IRA division and distributions would not trigger generation-skipping transfer tax

Plain-English summary

The IRS ruled that dividing an inherited IRA into two accounts and making annual distributions would not cause a trust to become subject to the generation-skipping transfer tax. The trust became irrevocable before September 25, 1985, and the ruling treated the proposed transfer of assets from one IRA to another as a change in how the trust assets were held. The IRS also found that the proposed distributions would not pass property to a lower generation or extend the vesting period of any beneficial interest. The ruling was based on the submitted facts and representations and did not address other tax consequences.

Ruling snapshot

• Question: Would the proposed IRA division and distributions cause the trust to lose its generation-skipping transfer tax protection?
• Outcome: Approved
• Key authorities: IRC §§ 2601, 2611, and 408; § 1433(b)(2) of the Tax Reform Act of 1986; Treas. Reg. §§ 1.408-2(b)(7)(ii) and 26.2601-1(b)(1)(i), (b)(4)(i), and (b)(4)(i)(A)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201023050 Third Party Communication: None
Release Date: 6/11/2010 Date of Communication: Not Applicable
Index Number: 2601.03-01
Person To Contact:
------------------------------------------------------------ -------------------------, ID No. -------------
------------ Telephone Number:
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------------------------------------------------- Refer Reply To:
------------------------------- CC:PSI:B04
PLR-146750-09
--------------------------------------------- Date: JANUARY 25, 2010
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LEGEND:

Taxpayer A = ------------------
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Trust B = ------------------------------------------------------------------------
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Individual C = ---------------------
Trust D = ---------------------------------------------------
----------------------------------
Date E = --------------------------
Date F = ---------------------------
Date G = -------------------
IRA X = ----------------------------------
IRA Y = ---------------------------
IRA Z = ------------------------------------------------------------------------

a = ---------
b = ----

Dear --------------------------------------:

  This ruling responds to your letter dated January 14, 2008, on behalf of Trust,

requesting a ruling under § 2601 of the Internal Revenue Code.

PLR-146750-09 2

   The facts submitted are as follows:

    Individual C established IRA Z during his lifetime to receive lump sum

distributions from his employer’s retirement plan. Prior to his death, Individual C
executed a trust agreement (“Trust D”) that was partially funded by IRA Z.

   Individual C died on Date E, before September 25, 1985, at which time Trust D

became irrevocable and, pursuant to the beneficiary designation for IRA Z, the
undistributed balance of IRA Z remaining at Individual C’s death became payable to
Trust D. The undistributed balance of IRA Z in Trust D and the other assets of Trust D
were divided into separate trusts for the benefit of certain of Individual C’s descendants,
including Taxpayer A. Trust B, the trust created for the benefit of Taxpayer A, received
an a% interest in IRA Z.

   On Date F, the Trustees of Trust B elected to treat the entire share of the

undistributed balance of IRA Z received by Trust B as a separate IRA (IRA Y) subject to
the distribution requirements of § 408(a)(6) then in effect and § 1.408-2(b)(7)(ii) of the Income Tax Regulations.

   In a private letter ruling dated Date G, the Internal Revenue Service ruled that

under § 408 in effect on the date of Individual C’s death, as applied with respect to Trust
B, Taxpayer A is the individual for whose benefit IRA Y is maintained for purposes of
determining (a) when distributions from IRA Y must be made or commence, (b) the
measuring life for installment distributions from IRA Y, and (c) the applicability of the
additional premature withdrawal tax with respect to IRA Y.

   The Trustees of Trust B propose to divide IRA Y into two separate individual

retirement accounts. This will be accomplished by transferring a portion of the assets
held by IRA Y in an investment account into a new individual retirement account (IRA X)
that will continue to be owned by Trust B.

   Following the division, the Trustees of Trust B propose to begin making annual

distributions from IRA X to Taxpayer A, age b. The proposed annual distribution
amount will be determined each year by dividing the account balance of IRA X as of
December 31 of the prior year by an annuity factor which is equal to the present value
of a $1 per year single-life annuity with such annuity factor (based on Taxpayer A’s age
in that distribution year) calculated using an assumed interest rate equal to 120% of the
federal mid-term rate as of December 31 of the prior year and the mortality table in
Appendix B of Revenue Ruling 2002-62. Although the annual distribution amount for
each year will be recalculated, the method by which the amount will be determined will
remain the same from year to year.

PLR-146750-09 3

   You have asked us to rule as follows:

   The generation-skipping transfer tax provisions do not apply to Trust B pursuant

to §1433(b)(2) of the Tax Reform Act of 1986 and § 26.2601-1(b)(1)(i) of the
Generation-Skipping Transfer Tax Regulations, and neither the proposed transfer of part
of the Investment Account of IRA Y to IRA X nor the proposed annual distributions from
IRA X to Trust B and from Trust B to Taxpayer A will cause Trust B to become subject to
the generation-skipping transfer tax provisions pursuant to § 26.2601-1(b)(4).

LAW AND ANALYSIS

    Section 2601 imposes a tax on every generation-skipping transfer (GST), which

is defined under § 2611 as a taxable distribution, a taxable termination, and a direct
skip.

   Under section 1433 of the Tax Reform Act of 1986 (the Act), GST tax is generally

applicable to generation-skipping transfers made after October 22, 1986. However,
under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i) of the Generation-Skipping
Transfer Tax Regulations, the tax does not apply to a transfer under a trust that was
irrevocable on September 25, 1985, except to the extent the transfer is made out of
corpus added to the trust by an actual or constructive addition after September 25, 1985.

    Section 26.2601-1(b)(4)(i) provides rules for determining when a modification,

judicial construction, settlement agreement, or trustee action with respect to a trust that
is exempt from the GST tax under § 26.2601-1(b) will not cause the trust to lose its
exempt status.

   Section 26.2601-1(b)(4)(i)(A) provides, in part, that the distribution of trust

principal from an exempt trust to a new trust will not cause the new trust to be subject to
the GST tax provisions if: (1) the terms of the governing instrument of the exempt trust
authorize distributions to the new trust without the consent or approval of any
beneficiary or court; and (2) the terms of the governing instrument of the new trust do
not extend the time for vesting of any beneficial interest in the trust 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 the original trust became
irrevocable, extending beyond any life in being at the date the original trust became
irrevocable plus a period of twenty-one years, plus, if necessary, a reasonable period of
gestation.

  In this case, Trust B was created under the provisions of Trust D. Upon the

death of Individual C on Date E, before September 25, 1985, Trust B became

PLR-146750-09 4

irrevocable. After the proposed division of IRA Y, Trust B will own the new IRA X and
will continue to own IRA Y. The proposed transfer of a portion of assets held by IRA Y
in an investment account into IRA X is a mere change in the manner in which the assets
of Trust D are held, and does not change the terms of Trust D. Moreover, the proposed
transfer of assets and the proposed annual distributions to Taxpayer A will not cause
property to pass to a lower generation and will not extend the time for vesting of any
beneficial interest in Trust D. Therefore, based on the facts submitted and the
representations made, we conclude that neither the proposed transfer of part of the
investment account of IRA Y to IRA X nor the proposed annual distributions from IRA X
to Trust B and from Trust B to Taxpayer A will cause Trust B to become subject to the GST tax.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  The ruling contained in this letter is based upon information and representations

submitted by the taxpayers 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 ruling, it is subject to verification on examination.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                   Sincerely,


                                   Katherine A. Mellody
                                   Senior Technician Reviewer, Branch 4
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)



   Enclosures
         Copy for § 6110 purposes
         Copy of this letter