[Federal Register Volume 67, Number 105 (Friday, May 31, 2002)]
[Rules and Regulations]
[Pages 37965-37967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13734]



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  Federal Register / Vol. 67, No. 105 / Friday, May 31, 2002 / Rules 
and Regulations  

[[Page 37965]]



OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2634

RIN 3209-AA00


Executive Branch Financial Disclosure, Qualified Trusts, and 
Certificates of Divestiture; Financial Disclosure Requirements for 
Interests in Revocable Inter Vivos Trusts

AGENCY: Office of Government Ethics (OGE).

ACTION: Final rule; clarifying amendment.

-----------------------------------------------------------------------

SUMMARY: The Office of Government Ethics is issuing a final rule to 
amend the regulation that describes the financial disclosure 
requirements of the Ethics in Government Act with respect to trusts in 
which employees, their spouses and their dependent children have 
certain interests. The amendment clarifies OGE's interpretation that 
the Act does not require filers of financial disclosure reports to 
disclose the holdings or income of a revocable inter vivos trust with 
respect to which they, their spouses or their dependent children have a 
beneficial interest or receive a discretionary distribution, provided 
that neither the filer, the filer's spouse, nor the filer's dependent 
child is the grantor of the trust.

EFFECTIVE DATE: May 31, 2002.

FOR FURTHER INFORMATION CONTACT: Richard M. Thomas, Associate General 
Counsel, Office of Government Ethics; Telephone: 202-208-8000; TDD: 
202-208-8025; FAX: 202-208-8037.

SUPPLEMENTARY INFORMATION:

I. Revocable Inter Vivos Trusts (``Living Trusts'')

    Revocable inter vivos trusts, so-called ``living trusts,'' have 
become a popular estate planning device in the last several decades. 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--all subject to the power of the grantor 
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. 
Therefore, it is widely recognized that living trusts are ``will 
substitutes.''

II. Legislative and Regulatory Background of Financial Disclosure 
Requirements

    Section 102(f)(1) of the Ethics in Government Act of 1978, as 
amended (the Act), sets out the general 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).

    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. 95-642, Part 1, at 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. 95-170, at 123-124 (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 FR 69776 (October 21, 
1980). Included in those regulations was a provision stating in greater 
detail what kinds of interests in trusts and estates needed to be 
reported under the Act. Although the Act itself did not specifically 
address the distinction between vested and nonvested beneficial 
interests, the OGE regulation specified that nonvested interests in an 
estate need not be reported and that nonvested interests in certain 
trusts needed to be evaluated on a case-by-case basis in consultation 
with OGE. See 45 FR 69784. In 1992, this regulation was amended to 
provide even greater detail with respect to those interests in trusts 
that were deemed reportable under the Act. See 57 FR 11800 (April 7, 
1992). In particular, nonvested beneficial interests were excluded 
altogether, and a definition of vested interests was provided. See 5 
CFR 2634.310(a)(2). Although there is no discussion of the subject of 
nonvested interests in the preambles to these two rules, OGE clearly 
recognized that the statutory phrase ``beneficial interest in principal 
or income'' should not be read so broadly as to require the public 
disclosure of interests the enjoyment of which is so speculative and 
uncertain: ``the uncertainty of the right of enjoyment * * * 
differentiates a `vested' and a `nonvested' interest.'' 5 CFR 
2634.310(a)(2). Furthermore, the reporting of nonvested interests would 
not further the statutory purpose of disclosing interests that pose a 
potential conflict of interest, because OGE determined that such 
interests generally are too uncertain to implicate the financial 
conflict of interest statute, 18 U.S.C. 208. See OGE's Public Financial 
Disclosure: A Reviewer's Reference 7-30 revised (1996), which is 
available in the publications section of the OGE Web site (http://www.usoge.gov).
    On a related subject, OGE also has provided guidance concerning the 
reporting of potential interests as a beneficiary under a will. Of 
particular

[[Page 37966]]

relevance, OGE determined that section 102(f)(1) of the Act and 5 CFR 
2634.310 do not require filers to report the holdings and income of an 
estate of a living person just because they are named as beneficiaries 
under that person's will. Id. The Office of Government Ethics concluded 
that any potential beneficial interest created by the will of a living 
person is not vested, within the meaning of Sec. 2634.310(a)(2). 
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; in 
such cases, ``the employee's interest in the assets to be distributed 
under the will is merely speculative since he may never inherit them.'' 
60 FR 47207, 47209 (September 11, 1995) (preamble to OGE's proposed 
financial conflict of interest regulation subsequently codified at 5 
CFR part 2640).

III. Treatment of Revocable Living Trusts Under Financial 
Disclosure Requirements

    Until now, OGE's regulations and other written guidance have not 
explicitly addressed the reporting requirements of beneficiaries under 
revocable living trusts. However, the approach taken in this final rule 
is consistent with, and follows from, OGE's prior treatment of 
nonvested interests in trusts and estates, including 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. Compare Randall v. Bank of America National Trust and 
Savings Ass'n., 119 P.2d 754 (Cal. App. 1941) (vested), with Bezzini v. 
Department of Social Services, 715 A.2d 791 (Conn. App. 1998) (not 
vested interest, but mere expectancy). Nevertheless, OGE finds it 
unnecessary to settle this technical question, in view of the fact that 
revocable living trusts clearly have evolved into widely accepted will 
substitutes. The Office of Government Ethics has determined, for 
purposes of section 102(f)(1) of the Act, 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. The 
Office of Government Ethics sees little connection between the purposes 
of section 102(f)(1), as described above, and the disclosure of 
expectations that are so speculative and subject to the complete 
control of someone other than the filer, the filer's spouse or the 
filer's dependent children. Moreover, such disclosures necessarily 
would reveal the interests--and estate planning decisions--of persons 
beyond the filer and the filer's own spouse and dependent children, 
thus intruding unnecessarily into the private affairs of persons beyond 
the ordinary scope of financial disclosure under the Act.
    Therefore, the final rule adds a note indicating that nothing in 
Sec. 2634.310 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 is vested or 
nonvested. However, 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 of trust 
income and whether or not the grantor actually serves as trustee.
    The new note also provides that nothing in Sec. 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 filer (or the filer's spouse or dependent 
child) is not the grantor. It is true that section 102(f)(1) of the Act 
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 to a 
beneficiary under a revocable living trust as income within the meaning 
of these provisions. In OGE's view, such 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 Act clearly treats income and 
gifts separately, 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)(1) (income), with section 102(a)(2) 
(gifts).
    OGE emphasizes that nothing in the final rule 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 circumstances specified in the trust instrument or State 
law.

IV. Matters of Regulatory Procedure

Administrative Procedure Act

    Pursuant to 5 U.S.C. 553(b) and (d), as Director of the Office of 
Government Ethics, I find good cause exists for waiving the general 
notice of proposed rulemaking, public comment procedures, and 30-day 
delay in effectiveness as to this revision. The notice, comment, and 
delayed effective date are being waived because this minor amendment to 
OGE financial disclosure regulations is an interpretative rule 
clarifying OGE's view concerning the scope of section 102(f)(1) of the 
Ethics in Government Act. Furthermore, it is in the public interest 
that this amendment become effective promptly, because the amendment 
has the effect of relieving an unnecessary burden on filers of 
financial disclosure reports.

Executive Order 12866

    In promulgating this final rule amendment, the Office of Government 
Ethics has adhered to the regulatory philosophy and the applicable 
principles of regulation set forth in section 1 of Executive Order 
12866, Regulatory Review and Planning. This amendment has not been 
reviewed by the Office of Management and Budget under that Executive 
order, since it is not deemed ``significant'' thereunder.

Executive Order 12988

    As Director of the Office of Government Ethics, I have reviewed 
this final amendatory regulation in light of section 3 of Executive 
Order 12988, Civil Justice Reform, and certify that it meets the 
applicable standards provided therein.

Regulatory Flexibility Act

    As Director of the Office of Government Ethics, I certify under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) that this proposed 
amendatory rule will not have a significant economic impact on a 
substantial number of small entities because it primarily affects 
Federal executive branch employees.

[[Page 37967]]

Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply 
because this final rule amendment does not contain information 
collection requirements that require the approval of the Office of 
Management and Budget.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
chapter 25, subchapter II), this final rule will not significantly or 
uniquely affect small governments and will not result in increased 
expenditures by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more (as adjusted for 
inflation) in any one year.

Congressional Review Act

    The Office of Government Ethics has determined that this proposed 
rulemaking involves a nonmajor rule under the Congressional Review Act 
(5 U.S.C. chapter 8) and has submitted a report thereon to the U.S. 
Senate, House of Representatives and General Accounting Office in 
accordance with that law.

List of Subjects in 5 CFR Part 2634

    Certificates of divestiture, Conflict of interests, Financial 
disclosure, Government employees, Penalties, Privacy, Reporting and 
recordkeeping requirements, Trusts and trustees.

    Approved: May 24, 2002.
Amy L. Comstock,
Director, Office of Government Ethics.

    Accordingly, for the reasons set forth in the preamble, the Office 
of Government Ethics is amending 5 CFR part 2634 as follows:

PART 2634--EXECUTIVE BRANCH FINANCIAL DISCLOSURE, QUALIFIED TRUSTS, 
AND CERTIFICATES OF DIVESTITURE

    1. The authority citation for part 2634 continues to read as 
follows:

    Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 26 
U.S.C. 1043; Pub. L. 101-410, 104 Stat. 890, 28 U.S.C. 2461 note 
(Federal Civil Penalties Inflation Adjustment Act of 1990), as 
amended by Sec. 31001, Pub. L. 104-134, 110 Stat. 1321 (Debt 
Collection Improvement Act of 1996); E.O. 12674, 54 FR 15159, 3 CFR, 
1989 Comp., p. 215, as modified by E.O. 12731, 55 FR 42547, 3 CFR, 
1990 Comp., p. 306.


    2. Section 2634.310 is amended by adding a note following paragraph 
(a)(2) to read as follows:


Sec. 2634.310  Trusts, estates, and investment funds.

    (a) * * *

    Note to paragraph (a): 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.


* * * * *

[FR Doc. 02-13734 Filed 5-30-02; 8:45 am]
BILLING CODE 6345-01-P