PLR 200029033: Charitable appointers do not make lead trusts grantor-owned

Plain-English summary

A donor created three charitable lead trusts that pay annual amounts to qualified charities before passing remaining assets to family beneficiaries. Family members could select charities to receive the payments and could appoint successors. The IRS ruled that those selection powers did not make the donor the owner of the trusts under the grantor trust rules. It also ruled that selecting a charity would not, by itself, be prohibited self-dealing merely because a family appointer served as an officer, director, or trustee of that charity. The ruling did not approve every possible transaction involving the trusts or appointers.

Ruling snapshot

• Question: Do the charitable appointment powers create grantor trust ownership or self-dealing when an appointer serves a selected charity?
• Outcome: Approved on the stated facts; charity selection alone did not create either result.
• Key authorities: IRC §§ 671–677, 674(b)(4), 4941, 4946, and 4947(a)(2).

Full text (IRS public release)

Internal Revenue Service          Department of the Treasury

Index Number:  671.00-00,         Washington, DC 20224
               4941.00-00
Number: 200029033
Release Date: 7/21/2000           Person to Contact:

                                  Telephone Number:

                                  Refer Reply To:
                                  CC:DOM:P&SI:2 - PLR-117304-99
                                  Date:
                                  April 19, 2000
X         =

A         =

B         =

C         =

D         =

Agreement =

Bank      =

Trust 1   =



Trust 2   =



Trust 3   =


Trust 4   =

D1        =

Year 1    =
Dear              :

     This letter responds to a letter dated October 11, 1999, and
subsequent correspondence submitted by you as X’s authorized
representative on behalf of X, requesting rulings under §§ 671
and 4941 of the Internal Revenue Code.
     The information submitted states that X executed Agreement
on D1 of Year 1, creating Trust 1, Trust 2, and Trust 3 (Trusts).
The trustee of Trusts is Bank.

                              -2-

     Article I, section (A), subsection (7), of Agreement defines
"presumptive remainderman" as to a particular one of Trusts, as
the person whose name is in the title of such one of Trusts. The
presumptive remainderman of each of the Trusts is set forth in
Schedule "A" of Agreement, which is annexed to and forms a part
of Agreement.

     Article I, section (A), subsection (8), of Agreement defines
"qualified charitable organization" as an organization that is
described in §§ 170(c), 2055(a), and 2522(a), and that is an
organization exempt from taxation under § 501(a) as an
organization described in § 501(c)(3) on the date that any
distribution is to be made to it under Agreement.

     Article I, section (A), subsection (9), of Agreement defines
"related person," as to an individual, as a person who is related
or subordinate to such individual within the meaning of § 672(c)
(determined as though such individual were the grantor, as that
term is used in § 672(c).

     Article I, section (A), subsection (12), of Agreement
defines "trust termination date" as the day before the twentieth
anniversary of the trust creation date.

     Article II, section (A), of Agreement provides that X
assigns, transfers, and delivers to the trustees the property
listed on Schedule "B" (the "initial trust fund"). The trustees
agree to hold such property in trust and to manage and dispose of
it in accordance with the provisions of Agreement.

     Article II, section (B), of Agreement provides, in part,
that the trustees shall divide the initial trust fund into three
equal shares, referred to as Share 1, Share 2, and Share 3,
respectively. These are to be held and administered as follows:
(1) Share 1 shall constitute the trust fund of a separate
charitable lead trust to be known as Trust 1, which shall be held
upon the terms set forth in Article IV; (2) Share 2 shall
constitute the trust fund of a separate charitable lead trust to
be known as Trust 2, which shall be held upon the terms set forth
in Article IV; and (3) Share 3 shall constitute the trust fund of
a separate charitable lead trust to be known as Trust 3, which
shall be held upon the terms set forth in Article IV.

     Article III of Agreement provides that Agreement and Trusts
may not be altered, amended, revoked, or terminated by X, in
whole or in part. The trustees shall have the limited power to
amend set forth in Article IV, section (J).

     Article IV, section (A), of Agreement provides, in part,
that (1) during each taxable year of Trusts the trustees shall

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pay to such qualified charitable organizations as the "charitable
appointer" shall direct an annuity amount determined in
accordance with the following graduated formula: in the first and
second taxable years of the Trusts, three percent of the initial
fair market value of the trust fund valued on the trust creation
date (the "initial value"), and in each taxable year thereafter,
an amount equal to the previous year’s annuity amount multiplied
by a factor of one and one hundred thirty-three thousandths; and
(2) the annuity amount shall be paid from income, and, to the
extent that income is not sufficient, from principal. Any income
of the Trusts for a taxable year in excess of the annuity amount
shall be added to principal.

     Article IV, section (C), subsection (1), of Agreement
provides that (a) during X’s lifetime, D shall be the "charitable
appointer" of the Trusts until such time as a new "charitable
appointer," designated by D pursuant to the provisions of Article
IV, section (C), subsection (1), paragraph (b), accepts such
position by written instrument delivered to the trustees and the
presumptive remainderman; (b) at any time and from time to time
during X’s lifetime, D (whether or not then acting as the
"charitable appointer") may designate, in the manner described in
Article IV, section (C), subsection (5), one individual, or a
series of individuals to serve singly, in succession and in the
order named, in each case other than X, as the "charitable
appointer"; and (c) D, at any time and from time to time during
X’s lifetime (whether or not then acting as the "charitable
appointer"), may designate an individual other than X who shall
have the power to designate a new "charitable appointer" as
provided in Article IV, section (C), subsection (1), paragraph
(b), in the event that D shall have temporarily or permanently
relinquished such power, or if D is under a disability or not
then living. Any such designation by D shall be in writing,
signed by D and delivered to the presumptive remainderman and to
each of the trustees. If D so designates an individual pursuant
to Article IV, section (C), subsection (1), paragraph (c), any
reference to D shall be construed as a reference to the
individual so designated by D.

     Article IV, section (C), subsection (2), of Agreement
provides that, upon and following X’s death, the "charitable
appointer" of the Trusts shall be the individual designated on
Schedule "A" (with respect to any one of the Trusts), or, if such
individual dies before X or is under a disability at X’s death or
executes a written instrument relinquishing the right to serve as
the "charitable appointer," the "charitable appointer" of that
one of Trusts shall be the successor (if any) such individual
designated pursuant to Article IV, section (C), subsection (3).

                              -4-

     Article IV, section (C), subsection (3), of Agreement
provides that the individual named on Schedule "A," if not then
under a disability, may designate one or more successor
"charitable appointers" by delivering a written designation to
the trustees, at any time and from time to time before such
individual ceases to serve as the "charitable appointer" of the
Trusts (including any time before he or she begins to serve as
the "charitable appointer"). Such designation shall take effect
on the date specified, but in no event prior to X’s death.
     Article IV, section (C), subsection (4), of Agreement
provides that, if at any time no "charitable appointer" of one of
the Trusts is serving and no successor designated pursuant to any
of the preceding subsections of Article IV, section (C), is
willing and able to serve, the trustees shall serve as
"charitable appointer."

     Article IV, section (D), of Agreement provides, in part,
that the Trusts shall terminate on the trust termination date.
Upon such termination, the trustees shall distribute the trust
fund to the trustees of that trust held for the benefit of the
presumptive remainderman pursuant to the provisions of Trust 4
or, if no such trust is then so held, the trustees shall
distribute the trust fund pursuant to the provisions of Article
IV, section (E), of Trust 4, as if the trust fund were the trust
fund of a trust held pursuant to the provisions of Trust 4 whose
beneficiary (as defined in Article IV of Trust 4) is the
presumptive remainderman and as if the beneficiary died on the
trust termination date.

     Article IV, section (E), of Agreement provides that, prior
to the trust termination date, the trustees are prohibited from
engaging in any act of self-dealing as defined in § 4941(d), from
retaining any excess business holdings as defined in § 4943(c)
which would subject the Trusts to tax under § 4943, from making
any investments which would subject the Trusts to tax under
§ 4944, and from making any taxable expenditures as defined in
§ 4945(d). The trustees shall make distributions at such time
and in such manner as not to subject the Trusts to tax under
§ 4942.

     Article IV, section (H), of Agreement provides that (1) no
payment shall be made from any of Trusts to any beneficiary other
than a qualified charitable organization prior to the trust
termination date, and (2) no federal estate taxes, state death
taxes, or any other estate, death or inheritance taxes regarding
any of Trusts shall be allocated to or be recoverable from any of
Trusts. X imposes an obligation on X and on X’s estate to pay
any such taxes from sources other than the Trusts, and agrees to

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so provide in X’s will or otherwise.   This provision may be
enforced by the trustees.

     Article IV, section (J), of Agreement provides that the
trustees are authorized, by an instrument in writing, duly
executed and acknowledge by them and delivered to the
"presumptive remainderman" of any of Trusts, to amend the
provisions of the Trusts at any time and in whatever manner they
shall deem necessary or desirable to ensure the continued and
efficient administration of Trusts as charitable lead trusts,
gifts to which are deductible under § 2522, and for no other
purpose; provided, however, that no amendment of the Trusts shall
be valid if, as a result of such amendment, (i) the annuity
amount described in Article IV, paragraph (A), would be reduced,
(ii) X’s federal gift tax charitable deduction would be reduced,
(iii) X is granted any power which would render the gift set
forth in Schedule "A" incomplete, in whole or in part, (iv) all
or any portion of the initial trust fund would be includable in
the gross estate of X for federal estate tax purposes, (v) X
would be treated as the owner of any portion of the trust fund of
any of Trusts for purposes of § 671, (vi) the powers granted to
the trustees by Article IV, paragraph (J), are expanded, or (vii)
the trust fund of any of Trusts is payable upon the trust
termination date to anyone other than an issue of X if any issue
of X is living on the trust termination date.

     Article VIII, section (A), subsection (1), of Agreement
provides that if, at any time or from time to time, the
presumptive remainderman of one of Trusts (if not then under a
disability) may designate one or more persons other than X to
serve as additional and/or successor trustees of such one of
Trusts.
     Article VIII, section (A), subsection (2), of Agreement
provides that, at any time when the presumptive remainderman of
one of Trusts is under a disability, has temporarily or
permanently relinquished the power to designate such trustees, or
is not living, D (or such successor as D shall have designated
pursuant to a written instrument) may designate one or more
persons other than X to serve as additional and/or successor
trustees of such one of Trusts.

     Article VIII, section (A), subsection (3), of Agreement
provides that, at any time when (i) the presumptive remainderman
of one of Trusts is under a disability, has temporarily or
permanently relinquished the power to designate such trustees, or
is not living, and (ii) D (or such successor as D shall have
designated pursuant to a written instrument) is under a
disability, has temporarily or permanently relinquished the power
to designate such trustees, or is not living (or if no such

                              -6-

successor to D was so designated), the trustees of that one of
Trusts may designate one or more persons other than X to serve as
additional or successor trustees.

     Article VIII, section (A), subsection (4), of Agreement
provides that, notwithstanding any other provision of Article
VIII, (i) no one of Trusts shall have more than three persons
serving together as co-trustees at any given time and at all
times during X’s lifetime, no more than half of the trustees of
any one of Trusts may be related persons as to X and (ii) any
designation of an additional or successor trustee or trustees of
one of Trusts shall not be effective if such designation would
result in a change of situs of such one of Trusts (absent an
affirmative election by the trustees to change such situs).

     Article IX of Agreement provides that, notwithstanding any
contrary provision of Agreement, (i) no interest of a beneficiary
of any of Trusts, whether income or principal, may be assigned,
transferred, encumbered or otherwise disposed of, voluntarily or
involuntarily, before its payment or distribution to such
beneficiary by the trustees; (ii) no disposition, charge, or
encumbrance of the income or principal of any of Trusts, or any
part thereof, by way of anticipation, alienation, or otherwise by
a beneficiary shall be valid and binding upon the trustees; and
(iii) no income or principal of any of Trusts, or any part
thereof, shall be liable to any claim of any creditor. This
section shall apply notwithstanding any contrary provision of
law.

     Schedule "A" of Agreement provides that each of the
following individuals is (i) the designated "charitable
appointer" after X’s death and (ii) the "presumptive
remainderman" of the trust indicated: A as to Trust 1, B as to
Trust 2, and C as to Trust 3.
    X requests the following rulings:

     1. None of Trusts will be treated as owned by X under any
of §§ 671 through 677 if A, B, or C acts as the "charitable
appointer" of any of Trusts (or had the power to designate
successor "charitable appointers," and such power did not
preclude A, B, or C from naming themselves as "charitable
appointer.")

     2. The designation of a private foundation, within the
meaning of § 509(a), by the "charitable appointer" of any of
Trusts as the recipient of all or any portion of the annuity
amount for a particular year will not be an act of self-dealing
under § 4941, merely because A, B, or C is the "charitable

                              -7-

appointer" and is also an officer, director, or trustee of such
designated private foundation.

RULING 1

     Section 671 provides that where it is specified in subpart E
that the grantor or another person shall be treated as the owner
of any portion of a trust, there shall then be included in
computing the taxable income and credits of the grantor or the
other person those items of income, deductions, and credits
against tax of the trust which are attributable to that portion
of the trust to the extent that such items would be taken into
account under chapter 1 in computing taxable income or credits
against the tax of an individual.
     Sections 673 through 677 specify the circumstances under
which the grantor is treated as the owner of a portion of a
trust.

     Section 674(a) provides that the grantor shall be treated as
the owner of any portion of a trust in respect of which the
beneficial enjoyment of the corpus or the income therefrom is
subject to a power of disposition, exercisable by the grantor or
a nonadverse party, or both, without the approval or consent of
any adverse party.

     Section 674(b)(4) provides that § 674(a) shall not apply to
a power, regardless of by whom held, to determine the beneficial
enjoyment of the corpus or the income therefrom if the corpus or
income is irrevocably payable for a purpose specified in § 170(c)
(relating to definition of charitable contributions) or to an
employee stock ownership plan (as defined in § 4975(e)(7)) in a
qualified gratuitous transfer (as defined in § 664(g)(1)).

     Section 1.674(a)-1(b) of the Income Tax Regulations provides
that, in general terms, the grantor is treated as the owner of
the portion of a trust if he or a nonadverse party or both has a
power to dispose of the beneficial enjoyment of the corpus or
income.

     Section 1.674(a)-1(b)(1)(iii) provides that § 1.674(a)-1(b)
does not apply to a power to choose between charitable
beneficiaries or to affect the manner of their enjoyment of a
beneficial interest.

     Based solely on the facts and representations submitted, we
conclude that none of Trusts will be treated as owned by X under
any of §§ 671 through 677 if A, B, or C acts as the "charitable
appointer" of any of Trusts (or has the power to designate
successor "charitable appointers," and such power does not

                              -8-

preclude A, B, or C from naming themselves as "charitable
appointer.")

RULING 2

     Section 4941 imposes an excise tax on any direct or indirect
act of self-dealing between a private foundation and a
disqualified person. The tax is imposed on the disqualified
person and, in certain situations, a tax is also imposed on the
foundation manager or managers participating in the act or acts.

     Section 4941(d)(1) provides, in part, that the term self-
dealing includes the direct or indirect sale, exchange, or
leasing of property between a private foundation and a
disqualified person; furnishing of goods, services, or facilities
between a private foundation and a disqualified person; payment
of compensation (or payment or reimbursement of expenses) by a
private foundation to a disqualified person; and transfer to, or
use by or for the benefit of a disqualified person of the income
or assets of a private foundation.

     Section 53.4941(d)-2(f)(2) of the Foundation and Similar
Excise Taxes Regulations states that the fact that a disqualified
person receives an incidental or tenuous benefit from the use by
a foundation of its assets or income will not, by itself, make
such use an act of self-dealing. For example, the regulation
provides that a grant by a private foundation to a § 509(a)
organization will not be an act of self-dealing merely because
one of the § 509(a) organization’s officers, directors, or
trustees is also a manager or substantial contributor of the
trust.

     Section 4946(a)(1) provides that the definition of
disqualified person includes, in pertinent part: (i) a
substantial contributor to the foundation; (ii) a foundation
manager; (iii) a member of the family of a disqualified person,
including a spouse, child, grandchild, and a spouse of a child or
grandchild; and (iv) a corporation of which disqualified persons
own more than thirty five percent of the total combined voting
power.

     Section 4947(a)(2) provides that a charitable lead trust is
subject to certain private foundation provisions contained in
§§ 507, 508(e), 4941, 4943, 4944, and 4945.

     We conclude that under § 4946(a)(1), A, B, and C are
disqualified persons with respect to Trusts since they are
foundation managers. A, B, and C, as "charitable appointers,"
will designate the charitable beneficiaries of the annuity
amount. Only organizations described in §§ 170(c), 2055(a), and

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2522(a) may be designated as recipients. A, B, and C may
designate a charitable beneficiary of which any or all of them
are officers, directors, or trustees. Any benefit to them merely
because of such designation will be incidental or tenuous. See
§ 53.4941(d)-2(f)(2).

     The designation of a charitable beneficiary is
distinguishable from the transactions that are normally
considered self-dealing under § 4941. Such transactions
generally include the provision of personal services, sale or
exchange of property, loans, leases, or payment of compensation.
There is no inherent violation of the self-dealing rules under
§ 4941 in the transactions described above.
     Therefore, we further conclude that the designation by A, B,
or C, as "charitable appointers," of organizations described in
§§ 170(c), 2055(a), and 2522(a) with respect to which any or all
of them are officers or directors as the recipients of the
annuity amount, does not solely by itself establish that an act
of self-dealing within the meaning of § 4941 has taken place.
     Except as specifically set forth above, no opinion is
expressed concerning the federal tax consequences of the facts
described above under any provision of the Code.

     This ruling is directed only to the taxpayers who requested
it. Section 6110(k)(3) provides that it may not be used or cited
as precedent.

     Pursuant to a power of attorney on file with this office,
copies of this letter are being sent to X and to X’s other
authorized representative.

                           Sincerely yours,
                           J. THOMAS HINES
                           Acting Branch Chief Branch 2
                           Office of the Assistant Chief Counsel
                           (Passthroughs and Special Industries)

Enclosures: 2
     Copy of this letter
     Copy for Section 6110 purposes