing and the spouse is able) to begin with a template or recommended plan that would … make the spouse trustee of each (trust.)
The foundation of this basic estate planning technique is the rule that a beneficiary is not the “owner” of a trust even if the beneficiary is the trustee of that trust as long as the discretionary distributions are limited to an “ascertainable standard.” 26 U.S.C.A. § 2041(b)(1)(A) provides that the federal gross taxable estate includes all property over which a decedent had a general power of appointment or a power to invade except for a power to invade that is limited by an ascertainable standard: “A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.” Thus, it is possible for the beneficiary to be the sole trustee or a co-trustee of a trust for his or her benefit as long as the power to make discretionary payments is limited by such an ascertainable standard. The distinguishing feature of a limited power of appointment, as opposed to a general power of appointment, is that the standard permits the power to be exercised in a manner “reasonably measurable in terms of [the beneficiaries’] needs.” U.S. Treas. Reg. § 2041-1(c)(2).
The federal gift tax provisions run parallel to the estate tax provisions in the treatment of an ascertainable standard. Under the gift tax provisions, the exercise of a general power of appointment is deemed to be a transfer by the donee of the power but the exercise of a power to consume or invade limited by an ascertainable standard is exempted from the general rule. 26 U.S.C.A. § 2514(c)(1). The gift tax regulations give a description of powers of appointment that are limited by ascertainable standards:
A power is limited by such a standard (an ascertainable standard) if the extent of the possessor’s duty to exercise or not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). As used in this subparagraph, the words “support” and “maintenance” are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare or happiness of the holder is not limited by the requisite standard. Examples of powers that are limited by the requisite standard are powers exercisable by the holder’s “support,” “support and reasonable comfort” “maintenance in health and reasonable comfort,” “support in his accustomed manner of living,” “education, including college and professional education,” “health,” and “medical, dental, hospital and nursing expenses and the expenses of invalidism.”
U.S. Treas. Reg. § 25.2514-1(c)(2).