PLR 200030014: Charitable lead unitrust receives deductions with a grantor trust issue reserved

Plain-English summary

A donor proposed a 25-year charitable lead unitrust paying 7 percent of annually valued assets to a family foundation, with the remainder going to grandchildren. The IRS allowed a section 642(c) deduction for qualifying payments of gross income, subject to stated limits, and a gift tax deduction for the present value of the charity's interest. It treated the gifts as complete and concluded, on the stated facts and absent an understanding with the foundation's directors, that the trust value would not enter the donor's gross estate. The IRS also found that the trust would meet split-interest trust rules and that the later transfer to grandchildren would be a taxable generation-skipping termination eligible for allocation of the donor's exemption. It found no grantor ownership under several specified sections, but deferred whether section 675 applied until the trust's actual operation could be examined.

Ruling snapshot

• Question: How would the proposed charitable lead unitrust be treated for income, gift, estate, and generation-skipping tax purposes?
• Outcome: Mixed: favorable rulings on stated facts, with section 675 grantor trust treatment left for examination.
• Key authorities: IRC §§ 508(e), 642(c), 671 through 677, 2522, 2601, 2612, 2631, and 4947(a)(2).

Full text (IRS public release)

Internal Revenue Service             Department of the Treasury

Index Number: 642.03-00, 2522.00- Washington, DC 20224
00, 2511.00-00, 508.00-00,
4947.00-00, 2601.00-00
Number: 200030014                 Person to Contact:
Release Date: 7/28/2000
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:2 - PLR-108116-99
Date:
April 28, 2000

A         =

B         =

C         =

D         =

Trust     =

Trustee 1 =
Trustee 2 =

Foundation      =

State     =

Dear                :

This letter responds to a letter dated April 27, 1999, and
subsequent correspondence submitted by you on behalf of A and B,
as A and B’s authorized representative, requesting certain
rulings under the Internal Revenue Code.

The facts submitted state that A and B are wife and husband.
A intends to establish Trust, a charitable lead unitrust (CLUT).
The grantor of Trust will be A and the trustee will be Trustee 1.
A and B intend to establish Foundation, which will be the initial
charitable beneficiary of Trust. The proposed directors of
Foundation are B, C, and D. C and D are the children of A and B.

Article 2 of Trust provides that Trust and the trusts
established under it are irrevocable, and except as provided in
Paragraph 11.15, unamendable.

Paragraph 3.1 provides that the charitable term of Trust
shall be for 25 years from the date of Trust.

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Paragraph 3.2 provides that, during the charitable term, the
trustee shall pay to Foundation each year an amount of the trust
equal to seven percent of the net fair market value of the trust
property determined as of the date of Trust or in subsequent
years the first day of the calendar year ("the unitrust amount").
The unitrust amount shall be payable to Foundation in quarterly
installments, at the end of each quarterly period.

Paragraph 3.4 provides that if Foundation is not in
existence or is not an organization described in §§ 170(c) and
2055(a) and the applicable subsection of § 2522 of the Internal
Revenue Code at the time any property is distributable to it
under Trust, the trustee shall instead distribute the trust
property to one or more other organizations, each of which is
engaged in comparable activities and is then described in
§§ 170(c) and 2055(a) and the applicable subsection of § 2522, as
the trustee in its sole discretion selects.

Paragraph 4.1 provides that Trust shall terminate at the end
of the charitable term.

Paragraph 4.3 provides that, on termination, the trustee
shall allocate the trust estate remaining after any prorated
unitrust payment in shares of equal value for the descendants of
A’s children ("grandchildren") who are then living, subject to
the Grandchild’s Separate Trust withholding provisions, and to
the estate of any grandchild who is not then living.

Article 7 provides that on the death of the last to die of
all beneficiaries of any trust (the "termination date") any of
Trust not otherwise distributable shall be divided into separate
equal shares and distributed one share to each of A’s nieces and
nephews and one share to B’s nieces and nephews. If a niece or
nephew fails to survive then to the niece’s or nephew’s
descendants per stirpes. If a deceased niece or nephew is not
survived by any descendants, then his or her share shall be
equally divided between the other nieces and nephews or if any
such niece or nephew failed to survive, to such other nieces or
nephews descendants per stirpes.

Paragraph 8.1 provides that a trustee may resign at any time
by written notice to the co-trustees, if any, and to the income
beneficiaries.

Paragraph 8.2 provides that each acting trustee (unless
limited in the instrument in which the trustee was designated)
may, by signed instrument filed with the trust records, (a)
designate one or more qualified corporations to act with or to
succeed the trustee consecutively or concurrently, in any stated
combination and on any stated contingency, and (b) amend or

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revoke the designation before the designated trustee begins to
act.

Paragraph 8.3 provides that if at any time no trustee is
acting and no designated trustee is able and willing to act, then
Trustee 2, or its successor shall be the trustee.

Paragraph 8.4 provides, in part, that a corporate trustee
may be removed at any time by a majority of the income
beneficiaries, or by the majority of A’s grandchildren, but only
if on or before the effective date of removal a qualified
corporation has been appointed corporate trustee in the same
manner.

Paragraph 8.6 provides that in no event may B or B’s spouse
be named as trustee for Trust or any trust created therein.

Paragraph 9.14 provides that the trustee shall not use trust
property to satisfy the legal obligations, including the legal
obligation of support, that A, B, or any other person may owe
individually to a beneficiary of the trust.

Paragraph 9.15 provides that A intends that the income of
Trust shall not be taxable to A under §§ 671 through 677.
Notwithstanding any other provisions, the trustee shall not lend
trust property to A or B, directly or indirectly, and may not use
the trust property to pay any premiums of life insurance on the
life of A or B.

Article 10 provides the express condition that the trustee
shall neither possess nor exercise any power or discretion during
the charitable term that would cause trust not to qualify as a
charitable lead unitrust.

Paragraph 11.1 provides that mandatory income payments shall
be made at least quarterly.

Paragraph 11.11 provides that, notwithstanding any other
provision, an individual trustee shall have no incident of
ownership or power or discretion with respect to any policy of
insurance upon the trustee’s life; (b) shall have no
discretionary power to allocate or distribute assets to the
extent that it would discharge the trustee’s legal obligation to
support any beneficiary; (c) shall, if the trustee has a
beneficial interest in a trust, have no discretionary power to
allocate or distribute assets of Trust, directly or indirectly,
to or for any beneficiary (including the trustee) unless
necessary for the beneficiary’s support in reasonable comfort,
health care, or education at any level; and (d) shall have no
other power or discretion that would be deemed a general power of

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appointment under § 2041 unless the trustee has the power in
other than a fiduciary capacity.

Paragraph 11.13 provides that additional contributions may
be made to Trust.

Paragraph 11.14 provides that the unitrust amount shall be
paid from current income and, to the extent current income is
insufficient from principal including capital gain. For purposes
of Paragraph 11.14, "current income" shall mean income from the
current taxable year. Any income in excess of the unitrust
amount shall be added to principal in the taxable year received.

Paragraph 11.15 provides that A intends to create a
charitable lead unitrust for which a deduction would be allowed
under §§ 2055(e)(2)(B) and 2522(c)(2)(B) for the unitrust amount
to Foundation, and Trust shall be administered during the
charitable term to so qualify. Trust and the trusts established
under Trust are unamendable, except that during the charitable
term the trustee may amend the terms of Trust solely to ensure
that Trust qualifies and continues to qualify as a charitable
lead unitrust. The trustee is prohibited from engaging in any
act of self-dealing as defined in § 4941(d) and from making any
taxable expenditures as defined in § 4945(d). The trustee shall
make distributions at such times and in such a manner as not to
subject Trust to tax under § 4942. Unless permitted pursuant to
§ 4947(b)(3), the trustee shall not retain any excess business
holdings as defined in § 4943(c) that would subject Trust to tax
under § 4943 nor make any investments that would subject Trust to
tax under § 4944. Nothing in this agreement shall be construed
to restrict the trustee from investing the trust assets in a
manner that could result in the annual realization of a
reasonable amount of income or gain from the sale or disposition
of trust assets. The provisions specifically applicable to Trust
during charitable term shall prevail over any other provisions of
Trust inconsistent therewith.

Article 3 of the Articles of Incorporation of Foundation
provides that the Directors of Foundation are B, C, and D. A
represents that A will not be an officer nor Director of
Foundation.

Article 4 provides that Foundation is organized exclusively
for charitable, educational, religious, literary or scientific
purposes and for the prevention of cruelty to children within the
meaning of § 501(c)(3) and that also constitutes charitable
purposes under State Revised Statutes. It is intended to create
a charitable organization that will be exempt from federal income
tax under § 501(c)(3) and that will qualify as a private
foundation as described in § 509(a).

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Paragraph 5.1 provides that Foundation is not authorized to
engage or carry on any activity that is not in furtherance of the
activities set forth in Article 4. Furthermore, Foundation is
prohibited from engaging in any political campaign activity or
legislative activity.

Paragraph 5.2 provides that Foundation shall undertake
actions that are consistent with the following provisions: (a)
any income for each taxable year is to be distributed at such
time and in such manner as not to subject Foundation to tax under
§ 4942, (b) unless permitted by § 4947(b)(3) Foundation shall not
retain any excess business holdings as defined in § 4943(c) that
would subject Foundation to tax under § 4943, (c) to prohibit
Foundation from engaging in any act of self dealing (as defined
in § 4941(d)), (d) from making any investments in such manner as
to subject Foundation to tax under § 4944 unless permitted by
§ 4947(b)(3), and (e) from making any taxable expenditure (as
defined in § 4945(d)). References in Paragraph 5.2 shall be
amended from time to time or pursuant to any corresponding
provisions of any subsequent federal tax laws.

Paragraph 5.3 provides that Foundation shall be dissolved at
such time as the Directors determine, in their sole discretion,
that the purposes of Foundation have been served. Upon
dissolution, and after payment of any provision for liabilities
and claims of Foundation, the Directors shall convey any
remaining assets and income to such organization or
organizations, exempt under § 501(c)(3), as the Directors shall
select, or as otherwise provided by the State Revised Statutes.

Article III, Section 6, of the Bylaws of Foundation provides
that all of the Board of Directors shall constitute a quorum for
the transaction of business at any meeting of the Board of
Directors, provided that if less than all of the Directors are
present at said meeting, a majority of the Directors present may
adjourn the meeting from time to time without further notice.

Article III, Section 7, provides that the act of all of the
Directors present at a meeting of the Directors of which a quorum
is present shall be the act of the Board of Directors.

Article III, Section 12, provides that Directors as such
shall not receive any stated salaries for their services, but
reimbursement for ordinary and reasonable expenses may be
allowed. Nothing therein contained shall be construed to
preclude any Director from serving Foundation in any other
capacity and receiving compensation therefor.

Article X, Section 1, provides that Foundation shall have
power to indemnify any person who was or is a party or is

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threatened to be made party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of Foundation) by reason of the fact that he or she is
or was a Director, officer, employee or agent of Foundation, or
who is or was serving at the request of Foundation as a Director,
officer, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with such action, suit or proceedings if such person acted in
good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The
termination of any action, suit or proceeding by judgment or
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to the best interest
of the corporation or, with respect to any criminal action or
proceeding, that the person had reasonable cause to believe that
his or her conduct was unlawful.

Article X, Section 2, provides that Foundation shall have
power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of Foundation to
procure a judgment in its favor by reason of the fact that such
person is or was a Director, officer, employee or agent of
Foundation, or is or was serving at the request of Foundation as
a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against
expenses (including attorneys’ fees) actually and reasonably
incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good
faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of Foundation, provided that
no indemnification shall be made in respect of any claim, issue
or matter as to which such persons shall have been adjudged to be
liable for negligence or misconduct in the performance of his or
her duty to Foundation, unless, and only to the extent that, the
court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as
the court shall deem proper. Further, such indemnification shall
be in accordance with § 53.4941(d)-2(f)(3) of the Income Tax
Regulations.

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Article X, Section 3, provides that to the extent that a
Director, officer, employee or agent of a corporation has been
successful, on the merits or otherwise in defense of any action,
suit or proceeding referred to in Article X, Sections 1 and 2, or
in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys’ fees)
actually and reasonably incurred by him or her in connection
therewith.

Article X, Section 4, provides that any indemnification
under Article X, Sections 1 and 2 (unless ordered by a court)
shall be made by Foundation only as authorized in the specific
case, upon a determination that indemnification of the Director,
officer, employee or agent is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in
Article X, Section 1 or 2. Such determination shall be made: (a)
by a majority vote of a quorum of the Board of Directors who were
not parties to such action, suit or proceeding; or (b) if such a
quorum is not obtainable, or, even if obtainable, a quorum of
disinterested Directors so directs, by independent legal counsel
in a written opinion; or (c) by the Directors entitled to vote,
if any.

Article X, Section 5, provides that expenses incurred in
defending a civil or criminal action, suit or proceeding may be
paid by Foundation in advance of the final disposition of such
action, suit or proceedings, as authorized by the Board of
Directors in the specific case, upon receipt of any undertaking
by or on behalf of the Director, officer, employee or agent to
repay such amount, unless it shall ultimately be determined that
he or she is entitled to be indemnified by Foundation as
authorized in Article X.
Article X, Section 6, provides that the indemnification
provided by Article X shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any
contract, agreement, vote of Directors or disinterested
Directors, or otherwise, both as to action in his or her official
capacity and as to action in another capacity and as to action in
another capacity while holding such office, and shall continue as
to a person who had ceased to be a Director, officer, employee or
agent and shall inure to the benefit of the heirs, executor and
administrators of such a person.

Article X, Section 7, provides that Foundation shall have
power to purchase and maintain insurance on behalf of any person
who is or was a Director, officer, employee or agent of
Foundation, or is or was serving at the request of Foundation, as
a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against

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any liability asserted against such person and incurred by such
person in any such capacity, or arising out of his status as
such, whether or not Foundation would have the power to indemnify
him or her against such liability under the provisions of Article
X. This authorization shall be in accordance with § 53.4941(d)-
2(f)(3).

Article XI provides that Foundation shall not undertake any
action that shall violate the following provisions: (a) to
acquire as income for each taxable year to be distributed at such
time and in such manner as not to subject Foundation to tax under
§ 4942, and (b) to prohibit Foundation from engaging in any act
of self dealing (as defined in § 4941(d)), from retaining any
excess business holdings (as defined in § 4942(c)), from making
any investments in such manner as to subject Foundation to tax
under § 4944 and from making any taxable expenditure (as defined
in § 4945(d)).

Article XII provides that Foundation shall be dissolved at
such time as the Directors determine, in their sole discretion,
that the purposes of Foundation have been served. Upon
dissolution, and after payment of any provision for liabilities
and claims of Foundation, the Directors shall convey any
remaining assets and income to such organization or
organizations, exempt under § 501(c)(3), as the Directors shall
select, or as otherwise provided by the State Revised Statutes.
Article XIV provides that Foundation is organized
exclusively for charitable, educational, religious, literary or
scientific purposes and for the prevention of cruelty to children
within the meaning of § 501(c)(3) and that also constitutes
charitable purposes under the State Revised Statutes. It is
intended to create a charitable organization that will be exempt
from the federal income tax under § 501(c)(3) and that will
qualify as a private foundation as described in § 509(a).

You have requested the following rulings:

1. Trust is a charitable lead unitrust (CLUT) that will be
allowed a deduction under § 642(c) for amounts of gross income
paid to Foundation or other charitable beneficiaries described in
§ 170(c) during the taxable year, or by the close of the
following year pursuant to an election under § 1.642(c)-1(b).

2.   Trust will not be a grantor trust under § 671.

3. Trust is a CLUT that will be allowed a gift tax
deduction under § 2522 for the present value of the charitable
interest in Trust.

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4. A’s gift to Trust will not be incomplete for purposes of
§ 25.2511-2(c) of the Gift Tax Regulations because of the fact
that B, A’s spouse, will serve as a Director and officer of
Foundation. The transfer to A’s grandchildren will be a gift in
an amount equal to the remainder interest remaining after the
gift to Trust.

5. A has not retained any interest in or power over Trust
that would cause Trust property to be included in A’s gross
estate.

6. The Service will provide the necessary factors pursuant
to Table D of § 1.664-4(e)(6) in order to determine the value of
the various interests transferred by A.

7. Trust meets the requirements of § 4947(a)(2) and as a
split interest trust meets the requirements of § 508(e) and
contains the restrictions necessary to avoid the taxes imposed by
§§ 4941 through 4945.
8. Foundation contains the appropriate language that
satisfies the requirements of § 508(e).

9. A’s transfer to Trust constitutes a generation skipping
tax transfer pursuant to § 2601, to which the generation skipping
transfer exemption may be applied.

ISSUE 1

Section 642(c)(1) provides the general rule that, in
computing its taxable income, a trust is allowed a deduction for
any amount of gross income, which pursuant to the terms of the
governing instrument, is paid during the taxable year for a
purpose specified in § 170(c) (determined without regard to
§ 170(c)(2)(A)). Section 642(c)(4) provides that the deduction
allowed for a trust is subject to § 681 (relating to unrelated
business income).
Section 681(a) provides that no charitable deduction is
allowable to a trust under § 642(c) for any amounts allocable to
the trust’s "unrelated business income" for the taxable year.
The term "unrelated business income" means an amount under § 512,
if the trust were exempt from tax under § 501(a) by reason of
§ 501(c)(3), that would be computed as its unrelated business
income under § 512.

ISSUE 2

Section 671 provides that where it is specified in subpart E
that the grantor or another person shall be treated as the owner

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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.
Under § 675 and applicable regulations, the grantor is
treated as the owner of any portion of a trust if under the terms
of the trust agreement or circumstances attendant on its
operation, administrative control is exercisable primarily for
the benefit of the grantor rather than the beneficiary of the
trust.

Section 677 provides that the grantor shall be treated as
the owner of any portion of a trust, whether or not the grantor
is treated as the owner under § 674, whose income without the
approval or consent of any adverse party is, or, in the
discretion of the grantor or a nonadverse party, or both, may be
distributed to the grantor or the grantor’s spouse, held or
accumulated for future distribution to the grantor or the
grantor’s spouse, or applied to the payment of premiums on
policies of insurance on the life of the grantor or the grantor’s
spouse.

Under § 1.677(a)-1(d), the grantor shall be treated as the
owner of the portion of a trust whose income is, or in the
discretion of the grantor or a nonadverse party, or both, may be
applied in the discharge of a legal obligation of the grantor.

ISSUE 3

Section 2501(a) imposes a tax on the transfer of property by
gift. Section 2511 provides that the gift tax shall apply
whether the transfer is in trust or otherwise, whether the gift
is direct or indirect, and whether the property is real or
personal, tangible or intangible.

Section 2522(a) provides that, in computing an individual’s
taxable gifts for the calendar year, a deduction shall be allowed
for the amount of all gifts to or for the use of certain
governmental entities, certain corporations organized and
operated exclusively for religious, charitable, scientific,
literary, or educational purposes, and certain other fraternal
and veterans organizations.

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Section 2522(c)(2)(B) provides that, where a transfer is
made to both a charitable and a noncharitable person or entity,
no deduction shall be allowed for the charitable portion of the
gift unless, in the case of an interest other than a charitable
remainder interest, such interest is in the form of a guaranteed
annuity or is a fixed percentage, distributed yearly, of the fair
market value of the property (to be determined annually).

Section 25.2522(c)-3(c)(1) of the Gift Tax Regulations
provides that if a donor transfers an interest in property for
charitable purposes and an interest in the same property is
transferred for private purposes, no deduction is allowed under
section 2522 for the value of the interest which is transferred
for charitable purposes unless the interest is a deductible
interest described in § 25.2522(c)-3(c)(2).

Section 25.2522(c)-3(c)(2)(vii) provides that an interest in
property is deductible where the interest is a unitrust interest,
whether or not such interest is in trust. Section 25.2522(c)-
3(c)(2)(vii) defines a unitrust interest as an irrevocable right
pursuant to the instrument of transfer to receive payment, not
less often than annually, of a fixed percentage of the net fair
market value, determined annually, of the property which funds
the unitrust interest.

ISSUE 4
Section 25.2511-2(c) of the Gift Tax Regulations provides,
in part, that a gift is incomplete in every instance in which a
donor reserves the power to revest the beneficial title to the
property in himself. A gift is also incomplete if and to the
extent that a reserved power gives the donor the power to name
new beneficiaries or to change the interests of the beneficiaries
as between themselves.

Section 25.2511-2(f) provides that the relinquishment or
termination of a power to change the beneficiaries of transferred
property, occurring otherwise than by the death of the donor (the
statute being confined to transfers by living donors), is
regarded as the event that completes the gift and causes the tax
to apply.

ISSUE 5

Under § 2035(a), as amended by the Taxpayer Relief Act of
1997, if the decedent made a transfer (by trust or otherwise) of
an interest in any property, or relinquished a power with respect
to any property during the 3-year period ending on the date of
the decedent's death, and the value of such property (or an
interest therein) would have been included in the decedent's

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gross estate under §§ 2036, 2037, 2038, or 2042 if such
transferred interest or relinquished power had been retained by
the decedent on the date of his death, the value of the gross
estate shall include the value of any property (or interest
therein) which would have been so included.

Section 2036 provides that the value of the gross estate
shall include the value of all property to the extent of any
interest therein of which the decedent has at any time made a
transfer (except in case of a bona fide sale for an adequate and
full consideration in money or money’s worth), by trust or
otherwise, under which he has retained for his life or for any
period not ascertainable without reference to his death or for
any period which does not in fact end before his death (1) the
possession or enjoyment of, or the right to the income from, the
property, or (2) the right, either alone or in conjunction with
any person, to designate the persons who shall possess or enjoy
the property or the income therefrom.

Section 20.2036-1(a) of the Estate Tax Regulations provides
that an interest or a right is treated as having been retained or
reserved if at the time of the transfer there was an
understanding, express or implied, that the interest or right
would later be conferred.

Section 20.2036-1(b)(3) provides that the phrase "right ...
to designate the person or persons who shall possess or enjoy the
transferred property or the income therefrom" includes a reserved
power to designate the person or persons to receive the income
from the transferred property during the decedent’s life or for
any period not ascertainable without reference to his death or
for any period which does not in fact end before his death. With
respect to such a power it is immaterial (i) whether the power
was exercisable alone or only in conjunction with another person
or persons, whether or not having an adverse interest; (ii) in
what capacity the power was exercisable by the decedent or by
another person or persons in conjunction with the decedent; and
(iii) whether the exercise of the power was subject to a
contingency beyond the decedent’s control which did not occur
before his death. The phrase does not apply to a power held
solely by a person other than the decedent, but, for example, if
the decedent reserved the unrestricted power to remove or
discharge a trustee at any time and appoint himself as trustee,
the decedent is considered as having the powers of the trustee.

In Rev. Rul. 72-552, 1972-2 C.B. 525, the decedent, prior to
his death, transferred property to a charitable corporation.
Decedent was an officer of the corporation who had the
discretionary power to select the charitable recipients of
distributions from the organization. The revenue ruling

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concludes that, as an officer of the corporation, the decedent
retained the power to determine the ultimate beneficiaries of the
transferred property. Accordingly, the transferred property was
includible in his gross estate under § 2036.

Section 2037 provides that the value of the gross estate
shall include the value of all property to the extent of any
interest therein of which the decedent has at any time made a
transfer (except in case of a bona fide sale for an adequate and
full consideration in money or money’s worth), by trust or
otherwise, if (1) possession or enjoyment of the property can,
through ownership of such interest, be obtained only by surviving
the decedent, and (2) the decedent has retained a reversionary
interest in the property, and the value of such reversionary
interest immediately before the death of the decedent exceeds 5
percent of the value of such property. Under § 2037(b), the term
"reversionary interest" includes a possibility that property
transferred by the decedent (1) may return to him or his estate,
or (2) may be subject to a power of disposition by him.

Section 2038 provides that the value of the gross estate
shall include the value of all property to the extent of any
interest therein of which the decedent has at any time made a
transfer (except in case of a bona fide sale for an adequate and
full consideration in money or money’s worth), by trust or
otherwise, where the enjoyment thereof was subject at the date of
his death to any change through the exercise of a power, either
by the decedent alone or in conjunction with any person, to
alter, amend, or revoke, or where the decedent relinquished any
such power during the 3-year period ending on the date of the
decedent’s death.

Section 20.2038-1(a) states that § 2038 does not apply to a
power held solely by a person other than the decedent. But, for
example, if the decedent had the unrestricted power to remove or
discharge a trustee at any time and appoint himself trustee, the
decedent is considered as having the powers of the trustee.
Section 2039 provides that the gross estate shall include
the value of an annuity or other payment receivable by any
beneficiary by reason of surviving the decedent under any form of
contract or agreement entered into after March 31, 1931 (other
than as insurance under policies on the life of the decedent),
if, under such contract or agreement, an annuity or other payment
was payable to the decedent, or the decedent possessed the right
to receive such annuity or payment, either alone or in
conjunction with another for his life or for any period not
ascertainable without reference to his death or for any period
which does not in fact end before his death.

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Under § 2041, the value of the gross estate shall include
the value of all property to the extent of any property with
respect to which the decedent has at the time of his death a
general power of appointment created after October 21, 1942, or
with respect to which the decedent has at any time exercised or
released such a power of appointment by a disposition which is of
such nature that if it were a transfer of property owned by the
decedent, such property would be includible in the decedent’s
gross estate under §§ 2035 to 2038, inclusive.

Section 2042 provides that the proceeds of life insurance
are includible in the gross estate in two instances: First, to
the extent of the amount receivable by the executor as insurance
under policies on the life of the decedent, and, second, to the
extent of the amount receivable by all other beneficiaries as
insurance under policies on the life of the decedent with respect
to which the decedent possessed at his death any of the incidents
of ownership, exercisable either alone or in conjunction with any
other person.

ISSUE 6

With an adjusted payout rate of 7.0 percent times .953258 or
6.673 percent, and with quarterly payments made at the end of
each quarter for which they are paid, the present worth of the
remainder interest in a unitrust which pays for 25 years certain
is $0.17796 for each $1.00 on initial trust corpus. The present
worth of these payments is $1.00 minus $0.17796 or $0.82204 for
each $1.00 of initial trust corpus. These factors are based on
an interest rate of 8.0 percent.

ISSUES 7 AND 8
Section 508(e) provides that a private foundation shall not
be exempt under § 501(a) unless its governing instrument includes
provisions the effects of which are: (A) to require its income
for each taxable year to be distributed at such time and in such
manner as not to subject the foundation to tax under § 4942, and
(B) to prohibit the foundation from engaging in any act of self-
dealing (as defined in § 4941(d)), from retaining any excess
business holdings (as defined in § 4943(c)), from making any
investments in such manner as to subject the foundation to tax
under § 4944, and from making any taxable expenditures (as
defined in § 4945(d)).

Section 4947(a)(2) classifies trusts which are not exempt
from tax under § 501(a), not all of the unexpired interests in
which are devoted to purposes described in § 107(c)(2)(B), and
which have amounts in trust for which a deduction was allowed
under §§ 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or

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2522 as split-interest trusts and provides with respect to such
trusts that §§ 507, 508(e) (to the extent applicable), 4941,
4943, 4944, and 4945 shall apply as if such trusts were private
foundations.

If Trust is created and operated as described above, it will
be described in § 4947(a)(2). First, it will not be exempt from
tax under § 501(a). Second, the trust instrument will provide
for a remainder interest that serves only a private interest.
Third, assuming that Foundation applies for and receives a
determination that it is described in § 501(c)(3), the trust
instrument will provide for the payment of a guaranteed annual
payment devoted exclusively to charitable purposes for which a
charitable deduction would be allowable.
The governing instruments of both Trust and Foundation will
contain provisions effectively prohibiting the organizations from
engaging in transactions that could result in the imposition of
excise taxes under §§ 4941 through 4945.

ISSUE 9

Section 2601 imposes a tax on every generation-skipping
transfer made by a "transferor." Under § 2652(a) a "transferor"
is defined, generally, as the last person with respect to whom
the property was subject to the estate or gift tax.
Section 2611(a) defines the term "generation-skipping
transfer" as (1) a taxable distribution, (2) a taxable
termination, and (3) a direct skip.

Under § 2612(a), the term "taxable termination" means the
termination (by death, lapse of time, release of power, or
otherwise) of an interest in property held in a trust unless (A)
immediately after such termination, a non-skip person has an
interest in such property, or (B) at no time after such
termination may a distribution (including distributions on
termination) be made from such trust to a skip person.

Under § 2612(b), the term "taxable distribution" means any
distribution from a trust to a skip person (other than a taxable
termination or a direct skip).

Under § 2612(c), the term "direct skip" means a transfer
subject to the estate tax or the gift tax of an interest in
property to a skip person.

Under § 2613, the term "skip person" means --

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(1) a natural person assigned to a generation that is
two or more generations below the generation assignment of
the transferor, or

(2) a trust --

(A) if all interests in such trust are held by
skip persons, or

(B) if --

(i) there is no person holding an interest in
such trust, and

(ii) at no time after such transfer may a
distribution (including distributions on
termination) be made from such trust to a non-skip
person.

Section 2631 provides that every individual shall be allowed
a GST exemption of $1,000,000 which may be allocated by such
individual (or his executor) to any property with respect to
which such individual is the transferor. In calendar years after
1998, the $1,000,000 amount will be adjusted for inflation. The
allocation, once made, is irrevocable.

Accordingly, we rule as follows:

1. Except to the extent that Trust has unrelated business
income under § 681(a), and except to the extent that
contributions are nondeductible under §§ 508(d) or 4948(c)(4),
Trust will be allowed deductions in accordance with § 642(c)(1)
for amounts of gross income paid to Foundation during that
taxable year, or by the close of the following taxable year, if
the trustees make an election under § 1.642(c)-1(b). Because the
deduction under § 642(c)(1) is limited to amounts of gross
income, no deduction will be allowed for a distribution of
principal except to the extent that the amount distributed has
been included in the gross income of Trust and provided no
deduction was allowed for any previous taxable year for the
amount distributed.

2. Our examination of the Trust reveals none of the
circumstances that would cause A to be treated as the owner of
any portion of Trust under §§ 673, 674, or 676.

Our examination of the Trust reveals none of the
circumstances that would cause administrative controls to be
considered exercisable primarily for the benefit of A under

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§ 675. Thus, the circumstances attendant on the operation of the
Trust will determine whether A will be treated as the owner of
any portion of the Trust under § 675. This is a question of
fact, the determination of which must be deferred until the
federal income tax returns of the parties involved have been
examined by the Office of the District Director with which the
parties file their tax returns.

Paragraph 9.14 of Trust specifically prohibits distributions
to satisfy the legal obligations of A or B. Paragraph 9.15 of
Trust specifically prohibits distributions to pay any premiums of
life insurance on the life of A or B. Based on all the facts and
circumstances, A will not be treated as the owner of any portion
of Trust under § 677.

3. In the present case, under the terms of the Trust, the
charitable beneficiary is given the irrevocable right to receive,
during each year of the Trust’s term, 7 percent of the net fair
market value of the Trust assets, valued annually on the first
day of the calendar year. Therefore, based on the facts
submitted and representations made, we conclude that a gift tax
charitable deduction will be allowed for the present value of the
charitable interest in the Trust, valued as of the date of
transfer to the Trust.

4. In the present case, it is represented that A is not an
officer or director of Foundation. Based on the representations
made, we conclude that the gift to Trust will be a completed gift
for purposes of § 25.2511-2(c). The fact that B, C, and D will
serve as directors and officers of Foundation will not cause A’s
gift to Trust to be incomplete for purposes of § 25.2511-2(c).
In addition, the transfer to the Trust will be a completed gift
to A’s grandchildren, the value of which will equal the value of
the remainder interest in the Trust.

5. In the present case, Trust will be irrevocable. A will
retain no interest in or power over the Trust, and no right to
alter, amend, or revoke the Trust. A has no right to receive an
annuity or other payment from the Trust during A’s lifetime. In
addition, A holds no general power of appointment over the Trust
property. Accordingly, based on the facts submitted and
representations made, and assuming there is no understanding,
express or implied, between A and the officers and directors of
the Foundation regarding the distribution of payments to the
Foundation by the Trust, we conclude that the value of the Trust
will not be includible in A’s gross estate.

6. Based on the information submitted and the
representations made, the present worth of the remainder interest
in Trust is $0.17796 for each $1.00 on initial trust corpus. The

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present worth of the unitrust amount is $0.82204 for each $1.00
of initial trust corpus.

7. Trust will be a split-interest trust within the meaning
of §    4947(a)(2) and will meet the requirements of § 508(e).

8. Foundation’s governing document, if drafted as described
above, will contain language that satisfies the requirements of
§ 508(e).

9.   In the present case, Foundation will receive the
unitrust interest for 25 years. At the end of the 25-year period,
the gift of the remainder interest will pass to A’s grandchildren
and is a generation-skipping transfer. The termination of the
unitrust interest will be a taxable termination within the
meaning of § 2612(a) and will be subject to the tax imposed under
§ 2601. Therefore, A may allocate all or a portion of A’s GST
exemption to the Trust.

Except as specifically set forth above, no opinion is
expressed concerning the federal tax consequences of the facts
described above under any other provision of the Code.

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

Pursuant to a power of attorney on file with this office, a
copy of this letter is being forwarded to A and B.

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 § 6110 purposes