PLR 200031012: Trust management changes preserve grandfathered GST treatment

Plain-English summary

A beneficiary sought rulings on management changes to one of twelve trusts created before September 25, 1985. This trust was to pay income to the beneficiary after age 21 and had received no later additions. The agreement would let the income beneficiary and an adult remainder beneficiary select an independent replacement trustee, with investment managers subject to fiduciary limits. The IRS ruled that the changes were administrative and would preserve the trust's generation-skipping transfer tax exemption if no assets were added. It also ruled that the trustee replacement power alone would not give the beneficiary a general power of appointment or cause the trust to be included in the beneficiary's estate.

Ruling snapshot

• Question: Would the trust management agreement affect grandfathered GST treatment or cause estate inclusion for the beneficiary?
• Outcome: Approved; the specified changes preserve GST treatment and the replacement power alone does not cause estate inclusion.
• Key authorities: IRC §§ 2041, 2601, and 672(c); Treas. Reg. § 26.2601-1(b)(1)(i); Rev. Rul. 95-58.

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury

Index Number:          2601.00-00; 2041.00-00   Washington, DC 20224



Number: 200031012                               Person to Contact:
Release Date: 8/4/2000                          Telephone Number:

                                                Refer Reply To:
                                                CC:DOM:P&SI:4-PLR-117075-99
                                                Date:
                                                        April 18, 2000



Beneficiary =

Trustee =

Trust =

Agreement =


Third Amendment =

Court =

City =

State =

County =

Statute =

Dear               :

      We received a letter dated April 9, 1999, and subsequent correspondence, from
your authorized representative requesting rulings concerning the possible estate tax
consequences resulting from the proposed modifications to twelve trusts.

        According to the facts submitted, Beneficiary is the current sole income
beneficiary of twelve trusts created prior to September 25, 1985. This ruling request
addresses one of these trusts, Trust. Trust was fully funded at the time it was
established and no additions have been made to Trust. Under Article I.(3) of Trust, all
trust income is to be paid to Beneficiary after Beneficiary attains age 21. On the death
of Beneficiary, the Trust corpus is to be held in further trust for the benefit of
Beneficiary’s issue. Trustee is currently acting as the trustee of all twelve trusts.
Under Article V. (5), any successor of Trust’s original trustee, whether through sale or
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transfer of its business, conversion, consolidation, merger, resignation as trustee, or
otherwise, shall become the successor trustee and succeeds to the trust estate as
though originally named as trustee.

      Certain disputes have arisen between Beneficiary and Trustee regarding the
management of Trust. In order to resolve these disputes, Trustee and Beneficiary
entered into the Agreement with respect to the twelve trusts.

        Paragraph 3.a. of the Agreement provides that at any time during the term of any
trust, upon the written request of the current income beneficiary and the adult
remainder beneficiary, a new trustee designated by the current income beneficiary and
the adult remainder beneficiary is to be substituted as the trustee of the trust provided
that any such new trustee: (1) is a corporation that has been, or its parent company
has been, in existence at least ten years; (2) is a bank or trust company then doing
business in City, State and that is authorized under the laws of State to execute trusts;
(3) has a net worth (including the net worth of any parent company) in excess of two
hundred million dollars; and (4) is not related or subordinate to any beneficiary within
the meaning of § 672(c) of the Internal Revenue Code. Upon any resignation by any
existing trustee of a trust, or any removal thereof other than pursuant to the immediately
preceding sentence, a new trustee designated by the current income beneficiary and
the adult remainder beneficiary shall be substituted as the new trustee of such trust
provided that such new trustee meets the requirements set forth in items (1), (2), (3)
and (4), above.

       Paragraph 4.a. of the Agreement provides that the current income beneficiary
shall have the right from time to time to have one or more investment managers or
submanagers manage the investment of a portion of the assets. The current income
beneficiary shall also have the right from time to time to transfer investment and
management of certain assets from any submanager or investment manager then
investing or managing such assets directly to another submanager or investment
manager, or to return such assets to the trustee for investment or management.

       Paragraph 4.b. provides that all assets managed, invested or administered by
the trustee shall be managed, invested and administered in accordance with certain
investment policies. All assets managed, invested or administered by an investment
manager or submanager shall be managed, invested and administered in accordance
with certain investment guidelines. The current income beneficiary may from time to
time propose modifications to the investment guidelines by written notice to the trustee,
and any investment manager or submanager. Each trustee, investment manager or
submanager shall have the right to approve such modification, such approval not to be
unreasonably withheld.

      Paragraph 4.c. provides that a “submanager” is an agent of the trustee that has
been designated and selected by the current income beneficiary and to which
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investment functions have been delegated pursuant to State Statute. The current
income beneficiary shall have the right to propose potential submanagers from time to
time for approval by the Trustee, such approval not to be unreasonably withheld.

       Paragraph 4.d. provides that an “investment manager” is a third party fiduciary,
not an agent of the trustee, that has been designated and selected by the current
income beneficiary and to which investment, administration and fiduciary
responsibilities for certain trust assets are transferred, with the trustee merely remaining
as custodian of such assets with no fiduciary duties except to the extent provided by
the provisions of State Statute. Any investment manager must meet the requirements
to become a trustee, that is, an investment manager must be: (1) a corporation that has
been, or its parent company has been, in existence at least ten years; (2) a bank or
trust company then doing business in City, State and that is authorized under the laws
of State to execute trusts; (3) have a net worth (including the net worth of any parent
company) in excess of two hundred million dollars; and (4) not be related or subordinate
to any beneficiary within the meaning of § 672(c) of the Internal Revenue Code.

        Paragraph 1.a. of Third Amendment to Agreement provides that, notwithstanding
any other provision of the Agreement, the trust instrument or applicable law to the
contrary: (1) in exercising its rights and powers under Paragraphs 4.c. and 4.d. of the
Agreement with respect to the selection, removal and replacement of investment
managers and submanagers, the current income beneficiary shall be deemed to be
acting in the role of a fiduciary as to all beneficiaries of Trust with respect to which any
such rights or powers are exercised, and shall be subject to the Uniform Prudent
Investor Act of State; and (2) each investment manager and submanager shall at all
times be deemed to be a fiduciary of a trust for which it administers assets, shall be
subject to the Uniform Prudent Investor Act of State, and shall not be a related or
subordinate party to the current income beneficiary, as defined in § 672(c), determined
as if the current income beneficiary was a grantor of the trust.

       You represent that no additions of assets, actual or constructive, have been
made to Trust subsequent to September 25, 1985. In addition, no modifications or
amendments, other than the proposed modifications have been made to any of the
trusts. In addition, all trusts were irrevocable as of the date of creation, prior to
September 25, 1985. The Agreement has been approved by Court and you propose to
have the Third Amendment approved by Court.

       You have requested the following rulings:

        1. Modification of Trust in accordance with the Agreement and the Court order
will not affect the exempt status of Trust for generation-skipping transfer tax purposes.

       2. The power to remove and replace the Trustee and to institute investment
guidelines and policies in accordance with the Agreement and the Court order will not
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cause inclusion of Trust in the gross estate of Beneficiary.

Issue 1

       Section 2601 provides that a tax is imposed on every generation-skipping
transfer. Under § 1431(a) of the Tax Reform Act of 1986 (the Act) the tax generally
applies to any generation-skipping transfer made after October 22, 1986, the date of
enactment of the Act. However, § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i) of
the Generation-skipping Transfer Tax Regulations provide that the GST tax shall not
apply to any GST under a trust that was irrevocable on September 25, 1985, but only to
the extent that such transfer is not made out of any addition, actual or constructive, to
the trust after September 25, 1985 (or out of income attributable to corpus so added).

       A modification of a generation-skipping trust that is otherwise exempt under the
Act and the regulations will generally result in a loss of its exempt or “grandfathered”
status if the modification changes the quality, value, or timing of any powers, beneficial
interest, rights, or expectancies originally provided for under the terms of the trust.

       Based on the facts presented and representations made, we conclude that the
proposed modifications to Trust are administrative in nature and will not result in any
change in the quality, value, or timing of any beneficial interest in Trust. Consequently,
Trust will continue to be exempt from the GST tax. Therefore, provided there are no
additions, constructive or otherwise, to Trust, neither distributions from nor the
termination of Trust will be subject to the GST tax under § 2601.

Issue 2

       Section 2041(a)(2) provides that 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 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 that 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 2041(b)(1)(A) provides that a general power of appointment is a power
that is exercisable in favor of the decedent, the decedent’s creditors, or the creditors of
the decedent’s estate. However, a power to consume, invade, or appropriate property
for the benefit of the decedent that is limited by an ascertainable standard relating to
the health, education, support, or maintenance of the decedent shall not be deemed a
general power of appointment.

     Section 20.2041-1(b) of the Estate Tax Regulations provides that a power in a
decedent to remove or discharge a trustee and appoint himself may be a power of
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appointment. For example, if under the terms of a trust instrument, the trustee or his
successor has the power to appoint the principal of the trust for the benefit of
individuals including himself, and the decedent has the unrestricted power to remove or
discharge the trustee at any time and appoint any other person including himself, the
decedent is considered as having a power of appointment.

       Rev. Rul. 95-58, 1995-2 C.B. 191, revoking, Rev. Rul. 79-353, 1979-2 C.B. 325,
holds that a decedent-settlor’s reservation of an unqualified power to remove a trustee
and appoint an individual or corporate successor trustee that is not related or
subordinate to the decedent within the meaning of § 672(c), is not considered a
reservation of the trustee’s discretionary powers of distribution over the property
transferred by the decedent-settlor to the trust, for purposes of §§ 2036 and 2038.

       Section 672(c) defines the term “related or subordinate party” to mean any
nonadverse party who is (1) the grantor’s spouse if living with the grantor; or (2) any
one of the following: the grantor’s father, mother, issue, brother or sister; an employee
of the grantor; a corporation or any employee of a corporation in which the stock
holdings of the grantor and the trust are significant from the viewpoint of voting control;
a subordinate employee of a corporation in which the grantor is an executive.

       In the present case, the Agreement gives Beneficiary of Trust the power to
remove and replace the trustee, to propose investment guidelines and policies, and to
recommend investment managers and submanagers. The powers of the Beneficiary,
the investment managers, and the submanagers are exercisable in a fiduciary capacity.
Any trustee, investment manager, or submanager may not be related or subordinate to
any beneficiary of Trust within the meaning of § 672(c). Further the trustee has no
discretionary power with respect to distributions of trust income and corpus. We
conclude that Beneficiary will not be treated as holding a general power of appointment
solely as a result of retaining the removal and replacement power. See Rev. Rul.
95-58. Therefore, the possession of the power will not cause Trust to be included in
Beneficiary’s gross estate.

        Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under the cited provisions or
any other provisions of the Code. This ruling is based on the facts and applicable law
in effect on the date of this letter. If there is a change in material fact or law (local or
Federal) before the transactions considered in the ruling take effect, the ruling will have
no force or effect. If the taxpayer is in doubt whether there has been a change in
material fact or law, a request for reconsideration of this ruling should be submitted to
this office.

       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.
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       In accordance with a power of attorney on file with this office, a copy of this ruling
is being sent to your authorized representative.

                                        Sincerely,
                                        Assistant Chief Counsel
                                        (Passthroughs and Special Industries)
                                     By George Masnik, Chief, Branch 4
Enclosure
 Copy for § 6110 purposes