DAEOgram -- DO-02-015 -- 06/11/02 -- Revocable Living Trusts

June 11, 2002

DO-02-015

MEMORANDUM

TO: Designated Agency Ethics Officials

FROM: Marilyn L. Glynn

General Counsel

SUBJECT: Revocable Living Trusts

On May 31, 2002, the Office of Government Ethics (OGE)

published an amendment to 5 C.F.R. § 2634.310. See 67 Federal

disclosure requirements of the Ethics in Government Act of 1978

(the Act), as amended, with respect to certain interests of filers,

their spouses and their dependent children as beneficiaries of

trusts, estates and other financial arrangements. The rule

amendment adds a new note to section 2634.310(a). This note makes

clear that financial disclosure reports do not have to disclose

certain interests of beneficiaries under revocable inter vivos

trusts, commonly known as “living trusts.”

The purpose of this

memorandum is to provide ethics officials with general guidance on

the subject of revocable living trusts and to explain the context

in which the rule amendment applies.

Specifically, the note provides:

Nothing in this section requires the reporting of the

holdings or income of a revocable inter vivos trust (also

known as a “living trust”) with respect to which the

filer, his spouse or dependent child has only a remainder

interest, whether or not vested, provided that the

grantor of the trust is neither the filer, the filer’s

spouse, nor the filer’s dependent child. Furthermore,

nothing in this section requires the reporting of the

holdings or income of a revocable inter vivos trust from

which the filer, his spouse or dependent child receives

any discretionary distribution, provided that the grantor

of the trust is neither the filer, the filer’s spouse,

nor the filer’s dependent child.

5 C.F.R. § 2634.310(a)(note).

Designated Agency Ethics Officials

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Living trusts as “will substitutes”

Revocable inter vivo trusts have become a popular estate

planning device in the last several decades. See, e.g., Langbein,

The Nonprobate Revolution and the Future of the Law of Succession,

97 Harv. L. Rev. 1108 (1984). It is frequently said that “the most

popular reason given for using the living trust in one’s estate

plan is the avoidance of probate.” Patrick, Living Trusts: Snake

Oil or Better than Sliced Bread?, 27 Wm. Mitchell L. Rev. 1083,

1092 (2000). In any event, it is very common for ethics officials

these days to encounter filers who are beneficiaries under someone

else’s living trust or who have established such trusts themselves.

In the typical living trust, the grantor (or settlor) conveys

property in trust to a trustee (who is often the grantor) and

retains a life estate, with the remainder to go to specified

beneficiaries upon the termination of the life estate. What makes

a living trust revocable is that the grantor expressly reserves the

power to revoke the trust entirely and to make lessor changes, such

as substitutions of beneficiaries or trustees. In this regard,

revocable living trusts have less in common with traditional

irrevocable trusts, in which the grantor no longer retains

substantial control over the administration of the trust or the

disposition of the property, than with wills, which remain

“ambulatory” until the death of the testator. See, e.g., Bullis v.

Downes, 612 N.W.2d 435, 469 (Mich. App. 2000). Given the control

retained by the grantor during his or her lifetime, a living trust

“actually functions as a will since it is an ambulatory instrument

that speaks at death to determine the settlor’s property.” In re

Estate of Tisdale, 655 N.Y.S.2d 809, 811 (Surr. Ct. 1997).

Therefore, it is widely recognized that living trusts are “clearly

a will substitute.” Georges v. Glick, 856 F.2d 971, 974 n. 2

(7th Cir. 1988), cert. denied, 489 U.S. 1097 (1989).

Financial disclosure requirements for beneficial interests in

trusts and estates generally

Section 102(f)(1) of the Ethics in Government Act sets out the

financial disclosure requirements for beneficiaries of trusts and

other financial arrangements:

each reporting individual shall report the information

required to be reported pursuant to subsections (a), (b),

and (c) of this section with respect to the holdings of

and the income from a trust or other financial

arrangement from which income is received by, or with

respect to which a beneficial interest in principal or

income is held by, such individual, his spouse, or any

dependent child. 5 U.S.C. app. 102(f)(1).

Designated Agency Ethics Officials

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The legislative history indicates several related purposes for this

provision. First, there was an intent to prevent filers from

avoiding reporting requirements “simply by transferring interests”

to a trust or other entity that would still benefit the filer

financially. H.R. Rep. No. 642, Part 1, 95th Cong., 1st Sess.

40 (1977) (reporting on H.R. 6954). Second, there was concern that

situations could arise in which there is an actual or apparent

conflict of interest because “any impact on the financial status of

the . . . trust also impacts significantly upon the financial

status of the reporting individual.” Id. Third, it appears that

the trust provision was included at least in part to deal with the

fact that Federal officials already had created a variety of

“blind” trusts, which did not follow any generally accepted

standards, in an attempt to comply with conflict of interest

requirements; Congress determined that any such pre-existing trusts

should be subject to full disclosure if the trusts could not be

brought into compliance with the new uniform standards for

qualified blind trusts under the Act. See S. Rep. No. 170,

95th Cong., 1st Sess. 123-24 (1977)(reporting on S. 555).

In 1980, OGE first published its “final regulations to state

in greater detail than the Act the information which must be

contained in the financial disclosure report (SF 278).” 45 Federal

was a provision stating in greater detail what kinds of interests

in trusts and estates needed to be reported under the Act. The OGE

regulation specified that filers did not have to report information

about any nonvested interests in an estate. See 45 Federal

to report any nonvested interests in certain trusts had to be

evaluated on a case-by-case basis in consultation with OGE. Id.

In 1992, this regulation was amended to provide even greater

detail with respect to those interests in trusts and estates that

were deemed reportable under the Act. See 57 Federal Register

11800 (April 7, 1992). In particular, all nonvested beneficial

interests in either a trust or an estate were now excluded

altogether. See 5 C.F.R. § 2634.310(a)(2). Moreover, the

1992 amendment added a definition of vested interests and explained

the distinction between vested and nonvested interests, based

largely on a distillation of common law principles.

The definition in section 2634.301(a)(2) reads:

A vested interest is a present right or title to

property, which carries with it an existing right of

alienation, even though the right to possession or

enjoyment may be postponed to some uncertain time in the

(continued...)

Designated Agency Ethics Officials

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In excluding nonvested interests, OGE recognized that

“beneficial interest in principal or income,” in section 102(f)(1)

of the Act, should not be read so broadly as to require the public

disclosure of speculative or uncertain interests. This is evident

in the text of the regulatory definition contained in

section 2635.310(a)(2): “the uncertainty of the right of enjoyment

. . . differentiates a ‘vested’ and a ‘nonvested’ interest.” OGE

also has recognized that the reporting of nonvested interests would

not further the statutory purpose of disclosing interests that pose

a potential conflict of interest, because OGE has determined that

such interests generally are too uncertain to implicate the

financial conflict of interest statute, 18 U.S.C. § 208. See

Public Financial Disclosure: A Reviewer’s Reference 7-30 (1996).

On a closely related subject, OGE has provided additional

guidance concerning the reporting of potential interests as a

beneficiary under a will. Of particular relevance, OGE has

determined that section 102(f)(1) of the Act does not require

filers to report the fact that they are named as beneficiary in the

will of a living person. Id. OGE has concluded that any potential

beneficial interest created by the will of a living person is not

vested, within the meaning of section 2634.310(a)(2), a conclusion

which is supported by the common law. See, e.g., Cunningham, The

Hazards of Tinkering with the Common Law of Future Interests: The

California Experience, 48 Hast. L.J. 667, 677 (1997). Likewise,

OGE has determined that an employee does not have a disqualifying

financial interest, under 18 U.S.C. § 208(a), as a result of being

named a beneficiary in a will of a person still living. As OGE has

explained, “the employee’s interest in the assets to be distributed

under the will is merely speculative since he may never inherit

them.” 60 Federal Register 47207, 47209 (September 11,

1995)(preamble to proposed 5 C.F.R. part 2640); see also Reviewer’s

Reference at 7-30 (no financial interest because will can be

changed). Indeed, it is sometimes said that an heir or beneficiary

of a living person has merely an “expectancy” or a “bare hope of

succession,” rather than a real “interest” in any property that is

part of the estate. Krause v. Krause, 174 Conn. 361, 365 (1978);

see also In re Braman Estate, 435 Pa. 573, 575 n.3 (1969)

(...continued)

future. This includes a future interest when one has a

right, defeasible or indefeasible, to the immediate

possession or enjoyment of the property, upon the ceasing

of another’s interest. Accordingly, it is not the

uncertainty of the time of enjoyment in the future, but

the uncertainty of the right of enjoyment (title and

alienation), which differentiates a “vested” and a

“nonvested” interest.

Designated Agency Ethics Officials

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(expectancy is “chance” of obtaining property from living person,

and such chances are not themselves rights in property).

Reporting requirements for interests in revocable living trusts

Until now, OGE’s regulations and other written guidance have

not specifically addressed the reporting requirements of

beneficiaries under revocable living trusts. However, the approach

taken in the new amendment to section 2634.310 is consistent with,

and follows from, OGE’s prior treatment of nonvested interests in

trusts and estates, especially OGE’s prior treatment of

beneficiaries under the will of a living testator.

As a technical matter, it may be open to debate whether a

remainder interest in a revocable living trust best should be

viewed as vested or nonvested. On the one hand, there are early

cases concluding that a remainder interest in a revocable inter

vivos trust may be viewed as vested, provided that there is no

condition of survivorship or other condition precedent to taking

possession of the property upon the termination of the prior

estate(s). See Randall v. Bank of America National Trust and

Savings Ass’n., 119 P.2d 754 (Cal. App. 1941)(vested even though

power of revocation or substitution might divest beneficiary at any

time); First Nat’l Bank of Cincinnati v. Tenney, 138 N.E.2d 15

(Ohio 1956)(vested remainder subject to defeasance by exercise of

power of revocation).

On the other hand, there are more recent cases concluding

either that such remainders are nonvested or contingent, or that it

is irrelevant whether they are technically vested, given the

functional equivalence between revocable living trusts and wills.

See Bezzini v. Department of Social Services, 715 A.2d 791

(Conn.App. 1998)(beneficiary of revocable trust does not have

vested interest but mere expectancy); Ullman v. Oldensmith,

645 So. 2d 168 (Fla. App. 1994)(beneficiary’s interest is

contingent upon settlor not exercising power to revoke); In re

Estate of Button, 490 P.2d 731 (Wash. 1971)(regardless of whether

vested or nonvested, remainder in practical effect is legacy). It

has been recognized among some commentators and practitioners that

there has been an “evolution of the revocable living trust from a

traditional trust, in which the beneficiary takes an immediate

equitable interest that confers genuine rights of recourse, to a

will-like devise, in which the interest conferred constitutes

little more than an expectancy.” Smith, Note, Why Limit a Good

Thing? A Proposal to Apply the California Antilapse Statute to

Revocable Living Trusts, 43 Hast. L.J. 1391, 1407 (1992).

OGE has determined, for purposes of section 102(f)(1), that

any “interest” in the remainder of a revocable living trust is just

as speculative as the mere expectancy enjoyed by the beneficiary of

a living testator. It is plain to OGE that revocable living trusts

Designated Agency Ethics Officials

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are will substitutes, and there is no compelling reason to treat

beneficiaries of wills and revocable trusts differently under the

financial disclosure rules. See, e.g., Upman v. Clarke, 359 Md.

32, 47 (2000) (no real distinction between gifts through wills and

revocable trusts, as both create only expectancy). To the extent

that a remainder beneficiary under a revocable living trust may

have certain rights, see Continental Bank & Trust Co. v. Country

Club Mobile Estates, Ltd., 632 P.2d 869 (Utah 1981), those rights

would appear to be largely theoretical and of little practical

value during the life of the grantor. See Nonprobate Revolution,

97 Harv. L. Rev. at 1126-28 (hard to envision enforcement by

beneficiary since grantor can always revoke trust and enjoy entire

corpus); Continental Bank & Trust, 632 P.2d at 873-74

(dissent)(violation of terms of revocable trust would not have been

challenged had grantor not died).

Furthermore, OGE sees little connection between the

legislative purposes underlying section 102(f)(1), as described

above, and the disclosure of remainder interests in a revocable

living trust.

3 Such

expectancies are not only speculative but are

so dependent on the control of someone else that there is little

potential for the abuses of subterfuge and self-dealing that

motivated Congress. Moreover, the reporting of such expectancies

necessarily would disclose the interests and estate planning

decisions of persons other than the filer and the filer’s own

spouse and dependent children. The legislative history of the

Ethics in Government Act is replete with discussions of the

delicate balance between the public’s right to know and the privacy

rights of individuals, particularly individuals who are not

themselves Government employees, and OGE believes that important

privacy considerations counsel against compelling such disclosures

in the absence of a clear Congressional directive.

Of course, as discussed more fully below, the question would

be different if the filer, the filer’s spouse or the filer’s

dependent child were the grantor of the trust, in which case we

believe that the purposes and language of the Act require

disclosure.

See, e.g., H.R. Rep. 800, 95th Cong., 1st Sess.

29 (1977)(Judiciary Committee report on H.R. 1)( “the committee

sought to accommodate the public policy considerations underlying

requirements for public disclosure of personal financial

information and the right of personal privacy which affects all

citizens”); 124 Cong. Rec. H10183 (September 20, 1978)(Statement of

Rep. Moorhead)(expressing concern for “personal privacy of the

official’s spouse and children” and concern over possible

“constitutional questions”); id. at H10185 (statement of

(continued...)

Designated Agency Ethics Officials

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We note that our conclusion also is consistent with Federal

tax law, which likewise focuses on the fact that the grantor of a

revocable trust retains the real power to control and benefit from

the trust property. See generally Miller & Rainey, Dying with the

“Living” (or “Revocable”) Trust: Federal Tax Consequences of

Testamentary Dispositions Compared, 37 Vand. L. Rev. 811 (1984).

Under the Internal Revenue Code, the grantor of a revocable trust

remains the owner of the trust property. See 26 U.S.C. § 676.

Moreover, the income of a revocable trust is taxable to the

grantor, whether or not the grantor actually receives a

distribution of trust income. See 26 U.S.C. §§ 671-678.

Similarly, for gift tax purposes, the transfer of property to a

revocable trust is not treated as a completed gift to the remainder

beneficiaries. See 26 C.F.R. § 25.2511-2(c).

Therefore, the new amendment to section 2634.310(a) provides

a note indicating that nothing in that section requires the

reporting of the holdings or income of a revocable living trust

with respect to which the reporting individual has only a remainder

interest. Under the language of this note, it is not necessary to

determine whether the remainder technically is vested or nonvested.

See 5 C.F.R. § 2634.310(a)(note).

Nevertheless, the note makes clear that filers are not excused

from reporting the holdings and income of a revocable trust if the

filer (or the filer’s spouse or dependent child) also is the

grantor of the trust. As should be clear from the discussion

above, the grantor of a revocable living trust retains such rights

of control and enjoyment with respect to the trust property that

OGE must view the grantor as the true owner of the property. OGE

believes this to be the case whether or not the grantor actually

receives any distribution from the trust and whether or not the

grantor actually serves as trustee. In this instance, what is true

for Federal taxation purposes is equally true for financial

disclosure purposes under the Ethics in Government Act:

All income and principal is available for distribution to

the grantor, and the trust can be terminated at any time

during the life of the grantor. The grantor is treated

as the owner of the trust for income and estate tax

purposes. Thus the grantor is taxed on all income (both

income and capital gains) earned by the trust whether or

not distributed. No shifting of income or assets away

(...continued)

Rep. McClory)(“spouse and dependent disclosure requirements

dramatically point up the inherent conflict that exists between the

public’s right to know and the individual’s right to privacy”).

Designated Agency Ethics Officials

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from the grantor is achieved with this type of revocable

trust.

Abbin, Income Taxation of Fiduciaries and Beneficiaries

§ 106 (2000).

The note also provides that nothing in section 2634.310

requires the reporting of holdings or income of a revocable living

trust from which the reporting individual receives any

discretionary distribution, provided again that the beneficiary is

not also the grantor. It is true that section 102(f)(1) requires

the disclosure of trusts “from which income is received” by the

reporting individual, and that section 109(7) of the Act defines

“income” as including “income from an interest in an estate or

trust.” However, OGE does not view discretionary distributions of

trust income or principal from a revocable living trust as income

within the meaning of these provisions. In OGE’s view, a

discretionary distribution is no different from a gift, because the

distribution is made at the pleasure of the grantor. For purposes

of financial disclosure, OGE sees no meaningful distinction

between, for example, a gift of money from a filer’s parent and a

discretionary distribution of money from the parent’s revocable

living trust.

The Ethics in Government Act clearly treats gifts

separately from income or property interests, and gifts are subject

to different reporting requirements (and exclusions) than those

found in section 102(f). Compare 5 U.S.C. app. § 102(a)(2)(gifts);

with §§ 102(f)(1)(income and principal of trust);

102(a)(1)(income); 102(a)(3)(property interests).

The new note is limited, however, to “discretionary”

distributions. In many cases, of course, the trust instrument will

not even mention present distributions to the filer or, if it does,

the terms of the instrument will make clear that such distributions

are discretionary. Nevertheless, disclosure still is required with

respect to a revocable trust if the trust instrument expressly

directs the trustee to make present, mandatory distributions of

trust income or principal to the filer (or the filer’s spouse or

dependent child). In such situations, even though the grantor

retains the power to revoke the trust or change beneficiaries, the

fact remains that the trust instrument gives the filer present

enjoyment–not merely a future interest–and this present enjoyment

cannot be interrupted except by an affirmative act of the grantor

to alter the trust.

This view is consistent with the treatment of distributions

from revocable trusts under Federal tax law: “the receipt of income

or of other enjoyment of the transferred property by the transferee

or by the beneficiary . . . constitutes a gift . . . .” 26 C.F.R.

§ 25.2511-2(f).

Designated Agency Ethics Officials

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OGE emphasizes that nothing in the rule amendment changes the

reporting requirements with respect to irrevocable trusts. In this

connection, it should be noted that revocable living trusts

themselves may become irrevocable upon the occurrence of certain

events, such as the death of the grantor or other circumstances

specified in the trust instrument or state law. See, e.g.,

Beauchamp, "It's My Money ‘Til I Die": When Trustees Must Notify

Heirs and Beneficiaries Concerning a Trust That Has Become

Irrevocable, 32 McGeorge L. Rev. 670 (2001).

Other ethics considerations

Although the new amendment to section 2634.310 focuses on

financial disclosure issues, we note that we would apply a similar

analysis to conflict of interest questions arising under 18 U.S.C.

§ 208. Specifically, we see no reason why the remainder interests

of a non-grantor beneficiary in a revocable living trust should be

treated any differently than the mere expectancy of a beneficiary

under the will of a living testator. In both cases, any potential

interest is too speculative to constitute a disqualifying financial

interest under section 208. The same would be true if the non-

grantor’s only interest were an expectancy of receiving

discretionary distributions from such a trust; as explained above,

such distributions really are gifts, and the bare hope of receiving

a gift is simply too speculative to be deemed a disqualifying

financial interest under section 208. Of course, if there are any

concerns about the appearance of a lack of impartiality under such

circumstances, such concerns may be resolved under the mechanism

provided in the Standards of Ethical Conduct for Executive Branch

Employees. See 5 C.F.R. § 2635.502(a)(2).

Furthermore, discretionary distributions from a revocable

living trust could implicate the gift rules, inasmuch as we are

generally treating such distributions as gifts. See 5 C.F.R.

part 2635, subpart B. This would be the case if the trust grantor

were a “prohibited source” or the distribution were made because of

the employee’s official position. Typically, however, we would

expect that such distributions would be “motivated by a family

relationship or personal friendship rather than the position of the

employee,” within the meaning of the relevant exception to the gift

prohibitions. 5 C.F.R. § 2635.204(b).