PLR 200031022: Clarifying adopted descendants' trust rights preserves GST exemption

Plain-English summary

Two trusts created under a decedent's will were irrevocable by September 25, 1985, and had received no later additions. Their trustees sought a court ruling on whether references to descendants and next of kin included legally adopted family members and their descendants. The court clarified that they did, with its judgment conditioned on an IRS ruling about generation-skipping transfer tax. The IRS concluded that the judicial clarification resolved a genuine question under state law and did not change the intended quality, value, or timing of trust interests. It ruled that the clarification would not cause the trusts or their distributions to become subject to GST tax, provided no additions were made to the trusts.

Ruling snapshot

• Question: Does the court's clarification of adopted descendants' rights end the trusts' grandfathered GST tax treatment?
• Outcome: Approved. The GST exemption continues if no additions are made to the trusts.
• Key authorities: IRC §§ 2601, 2611, 2612, and 2613; Treas. Reg. § 26.2601-1(b)(1)(i).

Full text (IRS public release)

Internal Revenue Service        Department of the Treasury

Index Number:      2601.00-00   Washington, DC 20224



Number: 200031022               Person to Contact:
Release Date: 8/4/2000          Telephone Number:

                                Refer Reply To:
                                CC:DOM:P&SI:7-PLR-107665-00
                                Date:
                                April 27, 2000




LEGEND:

Decedent                 =

a                        =

Daughter                 =

Son                      =

b                        =

6B Trust                 =




6C Trust                 =
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c                           =

State                       =

d                           =

e                           =

f                           =

g                           =

h                           =

i                           =

j                           =

Court                       =


Dear Sir or Madam:

       In a letter dated, January 10, 2000, you requested rulings concerning the
generation-skipping transfer (GST) tax consequences of the clarification of a
grandfathered trust . This letter responds to your request.

         The information submitted and representations made are summarized as
follows: Decedent died testate in a, survived by two children, Daughter and Son
(collectively, Children). Clause Sixth of Decedent’s will provides that Decedent’s
residuary estate is to be placed in equal trust funds so that there is one fund for
Daughter, and her children and more remote descendants as are then living, and one
fund for Son, and his children and more remote descendants who are then living.
Paragraph A of Clause Sixth of Decedent’s will provides that unless sooner terminated
by a complete distribution of funds by the trustee as provided in Decedent’s will, both
trusts will terminate b years after the death of the survivor of Daughter and her children
and more remote descendants living at Decedent’s death, Son and his children and
more remote descendants living at Decedent’s death, and Decedent.

        Paragraph B of Clause Sixth of Decedent’s will sets forth the terms of the trust
for the benefit of Daughter and her children and more remote descendants (the 6B
Trust). Paragraph C sets forth the terms of the trust for the benefit of Son and his
children and more remote descendants (the 6C Trust). Except for the beneficiaries, the
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provisions of the 6B Trust and the 6C Trust (collectively, the Trusts) are identical. Those
provisions are summarized as follows:

         Until the termination of the 6B Trust and the 6C Trust, the trustees have the
discretion to pay all or so much, if any, of the net income and principal as the trustees in
their discretion deem proper to and among Children and their children and more remote
descendants who may be living from time to time in such proportions and amounts as
the trustees in their discretion deem proper, with power to omit from participation any
one or more of the persons among whom the trustees have power to make payment.
Any income not distributed by the trustees in any calendar year is to be added to
principal.

        On the termination of a Trust at the time set forth in Paragraph A of Clause Sixth
of Decedent’s will, the trustees are to distribute the principal per stirpes to Children’s
children and more remote descendants then living, subject, however, to the power in the
trustees in their discretion within c months after the termination of a Trust, to increase or
decrease the share of one or more distributees by such amounts as the trustees in their
discretion deem appropriate in order to adjust any inequalities in distributions of income
or principal previously made to any one or more of the distributees, or any of their
ancestors or descendants, and the trustees in their discretion, may in determining such
amounts take into consideration the dates at which previous distributions have been
made. If at that time no child or more remote descendant of Children is living, the
trustees are to distribute the Trust fund per stirpes to the then living children and more
remote descendants of Children; and if none of such persons is living, to and among
those persons who would under the Statute of Distributions in force in State when
Decedent’s will was executed be Decedent’s next of kin if Decedent died immediately
after such time.

          If at any time after Decedent’s death and before the termination of the 6B Trust
and the 6C Trust at the time set forth in Paragraph A of Clause Sixth of Decedent’s will,
neither Daughter or Son nor any child or more remote descendant of Daughter or Son is
living, then at that time, the trustees are to add the 6B Trust to the 6C Trust, or vice
versa, as the case may be, if it is then in existence and if not, the trustees are to pay and
distribute the Trust to and among those persons who would under the Statute of
Distributions in force in State when Decedent’s will was executed be Decedent’s next of
kin if Decedent died immediately after the death of the last of Children, Children’s
children, and Children’s more remote descendants.

        Daughter died in d, survived by e children, all of whom are living. One of
Daughter’s children has e children, all of whom are adopted. Son died in f, survived by
g children all of whom are living. One of Son’s children has h children, i of whom are
adopted. At this time, no other descendants of Decedent are adopted, although it is
possible that future adoptions may occur.
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         For many years, it has been the practice of the trustees of the 6B Trust to
distribute all of the 6B Trust net income in equal shares to the e children of Daughter.
Similarly, the trustees of the 6C Trust have distributed all of the net income of the
6CTrust in equal shares to the g children of Son. Distributions of principal have been
infrequent and have been made only under extraordinary circumstances. At this point,
the trustees have made no distributions to any of the grandchildren of Daughter or Son.

        Following the deaths of the current distributees, the trustees would like to
continue their policy of equal distributions. Because, however, Decedent’s will is silent
as to whether the permissible beneficiaries of the Trusts include adopted issue, the
trustees determined it was necessary to ascertain whether adopted issue are
beneficiaries of the Trusts. The trustees, therefore, instituted judicial proceedings to
obtain a determination that adopted grandchildren and more remote descendants are
included as beneficiaries of the Trusts.

         On j, the Court entered an order that the terms “children or more remote
descendants,” “ancestors or descendants,” and “next of kin” when used in the Trusts
created under Clauses Sixth B and Sixth C of Decedent’s will, are confirmed and
clarified to include any person legally adopted by a Child or more remote descendant of
Decedent, and the issue, whether adopted or not, or any such adopted person, provided
that this Judgment takes effect on the issuance of a ruling by the Internal Revenue
Service that such clarification does not result in application of the federal generation-
skipping transfer tax to the Trusts or any payments therefrom.

        It is represented that the Trusts were irrevocable on September 25, 1985, and
that there have been no additions (actual or constructive) to them since that date.

        You have requested a ruling that the Court’s order declaring the rights of the
beneficiaries of the Trusts will not cause the Trusts to become subject to the GST tax.

       Section 2601 of the Internal Revenue Code imposes a tax on every
generation-skipping transfer made by the "transferor" to a "skip-person."

        Section 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations
provides that the tax does not apply to any generation-skipping transfer under a trust (as
defined in § 2652(b)) that was irrevocable on September 25, 1985. The rule of the
preceding sentence does not apply to a pro rata portion of any generation-skipping
transfer under an irrevocable trust if additions are made to the trust after September 25,
1985.

        Section 26.2611-1 provides that a generation-skipping transfer is an event that is
either a direct skip, a taxable distribution, or a taxable termination. The determination as
to whether an event is a generation-skipping transfer is made by reference to the most
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recent transfer subject to the estate or gift tax.

       Section 2612(c)(1) defines the term "direct skip" to mean a transfer subject to a
tax imposed by chapter 11 or 12 of an interest in property to a skip person.

        Section 2613(a) defines the term "skip person" to mean --

       (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 the trust are held by skip persons, or

                (B) if --

                         (i) there is no person holding an interest in the 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.

        The Trusts are generation-skipping trusts because they provide for distributions
to more than one generation of beneficiaries below Decedent’s generation. Because,
however, the Trusts were irrevocable on September 25, 1985, and there have been no
additions (actual or constructive ) to them since that date, they have been exempt from
the GST tax pursuant to § 26.2601-1(b)(1)(i). You have requested a ruling that the
Court Order declaring the rights of the beneficiaries of the Trusts will not cause the
Trusts to become subject to the GST tax.

         An amendment to an exempt trust that modifies or otherwise changes the
quality, value, or timing of any of the powers, or beneficial interests, rights, or
expectancies originally provided under the terms of the trust will cause the trust to lose
its exemption from the GST tax.

         We believe that the judicial action in this case involved a bona fide issue
concerning the terms of the Trusts and that the Court Order is consistent with applicable
State law that would be applied by the highest court of State. Commissioner v. Estate of
Bosch, 387 U.S. 456 (1967). Accordingly, based on the information submitted and the
representations made, we conclude that the Court Order does not alter the intended
quality, value, or timing of the interests Decedent created in the Trusts. Further, we
conclude that the Court’s declaration of the rights of the beneficiaries will not cause the
Trusts, or any distributions from the Trusts, to be subject to the GST tax, provided no
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additions are made to the Trusts.

        Except as ruled above, we express or imply no opinion concerning the federal
tax consequences of this transaction under the cited provisions of the Code or any other
provision of the Code.

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

        In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to your authorized representative.

                                     Sincerely yours,

                                     Christine E. Ellison


                                     Christine E. Ellison
                                     Chief, Branch 7
                                     Office of the Assistant Chief Counsel
                                     (Passthroughs and Special Industries)