PLR 200546055: Family trust company may serve as trustee with distribution safeguards

Plain-English summary

+A family proposed using a family-owned trust company as trustee of several trusts while its bylaws kept family members out of discretionary distribution decisions. The IRS ruled that, with those safeguards, the company was not a related or subordinate party to the grantors for the stated grantor trust rules. It found that appointing the company would not by itself cause trust assets to enter a grantor's estate, or a beneficiary's estate under section 2041 solely because of a role in the company; existing general powers of appointment were excluded from that conclusion. It also said naming the company as trustee of two older trusts was an administrative change that would not shift beneficial interests for generation skipping tax purposes. On section 675 administrative powers, the IRS deferred a final ownership determination until the relevant returns could be examined, because actual operation was a factual question. The result is therefore favorable on several issues but incomplete on that one.

Ruling snapshot

• Question: What tax consequences follow from appointing a family-owned trust company as trustee of the listed family trusts?
• Outcome: Mixed; favorable rulings on several grantor trust, estate, and GST issues, with the section 675 issue deferred.
• Key authorities: IRC §§ 672, 674, 675, 677, 678, 2036, 2038, 2041, 2601; Treas. Reg. § 26.2601-1.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200546055
Release Date: 11/18/2005
Index Number: 2036.00-00, 2038.00-00,
2041.00-00, 2601.03-01,
672.00-00, 674.00-00,
Person To Contact:
675.00-00, 677.00-00,
------------------------, ID No. -------------
678.00-00
Telephone Number:
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Refer Reply To:
-------------------------------------------- CC:PSI:B09 / PLR-117305-03
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Date:
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August 02, 2005

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Legend

Patriarch = -------------------------------------------------------------------------------------------
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Trust = -----------------------------------------------
Company
State = -------------------
Corporation = --------------------------------
A = -------------------------------------------------------------------------------------------
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B = -------------------------------------------------------------------------------------------
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C = -------------------------------------------------------------------------------------------
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D = -------------------------------------------------------------------------------------------
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E = -------------------------------------------------------------------------------------------
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Family = -------------------------------------------------------------------------------------------
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Matriarch = -------------------------------------------------------------------------------------------
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F = -------------------------------------------------------------------------------------------
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Child 1 = ------------------------------
Child 2 = --------------------------------
Child 3 = -----------------------------------------
Date 1 = ----------------------

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Trust 1 = -------------------------------------------------------------------------------------------
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Grandchild 1 = ----------------------------------------- Trust 2 = -------------------------------------------------------------------------------------------
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Grandchild 2 = ----------------------------------------- Trustee 1 = ----------------------- Fund 1 = -------------------------------------------------- Date 2 = ------------------------- Trust 3 = -------------------------------------------------------------------------------------------
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Beneficiary 1 = ----------------
Trustee 2 = ---------------------
Trustee 5 = ---------------------------
Fund 2 = -------------------------------------------- Date 3 = -------------------------- Trust 4 = -------------------------------------------------------------------------------------------
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Date 4 = ------------------------
Trust 5 = -------------------------------------------------------------------------------------------
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Trustee 3 = ----------------------------
Grandchild 3 = ------------------------------------------- Beneficiary 2 = -------------------- Beneficiary 3 = ------------ Grandchild 4 = ------------------------------------------ Grandchild 5 = ------------------------------ Grandchild 6 = ------------------------------ Date 5 = -------------------------- Trust 6 = -------------------------------------------------------------------------------------------
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Trust 7 = -------------------------------------------------------------------------------------------
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Date 6 = -----------------------
Trust 8 = -------------------------------------------------------------------------------------------
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Trust 9 = -------------------------------------------------------------------------------------------

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Trustee 4 = ---------------------------------
G = -------------------------------------------------------------------------------------------
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Foundation = ---------------------------------------------------- Date 8 = ---------------- Trust 10 = -------------------------------------------------------------------------------------------
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Trust 11 = -------------------------------------------------------------------------------------------
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Dear -----:

This letter responds to your letter, dated February 2, 2004, and prior correspondence requesting rulings regarding the income, estate, and generation- skipping consequences of naming a family-owned trust company as trustee of certain family trusts.

The descendants of Patriarch (collectively “the family”) have agreed to form Trust Company in State as a wholly-owned subsidiary of Corporation. The shareholders of Corporation are individual family members, trusts related to the family members, and foundations having a relationship with the family. Trust Company will serve as an independent trustee of certain family trusts.

Patriarch had five children: A, B, C, D, and E, all of whom are now deceased. This letter relates to the trusts currently operating for the benefit of the descendants of E.

Section 3.2 of the Trust Company Bylaws provides that the board of directors for Trust Company shall consist of no less than five nor more than twenty-five persons. The exact number of directors within the minimum and maximum limits is to be fixed and determined from time to time by resolution of a majority of the full board or by resolution of a majority of the shareholders at any meeting thereof. At any time such a resolution is not in effect, the number shall be five.

Section 4.5 of the Trust Company Bylaws provides in relevant part that the board may designate a Discretionary Decisions Review Committee (“DDRC”) whose responsibility shall be to review discretionary decisions made by the trust officers of the company upon the written request of a beneficiary of an affected trust. The DDRC shall be appointed by the board and shall include at least three directors. Upon the receipt of

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a written request from a beneficiary of an affected trust (as defined in section 12.5) for a review of a discretionary decision (as defined in section 12.5) that has been made by the senior trust officer or by another trust officer and reviewed and approved by the senior trust officer, the committee shall meet as soon as practicable to review the discretionary decision. The DDRC shall render its decision to affirm or alter the discretionary decision of the senior trust officer in writing and such action shall represent the final decision by the company on the discretionary decision in question.

Section 5.6 of the Trust Company Bylaws provides in relevant part that the senior trust officer shall review all discretionary decisions of other trust officers of the company upon the request of a beneficiary or other interested person of a trust.

Section 12.1 of the Trust Company Bylaws provides that there shall be at least one member of the board who is not a Family member (as that term is defined in section 12.5(d)) or a grantor of, a donor to, or a current or contingent beneficiary of an affected trust (as defined in section 12.5(a)).

Section 12.2 of the Trust Company Bylaws provides that all discretionary decisions (as defined in section 12.5(c)) shall be made by the trust officers of the company who are not Family members, subject to review by the senior trust officer and the DDRC. Therefore, at any time that the company serves as trustee of any affected trust, neither the board nor any committee that includes one or more board members, other than the DDRC, may make or participate in the making of any discretionary decision with respect to any affected trust.

Section 12.3 of the Trust Company Bylaws provides that at any time that the company serves as trustee of an affected trust, no officer or director, including directors serving on the DDRC, of the company may participate in a decision of the company (nor be present during any committee discussion of or vote on such a decision) involving: (a) the making of any discretionary decision with respect to any affected trust if the officer or director, or his or her spouse, is a grantor, donor, or a current or contingent beneficiary; or (b) the making of any discretionary decision with respect to any affected trust if the officer or director, or his or her spouse, is a member of the Family. An officer or director who is subject to the restrictions contained in section 12.3 with respect to a discretionary decision of the company, although absent from at least that part of the meeting at which such matter is considered, shall be deemed present for the purpose of determining whether a quorum is present for that part of the meeting.

Section 12.5(a) of the Trust Company Bylaws provides that an “affected trust” is a trust (i) of which any member of the Family is a grantor, donor or current or contingent beneficiary and (ii) for which the Trustee has any discretionary power, other than an investment power, and the discretionary power is not limited by an ascertainable standard.

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Section 12.5(c) of the Trust Company Bylaws provides that “discretionary decision” means, with respect to an affected trust, (i) the exercise of any incident of ownership with respect to any life insurance policy owned by that trust, or (ii) the exercise or non-exercise of a discretionary power (A) to distribute income or principal of that trust or any beneficiary, (B) to allocate receipts or disbursements between income and principal for purposes of affecting distributions of income or principal of that trust, or (C) to “adjust” income or principal or to make or terminate an election of “total return” or “unitrust” or like power.

Section 12.5(d) of the Trust Company Bylaws provides that “Family” includes each living lineal descendant and spouse of a lineal descendant of Patriarch and Matriarch.

E married F and had three children: Child 1, Child 2, and Child 3. E and F are deceased.

On Date 1, Child 2 created Trust 1 for the benefit of Grandchild 1 and his descendants. On Date 1, Child 3 created Trust 2 for the benefit of Grandchild 2 and her descendants. Trustee 1 currently serves as the trustee of both Trust 1 and Trust 2 (collectively the Series I Trusts). Date 1 is after September 25, 1985. The Series I Trusts each have the same operative provisions.

Article First of each Series I Trust Agreement provides that the trust will terminate upon the expiration of twenty-one years after the death of the last survivor of a list of named measuring lives.

Article Second of each Series I Trust Agreement provides that the income of the trust is paid to the Beneficiary (named child) or for the Beneficiary’s use and benefit during the Beneficiary’s life. The trustee has the discretion to distribute principal to or for the use and benefit of the Beneficiary. The Beneficiary has a testamentary limited power to appoint the trust assets to any lawful issue in any degree of the grantor or to appoint income only to a spouse of any of the lawful issue in any degree of the grantor other than the Beneficiary, the Beneficiary’s estate, the creditors of the Beneficiary or the creditors of the Beneficiary’s estate. Article Third provides that if the Beneficiary does not appoint the assets, then on the Beneficiary’s death, the trust will continue until it terminates under Article First.

Article Fifteenth of each Series I Trust Agreement provides in relevant part that the trustee(s) acting under the trust agreement, excluding any trustee who may be a beneficiary to whom income might then be distributed, may appoint a successor trustee to fill any vacancy occurring. If no successor trustee has been named, then a majority of the persons (other than the grantor, any contributor, a spouse either of the grantor during his lifetime or any contributor during the lifetime of the contributor, or any person who is then related or subordinate to the grantor or any contributor as defined in § 672

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of the Internal Revenue Code) then acting as trustees of Fund 1 may appoint a successor trustee or a co-trustee as the case may be.

On Date 2, Child 1 created Trust 3 for the benefit of Grandchild 1, Beneficiary 1, and Grandchild 1’s descendants. Trustee 2 currently serves as the trustee of Trust 3. Date 2 is after September 25, 1985.

Paragraph 2(a) of the Trust 3 Agreement provides that the trustees may distribute income or principal to or for the benefit of Grandchild 1, Beneficiary 1, or the lineal descendants of Grandchild 1. In addition, the trustees may distribute income to or for the benefit of the living spouse with whom Grandchild 1, or any lineal descendant of his, if then living, or if Grandchild 1 or such living descendant is deceased, with whom Grandchild 1, or such descendant, was living immediately prior to his or her death. Payments of income or principal under Trust 3 may be made for the health, education, support, maintenance, comfort, happiness, and other reasonable needs.

Paragraph 2(c) of the Trust 3 Agreement provides that Trust 3 will terminate upon the death of the last living member of the class consisting of Grandchild 1, Beneficiary 1, and the issue of Grandchild 1. Upon termination, the assets shall be distributed to the then living issue of Grandchild 1, if any, per stirpes, and if there are none, to the then living children and stepchildren of Child 2, the then living issue, if any, of any then deceased child or stepchild of Child 2 to take, per stirpes, the share which the child or stepchild would have taken if living, and if there are none, to the then living issue of E, per stirpes. If, upon the termination of this trust, there are no then living issue of E, then the remaining assets of this trust shall be distributed to the then living issue, per stirpes, of Patriarch. Paragraph 2(d) provides that notwithstanding any other provision, if not terminated earlier in accordance with paragraph 2(c), Trust 3 shall terminate upon the expiration of twenty-one years after the death of the last survivor of the descendants of Patriarch who were in being on Date 2.

Paragraph 11(b) of the Trust 3 Agreement names Trustee 5 as successor trustee. Trustee 2 or Trustee 5 (respectively, when serving as trustee), or, if neither Trustee 2 or Trustee 5 is living and serving as trustee, the then serving trustees of Fund 2 shall be empowered, by written instrument, to designate a successor trustee to fill any vacancy occurring or which may occur if the then serving trustee should die, resign, become incapacitated, or for any other reason be unable or unwilling to serve or continue to serve as trustee.

On Date 3, Child 2 created Trust 4 for the benefit of the descendants of Child 2. On Date 4, Child 3 created Trust 5 for the benefit of the descendants of Child 3. Trustee 3 currently serves as trustee of Trust 4 and Trust 5 (collectively, the Series II Trusts). Date 3 and Date 4 are after September 25, 1985. The Series II Trusts each have the same operative provisions.

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Article One of the Trust 4 Agreement provides that during Child 2’s life, the trustee has the discretion to pay income or principal to one or more of the following persons: (1) out of a class composed of Grandchild 1, Grandchild 3, Beneficiary 2, Beneficiary 3 (collectively, the “Trust 4 beneficiaries”), the descendants of Grandchild 1 and Grandchild 3, or the descendants of Beneficiary 2 and Beneficiary 3 if none of the named individuals is living, (2) out of a class composed of the descendants of Patriarch. The power to pay principal is subordinate to the exercise of any power of withdrawal under Article Two. Net income not distributed shall be added to the principal of the trust. Upon the death of Child 2, the trustee shall divide and set apart the income and principal of Trust 4 into equal shares, one share for each of the Trust 4 beneficiaries who shall then be living and one share for the issue who shall then be living of each of the Trust 4 beneficiaries who shall not then be living. Each share for the issue of one of the Trust 4 beneficiaries shall be further divided and set apart into subshares for that individual’s issue, per stirpes.

Article One of the Trust 5 Agreement provides that during Child 3’s life, the trustee has the discretion to pay income or principal to one or more of the following persons: (1) out of a class composed of Grandchild 2, Grandchild 4, Grandchild 5, Grandchild 6 (collectively, the “Trust 5 beneficiaries”), the spouses of the Trust 5 beneficiaries, and the descendants of the Trust 5 beneficiaries, or if none of these individuals is living, (2) out of a class consisting of the descendants of E, or if none, (3) out of a class composed of the descendants of Patriarch. The power to pay principal is subordinate to the exercise of any power of withdrawal under Article Two. Net income not distributed shall be added to the principal of the trust. Upon the death of Child 3, the trustee shall divide and set apart the income and principal of Trust 5 into equal shares, one share for each the Trust 5 beneficiaries who shall then be living and one share for the issue who shall then be living of each of the Trust 5 beneficiaries who shall not then be living. Each share for the issue of one of the Trust 5 beneficiaries shall be further divided and set apart into subshares for that individual’s issue, per stirpes.

Article One of each Series II Trust Agreement further provides that for each share or subshare so set apart for an individual (the “Beneficiary”), the trustee has the discretion to distribute income or principal to one or more of the Beneficiary and the Beneficiary’s living descendants. Any net income not so paid shall be added to principal. Upon the death of the Beneficiary, the trustee shall distribute all income and principal of the trust to the person(s) (other than the Beneficiary, the Beneficiary’s estate, the creditors of the Beneficiary, or the creditors of the Beneficiary’s estate), in such proportions as the Beneficiary may, by a will specifically referring to the power, appoint. The trustee shall distribute all property not effectively appointed to the Beneficiary’s issue surviving him or her, per stirpes, provided that any property that would pass to a descendant of the grantor who is a current beneficiary of another trust being held under the applicable Series II Trust, shall not pass to the descendant, but shall instead be added to the principal of the other trust. If the Beneficiary was not living on Date 3 or Date 4 respectively, then the Beneficiary’s trust shall terminate no later than twenty-one years after the death of all descendants of Patriarch who were living on

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Date 3 or Date 4, respectively, and all income and principal of the trust shall be distributed to the Beneficiary.

Finally, Article One of the Trust 4 Agreement provides that if there is not an effective disposition of trust property under the other provisions in Article One, the trust property shall be distributed to Patriarch’s then living issue, per stirpes. Article One of Trust 5 Agreement provides that if there is not an effective disposition of trust property under the other provisions in Article One, the trust property shall be distributed to E’s then living issue, per stirpes, or if none, to Patriarch’s then living issue.

Article Two of each Series II Trust Agreement provides that in each calendar year during the life of the grantor in which an addition is made to the trust (including the year in which the trust is created), each of Patriarch’s descendants and each of the other beneficiaries to whom the trustee may then make distributions under Article One, as designated by the person making the addition, shall have the power to withdraw principal having a value equal at the time of the withdrawal to the value of the addition divided by the number of persons authorized to make withdrawals with respect to the property added. The powers of withdrawal are cumulative, provided that on December 31 of each year, the total amount that may be withdrawn by each power holder shall be reduced by the greater of $5,000 or five percent of the value of the trust principal on that date. Any power of withdrawal in existence when separate trusts are established under Article One shall continue in effect with respect to the trust as to which the power holder is a current beneficiary.

Article Four of the Trust 4 Agreement and Article Three of the Trust 5 Agreement provide that each trust is irrevocable.

Article Six of the Trust 4 Agreement and Article Five of the Trust 5 Agreement provide in relevant part that any trustee of any trust may, by an instrument filed with the trust records, appoint a successor trustee to act in his place from and after the time he ceases to act. If no trustee is acting, the grantor’s oldest living descendant shall appoint a trustee by an instrument filed with the trust records.

On Date 5, Child 2 created Trust 6 for the benefit of the descendants of Child 2. Also on Date 5, Child 3 created Trust 7 for the benefit of the descendants of Child 3. Trustee 2 currently serves as trustee of Trust 6 and Trust 7 (collectively, the Series III Trusts). Date 5 is after September 25, 1985. The Series III Trusts each have the same operative provisions.

Article 2, paragraph (a) of the Trust 6 Agreement provides that the trustee has the discretion to distribute income or principal to any one or more persons in a class consisting of: each of the then living lineal descendants of the grantor, each of the then living stepchildren of the grantor, each of the then living descendants of any stepchild of the grantor, and each then living spouse with whom such lineal descendant, stepchild, or descendant of a stepchild, of the grantor is then living. If such lineal descendant,

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stepchild, or descendant of a stepchild is deceased, income may be distributed to a spouse with whom such descendant, stepchild, or descendant of a stepchild was living immediately prior to his or her death. The trustee may distribute all or none of the net income or principal of the trust for the health (including medical, dental, and hospital), education, support, maintenance, comfort, happiness and other reasonable needs of the lineal descendants of the grantor, stepchildren of the grantor and their descendants, and the spouses of lineal descendants, stepchildren of the grantor and their descendants, at such times and in such amounts, whether equal or unequal, as the trustee, in his absolute discretion may determine.

Article 2, paragraph (d) of the Trust 6 Agreement provides that upon termination of Trust 6, the then remaining assets shall be distributed to the then living children and stepchildren of the grantor, the then living issue, if any, of any then deceased child or stepchild of the grantor to take, per stirpes, the share which that child or stepchild would have taken if living; provided, that if there are no such issue of the grantor then living, then to the then living issue, per stirpes, of the E. If, upon termination of this trust, there are no then living issue of E, then the remaining assets of the trust shall be distributed to the then living issue, per stirpes, of Patriarch.

Article 2, paragraph (a) of the Trust 7 Agreement provides that the trustee has the discretion to distribute income or principal to any one or more persons in a class consisting of: each of the living lineal descendants of the grantor and each then living spouse with whom such lineal descendant is then living. If such lineal descendant is deceased, income may be distributed to a spouse with whom such descendant was living immediately prior to his or her death. The trustee may distribute all or none of the net income or principal of the trust for the health (including medical, dental, and hospital), education, support, maintenance, comfort, happiness and other reasonable needs of the lineal descendants of the grantor and the spouses of lineal descendants at such times and in such amounts, whether equal or unequal, as the trustee, in his absolute discretion may determine.

Article 2, paragraph (d) of the Trust 7 Agreement provides that upon termination of Trust 7, the then remaining assets shall be distributed to the then living issue of the grantor, per stirpes, provided, that if there are no issue of the grantor then living, then to the then living issue, per stirpes, of E. If upon the termination of this trust, there are no then living issue of the grantor and no then living issue of E, then the remaining assets of the trust shall be distributed to the then living issue, per stirpes, of Patriarch.

Article 2, paragraph (c) of each Series III Trust Agreement provides that each trust shall terminate upon the expiration of twenty-one (21) years after the death of the last survivor of the descendants of Patriarch who were in being on the date of the creation of the trust.

Article 4, paragraph (a) of each Series III Trust Agreement provides that notwithstanding anything to the contrary, if during any calendar year (including the

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calendar year in which a trust is executed), any transfers that are treated as gifts under the federal gift tax laws are made to a trust by the grantor or any other person, each of the then living persons who is a permissible distributee of trust income or principal under Article 2, paragraph (a) who is living on the date that the property that is the subject of the demand right is transferred to the trust, shall have the power to demand the immediate distribution from the trust of an amount (which the trustee in his discretion may satisfy in cash or in property of equivalent fair market value or both) equal to the amount of the transfer divided by the total number of persons having a demand right. The annual demand right, however, of any person with respect to all contributions made by the same transferor in a single calendar year shall not exceed the transferor’s maximum annual federal gift tax exclusion under § 2503(b). If the transferor is married on the date of the transfer to the trust, then the annual demand right shall not exceed twice the transferor’s annual federal gift tax exclusion amount. The demand rights shall take precedence over any other power or discretion granted to the trustee or to any other person.

Article 5 of each Series III Trust Agreement provides that notwithstanding any other provision, if any person who at any time has a right of withdrawal under Article 4 shall die prior to the time of the distribution of assets from a trust as provided in Article 2, then the beneficiary shall have the power to appoint by Will or Codicil over a portion of the trust principal that may remain at his or her death, determined as follows: to the extent that for any year the beneficiary had a right under Article 4 to demand a distribution of trust principal that exceeded the greater of five thousand dollars ($5,000.00) or five percent (5%) of the then market value of the net principal of the trust, then the beneficiary shall have the limited right to appoint an amount equal to the cumulative total of the excess. The power of appointment may only be exercised in favor of any one or more of the beneficiary’s then living issue, or a trust(s) for their benefit. The power of appointment must be exercised, if exercised at all, by a Will or Codicil that makes express and direct reference to the exercise of the power of appointment. To the extent the deceased beneficiary has not exercised the power of appointment in his or her Will, the amount that could have been appointed shall remain a part of the trust property, to continue to be managed, administered and distributed as a part of the trust.

Article 11, paragraph (b) of each Series III Trust Agreement provides that in the event the named trustee should die, resign, become incapacitated or for any other reason be unable or unwilling to serve or continue to serve as trustee, then Trustee 5 shall serve as successor trustee.

Article 11, paragraph (c) of each Series III Trust Agreement provides that Trustee 2 (at any time while he is serving as trustee) or Trustee 5 (at any time while he is serving as trustee), or, if neither Trustee 2 or Trustee 5 is living and serving as trustee, the then serving trustees of Fund 1 shall be empowered, by written instrument, to designate a successor trustee to fill any vacancy occurring or that may occur if the then serving trustee should die, resign, become incapacitated or for any other reason be

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unable or unwilling to serve or continue to serve as trustee and a successor trustee shall not be named.

On Date 6, E created Trust 8 for the benefit of Child 2 and his descendants and Trust 9 for the benefit of Child 3 and her descendants. Trustee 1 and Trustee 4 currently serve as trustees for Trust 8 and Trust 9 (collectively, the Series IV Trusts). Date 6 is before September 25, 1985. The Series IV Trusts each have the same operative provisions.

Article First of each Series IV Trust Agreement provides that the trustee shall pay in each calendar year all of that year’s net income at such times and in such amounts as the trustee in his absolute discretion shall determine: (A) to, or for the use and benefit of the named beneficiary, until ten years from Date 6 or the date of the named beneficiary’s death, whichever shall come first. (B) On the occurrence of either of the events stated in (A), then to or for the use and benefit of G so long as he shall live. (C) After the death of G and the occurrence of either of the events stated in (A), then the trustee shall accumulate the net income for the remaining duration of the trust. Article First, paragraph (D) provides that the trustee is authorized, during the period of accumulation described in paragraph (C), to pay the current or accumulated income or the principal, in such amounts and at such times as the trustee in his absolute and uncontrolled discretion may select, to, or for the use and benefit of, the named beneficiary during his or her lifetime, and after his or her death to, or for the use and benefit of, the children and grandchildren of the named beneficiary as the trustee in his absolute and uncontrolled discretion may select. In the event that the last survivor of the named beneficiary and his or her children and grandchildren dies before the termination of the trust, the discretion granted to the trustee in paragraph (D) may be exercised among the class composed of the named siblings of the named beneficiary and their children and grandchildren.

Article First, paragraph (E) of each Series IV Trust Agreement provides that each trust shall terminate at the later of the following times: (1) the death of G, or (2) twenty- one years after the death of the last survivor of Child 1, Child 2, and Child 3. On termination, the trustee shall transfer the principal and accumulated income to the children and grandchildren of the named beneficiary and in such portions as the named beneficiary shall by will appoint; and in default of appointment, to the children of the named beneficiary, and the issue of any deceased children in equal shares per stirpes. In the event that on the termination of a trust, there are no children or grandchildren of the named beneficiary eligible to receive the principal and accumulated income, then the trustee shall transfer the principal and accumulated income to the children and grandchildren of the named beneficiary’s named siblings, in equal shares per capita; and if there be no such children or grandchildren then living, then to Foundation.

Article Second, paragraph (P) of each Series IV Trust Agreement provides that the trustee has the power to appoint an additional trustee(s), and to remove any additional trustee so appointed. In the event of the refusal to act, resignation,

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incapacity, or death of any trustee, the trustees of Foundation are authorized to appoint a successor trustee(s).

On Date 8, Child 2 created Trust 10 for the benefit of Grandchild 1 and his descendants. Also on Date 8, Child 3 created Trust 11 for the benefit of Grandchild 2 and her descendants. Trustee 2 currently serves as the trustee of both Trust 10 and Trust 11 (collectively, the Series V Trusts). Date 8 is after September 25, 1985. The Series V Trusts each have the same operative provisions.

Article One of each Series V Trust Agreement provides that the trustee shall invest and reinvest the trust property until the expiration of ten years after Date 8 and shall pay the net income at least quarter-annually to the grantor or, if the grantor shall not be living, to the legal representatives of the grantor’s estate. Notwithstanding any contrary statute or case law, the trustee shall not pay to the grantor or the legal representatives of the grantor’s estate any principal, including but not limited to amounts required to discharge the grantor’s tax liability (whether federal, state, or otherwise), if any, in respect of gains realized by the trust and taxable to the grantor.

Article One of the Trust 10 Agreement further provides that upon the expiration of ten years from Date 8, all property then belonging to the principal of Trust 10 shall be distributed, divided and set apart into equal shares, one share for each of the grantor’s children and stepchildren. Trust 10 is the separate share set aside ten years after Date 8, for Grandchild 1.

Article One of the Trust 11 Agreement further provides that upon the expiration of ten years from Date 8, all property then belonging to the principal of Trust 11 shall be distributed, divided and set apart into equal shares, one share for each of the grantor’s daughters. Trust 11 is the separate share set aside ten years after Date 8, for Grandchild 2.

Article One of each Series V Trust Agreement further provides that each share set apart for a child of the grantor shall be held by the trustee in further trust, and the trustee shall pay the net income to the child during his or her life at least quarter- annually and at any time or from time to time to pay to the child so much of the principal, whether the whole or a lesser amount, as the trustee may in his sole discretion determine. Upon the death of the child, the trustee shall distribute all property then belonging to the income or principal of the trust to the person(s) (other than the child, his or her estate, his or her creditors, or the creditors of his or her estate), and in such estates, interests and proportions, as the child may, by a will specifically referring to the trust appoint. If the child shall fail to exercise, or shall not fully and effectually exercise, the power of appointment, the trustee shall distribute all property not effectually appointed to the issue of the child living at his or her death, per stirpes, or, in default thereof, to the grantor’s issue then living, per stirpes, or, in default thereof to Fund 1.

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Article Four of each Series V Trust Agreement provides that any trustee may, by an instrument filed with the trust records, appoint a trustee to act in his or her place from and after the time he or she ceases to act. If no trustee shall be acting, Fund 1 shall appoint a trustee by an instrument filed with the trust records.

Of the eleven trusts discussed in this letter, the following are trusts for which the grantor(s) is still living: Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 10, and Trust 11. Potential beneficiaries of all trusts discussed in this letter include individuals who are two or more generations below the grantors’ generation, therefore, distributions from each trust may be subject to the GST tax. Trust 8 and Trust 9 were irrevocable on September 25, 1985.

RULINGS REQUESTED

You have requested the following rulings: 1) Trust Company is not a “related or subordinate party” within the meaning of § 672(c) with respect to a grantor of the trusts for which Trust Company will serve as trustee. Trust Company will qualify as an independent trustee under § 672(c)(1). 2) Neither the appointment of Trust Company as trustee of the trusts nor Trust Company’s exercise of any discretionary powers as to distributions to beneficiaries of the trust will result in any grantor being treated as the owner of any portion of the trust assets under § 674(a). 3) Any grantor serving on Trust Company’s Trust Committee will not result in a grantor being treated as the owner of any portion of the trust under § 675(4). 4) Neither the appointment of Trust Company as trustee of the trusts nor Trust Company’s exercise of any discretionary distribution powers to beneficiaries of the trusts will result in a grantor’s being treated as the owner for any portion of the trust assets under § 677. 5) Neither the appointment of Trust Company as trustee of the trusts nor Trust Company’s exercise of any discretionary distribution powers will result in a grantor being treated as the owner of any portion of the trust assets under § 678. 6) Neither the appointment of Trust Company as trustee of the trusts nor Trust Company’s exercise of any discretionary powers with respect to distributions to beneficiaries will result in the inclusion of any portion of the trust assets in the estate of any grantor or beneficiary under §§ 2036, 2038, or 2041. 7) The appointment of Trust Company as trustee of the trusts created, funded, and irrevocable prior to September 25, 1985, will not constitute a constructive addition to the trust and affect the status of the pre-September 25, 1985 trusts as exempt from the generation- skipping transfer tax under § 2601.

RULINGS 1 and 2

Section 672(c)(2) provides that for purposes of subpart E of part I of subchapter J, the term “related or subordinate party” means any nonadverse party who is 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 stockholdings 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.

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Section 674(a) provides, in general, 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(c) provides that § 674(a) shall not apply to a power solely exercisable (without the approval or consent of any other person) by a trustee or trustees, none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor (1) to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries; or (2) to pay out corpus to or for a beneficiary or beneficiaries or to or for a class of beneficiaries (whether or not income beneficiaries).

Based solely on the facts and representations submitted, including the provision of the bylaws of Trust Company that prohibits any family member from taking part in any discretionary distribution decision with regard to any trust for which Trust Company is acting as trustee, we conclude that Trust Company is not a related or subordinate party, within the meaning of § 672(c)(2), to any of the grantors of the trusts for which it will be acting as trustee. Therefore, Trust Company may exercise the powers described in
§ 674(c) with regard to those trusts without causing the grantors to be treated as the owners of any portion of the trusts under § 674(a).

RULING 3

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 675(4) provides that the grantor shall be treated as the owner of any portion of a trust in respect of which a power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of § 675(4), the term “power of administration” means any one or more of the following powers: (A) a power to vote or direct the voting of stock or other securities of a corporation in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; (B) a power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvestments, to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; or (C) a power to reacquire the trust corpus by substituting other property of an equivalent value.

Based solely on the facts and representations submitted, we conclude that our examination of the terms of the trusts and the bylaws of Trust Company reveals none of

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the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of the grantors of the trusts for which Trust Company will act as trustee under § 675, if those trusts are substantially identical to the trusts. Thus, the circumstances attendant on the operation of the Trust Company, its trust committee, and the trusts for which the Trust Company is acting as trustee will determine whether any grantor will be treated as the owner of any portion of the trusts 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 with responsibility for such examination.

RULING 4

Section 677(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such 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 (1) distributed to the grantor or the grantor’s spouse; (2) held or accumulated for future distribution to the grantor or the grantor’s spouse; or (3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse.

Section 1.677(a)-1(d) of the Income Tax Regulations provides that, under § 677, a grantor is, in general, treated as the owner of a portion of a trust whose income is, or in the discretion of the grantor or a nonadverse party, or both, may be applied in discharge of a legal obligation of the grantor.

Our examination of the trusts does not reveal any provision that would allow distributions to be made to the grantor, the grantor’s spouse, or in discharge of the grantor’s legal obligations. Based solely on the facts and representations submitted, we conclude that a living grantor’s ownership interest in Trust Company or membership on its board of directors or any of its committees will not give the grantor an interest or power that would cause that grantor to be treated as an owner of any portion of the trusts under § 677.

RULING 5

Section 678(a) provides, in general, that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of §§ 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof.

Based solely on the facts and representations submitted, including the provision of the bylaws of Trust Company that prohibits any family member from taking part in any

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discretionary distribution decision with regard to any trust for which Trust Company is acting as trustee, we conclude that no beneficiary of a trust for which Trust Company will act as trustee has a power exercisable solely by that beneficiary to vest the trust corpus or income in themselves as a result of that beneficiary’s ownership interest in Trust Company or membership on its board of directors or any of its committees.

RULING 6

Section 2036(a) 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 the 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 that 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 2036(b)(1) provides in part that for the purposes of § 2036(b)(1), a corporation shall be treated as a controlled corporation if, at any time after the transfer of the property and during the three-year period ending on the date of the decedent’s death, the decedent owned (with the application of § 318), or had the right (either alone or in conjunction with any person) to vote, stock possessing at least twenty percent of the total combined voting power of all classes of stock.

Section 20.2036-1(b)(3) provides in part that if a decedent reserved the unrestricted power to remove or discharge a trustee at any time and to appoint himself as trustee, the decedent is considered as having the powers of the trustee.

Section 2038(a)(1) 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 the case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, where the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired the power), to alter, amend, revoke, or terminate, or where any power is relinquished during the three-year period ending on the date of decedent’s death.

Section 20.2038-1(a)(3) provides in part that if a 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.

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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 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 a power of appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent’s gross estate under §§ 2035 to 2038, inclusive. For purposes of
§ 2041(a)(2), the power of appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised.

Section 2041(b)(1) provides that a general power of appointment is a power that is exercisable in favor of the decedent, the decedent’s estate, 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)(1) provides, in part, that a donee may have a power of appointment if he has the power to remove or discharge a trustee and appoint himself. For example, if under the terms of the 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. However, the mere power of management, investment, custody of assets, or the power to allocate receipts and disbursements as between income and principal, exercisable in a fiduciary capacity, whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of the fiduciary duties is not a power of appointment.

Rev. Rul. 95-58, 1995-2 C.B. 191, holds that a decedent/grantor’s reservation of an unqualified power to remove a trustee and to 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/grantor to the trust. Accordingly, the trust corpus was not included in the decedent’s gross estate under
§§ 2036 or 2038. The ruling notes that the Eighth Circuit in Estate of Vak v. Commissioner, 973 F.2d 1409 (8th Cir. 1992), concluded that the decedent had not retained dominion and control over assets transferred to a trust by reason of his power to remove and replace the trustee with a party that was not related or subordinate to the decedent. Accordingly, the court held that under § 25.2511-2(c), the decedent made a completed gift when he created the trust and transferred assets to it.

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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 order for §§ 2036-2038 to apply, the decedent must have made a transfer of property or any interest therein (except in the case of a bona fide sale for an adequate and full consideration in money or money’s worth) under which the decedent retained an interest in, or power over, the income or corpus of the transferred property. For purposes of §§ 2036 and 2038, it is immaterial in what capacity the power was exercisable by the decedent.

The governing trust instruments prevent grantors and beneficiaries from directly participating in decisions regarding discretionary distributions from the trusts. Section 12.1 of the Trust Company Bylaws requires that at least one member of the board will not be a Family member, a grantor of, a donor to, or a current or contingent beneficiary of an affected trust. Affected trusts are trusts of which any member of the Family is a grantor, donor, or current or contingent beneficiary and for which the trustee does not have any discretionary power, other than an investment power, that is not limited by an ascertainable standard. Family is defined in section 12.5(d) as each living lineal descendant and spouse of a lineal descendant of Patriarch and Matriarch. Section 12.2, accordingly, restricts discretionary distribution decisions with respect to affected trusts to trust officers who are not descendants or the spouse of a descendant of Patriarch and Matriarch. Discretionary distribution decisions are initially made or reviewed by the Senior Trust Officer and can be appealed to the DDRC at a beneficiary’s request. Under section 12.3 of the Trust Company Bylaws, neither a Senior Trust Officer nor a member of the DDRC may participate in discussions or decisions involving an affected trust if the officer or director, or his or her spouse, is a grantor, donor, or a current or contingent beneficiary of the trust. That section further prohibits Senior Trust Officers and members of the DDRC from participating in discussions or decisions with respect to any affected trust if the officer or director, or his or her spouse, is a member of the Family. Therefore, the grantors and the beneficiaries of the trusts discussed in this letter are sufficiently prohibited from participating in initial decisions and subsequent review of decisions regarding discretionary distributions from their own trusts. In addition, the structure of the bylaws prohibits the grantors and beneficiaries of E’s branch and the other four branches of the family from participating in Trust Company’s exercise of discretion to make distributions from any of the trusts by or for descendants of Patriarch and Matriarch, thus preventing the possibility of outside reciprocal agreements that may indirectly give members of E’s branch of the family effective control over the discretionary distributions from the trusts discussed in this letter.

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The combination of the firewall provision in the Trust Company Bylaws and the trustee provisions in each trust agreement preclude a donor of any of the trusts from having the retained dominion and control as contemplated by §§ 2036 or 2038. No grantor, therefore, will be considered as having the powers of the trustees under
§§ 20.2036-1(b)(3) or 20.2038-1(a)(3) solely as a result of being a shareholder in or participating in the daily activities of Trust Company as they are precluded from participating in discretionary distribution decisions with respect to the trusts discussed in this letter, both directly by the trust agreement and indirectly when made by Trust Company. Therefore, neither the appointment of Trust Company as trustee of the trusts nor its exercise of the discretionary powers over distributions to beneficiaries of the trusts will result in the inclusion of any portion of the value of the trusts in the respective estate of a grantor to one of the trusts discussed in this letter. Accordingly, based on the facts submitted and the representations made, we conclude that the appointment of Trust Company as a trustee of the trusts will not result in the inclusion of any portion of the value of the trusts in the estate of the respective grantor under §§ 2036 or 2038.

Furthermore, the combination of provisions also preclude a beneficiary from having the power to affect the beneficial enjoyment of the trust property as contemplated by § 2041. No beneficiary, therefore, will be considered as having the power of the trustees under § 20.2041-1(b)(1) solely as a result of being a shareholder in and participating in the daily activities of Trust Company as they are precluded from participating in discretionary distribution decisions with respect to the trusts discussed in this letter, both directly by the trust agreement and indirectly when made by Trust Company. Therefore, neither the appointment of Trust Company as trustee of the trusts nor its exercise of the discretionary powers over distributions to beneficiaries of the trusts will result in the inclusion of any portion of the value of the trusts in the respective estate of a beneficiary. We note that some of the trusts discussed in this letter provide certain beneficiaries a general power of appointment over part or all of the assets of the trust. The ruling provided in this letter does not imply that the value of the assets to which the general power of appointment pertains will not be included in a beneficiary’s estate. Accordingly, based on the facts submitted and the representations made, we conclude that the implementation of the proposed trust restructuring plan and the appointment of Trust Company as an independent trustee of the trusts will not result in the inclusion of any portion of the value of the trusts in the estate of a beneficiary who is not granted a general power of appointment by the terms of the trust agreement under
§ 2041.

RULING 7

Section 2601 imposes a tax on every generation-skipping transfer.

Section 2611(a) defines the term Ageneration-skipping transfer@ to include a taxable distribution, taxable termination, and a direct skip.

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Each of the trusts discussed in this letter is a generation-skipping transfer trust because the trusts provide for distributions to one or more generation of beneficiaries below the grantors’ generations. Trust 8 and Trust 9 were irrevocable on September 25, 1985. The trustees represent that there have been no additions, actual or constructive, to these trusts after September 25, 1985.

Under § 1433(b)(2)(A) of the Tax Reform Act of 1986 and § 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations, the generation-skipping transfer tax provisions do not apply to any generation-skipping transfer under a trust (as defined in
§ 2652(b)) that was irrevocable on September 25, 1985, but only to the extent that the transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added).

Section 26.2601-1(b)(1)(ii)(A) provides that any trust in existence on September 25, 1985, is considered an irrevocable trust except as provided in §§ 26.2601-1(b)(ii)(B) or (C), that relate to property includible in a grantor’s gross estate under §§ 2038 and 2042. In the present case, Trust 8 and Trust 9 are considered to have been irrevocable on September 25, 1985, because neither § 2038 nor § 2042 applies.

Section 26.2601-1(b)(1)(v)(B) provides that the release, exercise, or lapse of a power of appointment (other than a general power of appointment as defined in
§ 2041(b)) is not treated as an addition to a trust if - (1) the power of appointment was created in an irrevocable trust that is not subject to chapter 13 under paragraph (b)(1) of this section; and (2) in the case of an exercise, the power of appointment is not exercised in a manner that may postpone or suspend the vesting, absolute ownership or power of alienation of an interest in property for a period, measured from the date of creation of the trust, extending beyond any life in being at the date of creation of the trust plus a period of twenty-one years plus, if necessary, a reasonable period of gestation (the perpetuities period). For purposes of paragraph (b)(1)(v)(B)(2), the exercise of a power of appointment that validly postpones or suspends the vesting, absolute ownership or power of alienation of an interest in property for a term of years that will not exceed ninety years (measured from the date of creation of the trust) will not be considered an exercise that postpones or suspends vesting, absolute ownership or the power of alienation beyond the perpetuities period. If a power is exercised by creating another power, it is deemed to be exercised to whatever extent the second power may be exercised.

Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the generation-skipping transfer tax under § 26.2601-1(b)(1), (2), or (3) (hereinafter referred to as an exempt trust) will not cause the trust to lose its exempt status. In general, unless specifically provided for otherwise, the rules contained in
§ 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping transfer tax purposes. Unless specifically noted, the rules do not apply in determining, for example, whether the

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transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of § 1001.

Section 26.2601-1(b)(4)(i)(D)(1) provides that a modification of the governing instrument of an exempt trust by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided in the original trust. Furthermore, a modification that is administrative in nature that only indirectly increases the amount transferred (for example, by lowering administrative costs or income taxes) will not be considered a shift in a beneficial interest in a trust.

Naming Trust Company as trustee of Trust 8 and Trust 9 is an administrative change and will not be considered a shift in a beneficial interest in a trust under
§ 26.2601-1(b)(4)(i)(D)(1)

Except as expressly provided herein, no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings it is subject to verification on examination.

Pursuant to the Power of Attorney on file with this office, a copy of this letter is being sent to your attorney.

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

Sincerely,

James. F. Hogan

James F. Hogan
Senior Technician Reviewer, Branch 9
Office of Associate Chief Counsel

(Passthroughs & Special Industries)

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Enclosure
Copy of this Letter for § 6110 purposes

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