PLR 1024026: IRS approved dividing a pre-1985 trust into six family-line trusts

Plain-English summary

The trustees proposed dividing a pre-September 25, 1985 irrevocable trust into six trusts, with one trust for one family line and five trusts for the family lines of another family branch. They also proposed dividing an existing charitable subtrust into five related charitable subtrusts. The IRS ruled that the division would preserve the trusts' exemption from generation-skipping transfer tax, would not create taxable gifts or estate-tax inclusion for the affected beneficiaries, and would not trigger income or capital gain recognition. The new trusts would carry over the original assets' adjusted bases and holding periods. The ruling was based on the submitted facts and representations and applied only to the matters specifically addressed.

Ruling snapshot

• Question: What are the GST, gift, estate, income, basis, and holding-period consequences of dividing the trust and charitable subtrust?
• Outcome: Approved
• Key authorities: IRC §§ 61, 1001, 1015, 1223, 2036 through 2038, 2041, 2501, 2511, 2512, and 2601

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024026 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1001.00-00, 2501.00-00, -----------------------, ID No. -------------
2601.00-00 Telephone Number:
---------------------
-------------------------- Refer Reply To:
------------------------------ CC:PSI:B04
------------------- PLR-140633-09
------------------------------- Date:

------------- March 08, 2010

Re: -------------------------------------------------------

LEGEND
Trust = ----------------------------------------------------------------------------

Parent = -------------------------
Family Member 1 = ----------------------------
Family Member 2 = ------------------------------
Family Member 3 = ----------------------
Employees = ----------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------

Charity A = -------------------------------------------------------
Charity B = ----------------------------------------------------------------------------
Original Trustee = ------------------------
Successor Trustee = -------------------
Law Firm = -------------------------------
A = ---------------------
B = ---------------------------
Corporate Trustee = --------------------------------------------------
State Statute = ------------------------------------
Child 1 = ------------------------------
Child 2 = ------------------------------------
Grandchild 1 and spouse = -------------------------------------------------------
Grandchild 2 and spouse = -----------------------------------------------------
Grandchild 3 and spouse = --------------------------------------------------

PLR-140633-09 2

Grandchild 4 and spouse = ---------------------------------------------------
Grandchild 5 = -----------------------
Great-grandchild = --------------------------
Charitable Subtrust = -------------------------------------------------------

Divided Trust A = ---------------------------------------------------------------------------

Divided Trust 1 = -------------------------------------------------------------------

Divided Trust 2 = ----------------------------------------------------------------------------

Divided Trust 3 = ---------------------------------------------------------------------

Divided Trust 4 = ---------------------------------------------------------------------

Divided Trust 5 = ---------------------------------------------------------------------

Group = ---------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------

State = ------------------
Court = ---------------------------------------------------------------------

Primary Asset = ----------------------------------------
Date 1 = --------------------------
Date 2 = -------------------
Date 3 = -------------------------
Date 4 = ----------------------

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

This responds to the September 4, 2009 letter from your authorized representative,
requesting rulings on the income, gift, estate and generation-skipping transfer (GST) tax
consequences of a proposed division of Trust and Charitable Subtrust.

The facts and representations are as follows. Parent irrevocably created Trust on Date 1,

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prior to September 25, 1985. It is represented that no additions, constructive or otherwise,
have been made to Trust after September 25, 1985.

The Trust agreement includes the following provisions. Section 1.05(3) provides that the
rules of law and the statutes of State are to govern in the validity, interpretation, and
enforcement of the Trust agreement and the administration of each trust thereunder.

Paragraph 3.02 provides that payment of any benefits, whether principal, income, or
otherwise, shall be made in the sole discretion of the trustees. Amounts of net income,
capital gains or other amounts of principal not paid to a beneficiary are to be accumulated
and added to principal. Payments of income or principal determined by the trustees, if any,
except as made to potential charitable beneficiaries, shall be made only among the members
of the lowest numbered class, as defined in Section 3.03(1), which at the time of payment
has one or more living individual beneficiaries (Individual Beneficiaries). The payments
among the members of a class of Individual Beneficiaries and charitable beneficiaries need
not be equal and may be to one, to all, or to any number of members, as the trustees
determine, in their sole discretion.

Paragraph 3.03 provides that payments of income, principal or otherwise may be made to
any one or more members of the lowest numbered of the classes of Individual Beneficiaries
described in Section 3.03(1) which has one or more members then living and/or to any one
or more members of the class of charitable beneficiaries described in Section 3.03(2).

Section 3.03(1) defines the potential Individual Beneficiaries as:

(i) Class One: The issue of Parent then living, and all spouses of then living or
deceased issue of Parent; or

(ii) Class Two: The issue of Family Member 1 then living, and all spouses of then
living or deceased issue of Family Member 1;

(iii) Class Three: The issue of Family Member 2 and Family Member 3 who are then
living, and all spouses of then living or deceased issue of Family Member 2 and
Family Member 3; or

(iv) Class Four: The persons who would be the heirs-at-law of the last survivor of all
members of Class One who leaves heirs then living; if there are no such heirs,
then such heirs of the last survivor of Class Two who leaves heirs then living; if
there are no such heirs, then such heirs of the survivor of Class Three who leaves
heirs then living; or

(v) Class Five: Certain employees (the Employees).

Section 3.03(2) provides that the potential charitable beneficiaries shall include Charity A and

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Charity B (so long as they are organized and operated exclusively for the purposes described
in § 501(c)(3) of the Internal Revenue Code), and such of a group consisting only of
corporations, associations and institutions organized and operated exclusively for religious,
charitable, literary, and educational purposes and described in § 501(c)(3).
Section 3.03(4) provides that the trustees may make a complete distribution of all Trust
assets at any time. In the event final distribution is determined by the trustees or legally
required under Paragraph 4.01 or otherwise, distribution will be made by the trustees to any
or all members of the class of Individual Beneficiaries and charitable beneficiaries then
eligible under the provisions of Article 3, as determined by the trustees, in their sole
discretion.

Paragraph 4.01 provides that Trust, if not sooner terminated pursuant to complete
distribution, is to terminate twenty-one years after the death of the survivor of all persons
described as potential Individual Beneficiaries in Classes One to Three inclusive, determined
at the date of the execution of the Trust agreement. Any assets governed by a rule of law of
situs under which termination at the date prescribed would render Trust invalid are to be
distributed on the last date on which the assets can validly remain in trust. It is Parent’s
intent that Trust be permitted to endure in perpetuity.

Paragraph 4.05 provides that all determinations to make, apply, withhold or accumulate any
discretionary payments or distributions of income or principal shall be made only by the
trustees then acting who are not “related or subordinate parties” as to Parent, within the
meaning of § 672(c), or who are not within the definition of Individual Beneficiaries and
charitable beneficiaries eligible at the time of the determination

Paragraph 5.01 provides that if Original Trustee ceases to be trustee, he shall be replaced by
Successor Trustee. If Successor Trustee ceases to serve, he or his successor shall be
replaced by the partner, associate or member of Law Firm as designated by two partners of
Law Firm. The power of designation shall be exercised by Law Firm as often as there may
be a vacancy in the trusteeship originally filled by Original Trustee and Successor Trustee so
that, except as specifically provided to the contrary, there will always be a partner, associate,
or member of Law Firm serving with the remaining trustees or trustee.

Paragraph 5.01 provides that the individual trustee or trustees (as distinguished from the
corporate trustee) may appoint one or more individual trustees, or a corporate trustee, or one
or more individual trustees and a corporate trustee to act with the trustee or trustees then
acting, and also the further power to determine that any partner, associate, or member of
Law Firm shall never serve as trustee, thus completely nullifying the further service or
succession by any member or appointee of Law Firm. In the event no trustee is acting, a
trustee or trustees of the type which might be appointed by individual trustees shall be
appointed by a majority of the adult potential Individual Beneficiaries in the lowest numbered
Class which contains any such Individual Beneficiaries, as defined in Section 3.03(1). The
power of appointment shall not be exercised in such manner as to result either (i) in Parent’s
becoming a trustee, or (ii) in all of the trustees being “related or subordinate parties” as to

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Parent within the meaning of section 672(c).

Section 5.04(9) provides that the trustees may divide Trust, determining values and
designating particular assets for beneficiaries, assign like or unlike properties to different
beneficiaries or trusts, and make distribution and payments in cash or in kind or in both.
A and B are the present trustees of Trust. Corporate Trustee is a limited trustee with no
power to make discretionary distributions. The situs of Trust is State. Under the terms of
Trust and the law of State, Trust is to continue until the earlier to occur of: (i) the trustees’
complete distribution of the Trust assets, or (ii) 21 years after the death of the last survivor of
the persons named in Group.

The trustees of Trust requested a private letter ruling regarding the creation and funding of a
revocable charitable subtrust of Trust. The private letter ruling was issued on Date 2. On
Date 3, pursuant to the letter ruling, the trustees created the revocable charitable subtrust
(Charitable Subtrust).1 A and B are the trustees of Charitable Subtrust.

Currently, income and principal of Trust may be distributed to the members of Class One,
i.e., the living issue of Parent and the spouses of the living or deceased issue of Parent. In
addition, income and principal may be distributed to the charitable beneficiaries.

Parent had two children, Child 1 and Child 2. Child 1 is x years old, is unmarried, and has no
issue. Child 2 is married and has five adult children. Child 2’s five adult children are:
Grandchild 1, Grandchild 2, Grandchild 3, Grandchild 4, and Grandchild 5. Four of the adult
children are married. Child 2 has one grandchild (Great-grandchild).
1
The Charitable Subtrust agreement includes the following provisions:

Paragraphs 2.01 and 2.02: The trustee may amend the agreement, but it shall not be effective without the
consent of the trustee of Trust. The trustee of Trust may at any time revoke Charitable Subtrust.

Paragraph 2.03: The trustee may not accept contributions from any person or entity other than the trustee of Trust.

Paragraph 3.01: Unless sooner terminated by a complete distribution of the assets, Charitable Subtrust will
terminate on the date required for the termination of Trust, and the remaining Charitable Subtrust assets will be
distributed to Trust, and added to and disposed of as part of the general Trust estate under the Trust agreement.

Paragraph 3.02: The payment or accumulation of any amount is vested in the sole discretion of the trustee.
Payments determined by the trustee shall be made only to charitable beneficiaries.

Section 3.03(1): The potential charitable beneficiaries shall be Charity A, Charity B, and such of a group as may
be selected by the trustee, in the trustee’s sole discretion, consisting only of corporations, associations, and
institutions that are: (1) organized and operated exclusively for religious, charitable, literary or educational
purposes, (2) described in §§ 170(c), 642(c) and 501(c)(3), and (3) exempt from taxation under § 501(a).

Paragraph 5.01: The individual trustee (as distinguished from a corporate trustee) of Trust shall have the power
to appoint cotrustees or successor trustees of Charitable Subtrust. Any cotrustee or successor trustee may be
removed by at any time by the trustee of Trust.

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Proposed transaction

Trust will be divided into six separate shares (Divided Trusts). One-half of the Trust assets
and liabilities will be held as a Divided Trust for the benefit of the Child 1 family line (Family
Line). The other one-half of the Trust assets and liabilities will be divided into five
approximately equal Divided Trusts, with a respective Divided Trust held for a respective
Family Line of a child of Child 2. A person’s Family Line will consist of the person, the
person’s spouse, the person’s issue, and the spouses of the person’s issue.

The distribution to the Divided Trusts will be on a pro rata basis to the extent practical. For
instance, the trustees will divide the primary asset (Primary Asset) of Trust strictly pro rata.
The division will be adjusted to account for modest prior distributions made to certain
Individual Beneficiaries in Class One.

The Divided Trusts will have the same dispositive, termination, allocation, and administrative
provisions as Trust except that Section 3.03(1)(i) of the Divided Trust for Child 1’s Family
Line will limit the Individual Beneficiaries of Class One to Child 1, Child 1’s spouse (if any),
Child 1’s issue (if any) and the spouses (if any) of Child 1’s issue. Likewise, Section
3.03(1)(i) of a respective Divided Trust for the Family Line of a child of Child 2 will limit the
Individual Beneficiaries of Class One to the respective child, the child’s spouse, the child’s
issue, and spouses of the child’s issue. Child 2 and Child 2’s spouse will also be
beneficiaries of the five Divided Trusts held for the Family Lines of Child 2’s children.

Accordingly, Trust will be divided into: (i) Divided Trust A for the Child 1 Family Line, (ii)
Divided Trust 1 for the Grandchild 1 Family Line, (iii) Divided Trust 2 for the Grandchild 2
Family Line, (iv) Divided Trust 3 for the Grandchild 3 Family Line, (v) Divided Trust 4 for the
Grandchild 4 Family Line and (vi) Divided Trust 5 for the Grandchild 5 Family Line.2

The assets and liabilities of Charitable Subtrust will be divided into five equal shares (Divided
Charitable Subtrusts) with a respective Divided Charitable Subtrust associated with a
respective Divided Trust created for the Family Line of a child of Child 2. It is not expected
that there will be a charitable subtrust relating to Divided Trust A. The Divided Charitable
Subtrusts will have the same provisions as Charitable Subtrust except that the powers to
amend, revoke, etc., a particular Divided Charitable Subtrust will be exercisable by the

2
Each Divided Trust will provide that, if all the members of a particular Family Line are deceased, the Divided
Trust for that Family Line will terminate. Its assets and liabilities will be allocated among Grandchild 2’s then living
issue, per stirpes, by distribution to the Divided Trust held for the benefit of that issue or to a separate trust with
the same terms and trustee as the Divided Trust for that issue. If the last surviving member of Child 2’s Family
Line dies during the Trust term, the assets of the Divided Trusts held for Child 2’s Family Line may be
administered for the benefit of the Class Two Individual Beneficiaries (Child 1’s Family Line) or distributed to
Divided Trust A (for the benefit of Child 1’s Family Line).

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trustees of the Divided Trust to which it is associated.

Trust is administered under the laws of State. Under State Statute, a trustee may divide a
trust into two or more trusts if it is in the best interests of all persons interested and will not
substantially impair accomplishment of the purposes of the trust.

On Date 4, pursuant to the trustees’ petition, Court issued an order authorizing the proposed
division. The order is subject to receipt of a favorable private letter ruling from the Internal
Revenue Service.

You have asked for the following rulings:

(1) The Divided Trusts and Divided Charitable Subtrusts will be exempt from the GST tax.

(2) The division will not cause any of Parent’s issue or any member of their respective
Family Lines to be treated as having made a transfer subject to gift tax.

(3) The division will not cause the assets of the Divided Trusts or Divided Charitable
Subtrusts to be includible in the gross estate of any of Parent’s issue or any member
of their respective Family Lines, for estate tax purposes.

(4) The allocation of assets and liabilities of Trust and Charitable Subtrust will not cause
Trust, the Divided Trusts, Charitable Subtrust, the Divided Charitable Subtrusts,
Parent’s issue, or any member of their respective Family Lines to recognize any
ordinary income or loss or capital gain or loss, for income tax purposes.

(5) The adjusted basis of the assets received by the Divided Trusts and Divided
Charitable Subtrusts will be the same as the respective adjusted basis of the assets
held by Trust and Charitable Subtrust, for purposes of § 1015.

(6) The holding periods of the assets received by the Divided Trusts and Divided
Charitable Subtrusts will be the same as the holding periods of the assets in Trust and
Charitable Subtrust, for purposes of § 1223(2).

Issue 1

Section 2601 imposes a tax on every generation-skipping transfer (GST), which is defined
under § 2611 as a taxable distribution, a taxable termination, or a direct skip.

Section 1433(b)(2)(A) of the Tax Reform Act of 1986 (the Act), 1986-3 (Vol. 1) C.B. 1, and
§ 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations provide that the
generation-skipping transfer tax shall not apply to any generation-skipping transfer under a
trust that was irrevocable on September 25, 1985, but only to the extent that the transfer was
not made out of corpus added to the trust after September 25, 1985 (or out of income

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attributable to corpus so added).

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), (b)(2), or (b)(3), will not
cause the trust to lose its exempt status. The rules of § 26.2601-1(b)(4) apply only to
determine whether an exempt trust retains its exempt status for generation-skipping transfer
tax purposes. They do not apply in determining, for example, whether the 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) 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, but
only if: 1) 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 (2) the modification does not extend the
time for vesting of any beneficial interest in the trust beyond the period provided for in the
original trust. A modification of an exempt trust will result in a shift in a beneficial interest to a
lower generation beneficiary if the modification can result in either an increase in the amount
of a generation-skipping transfer or the creation of a new generation-skipping transfer.

Section 26.2601-1(b)(4)(i)(E), Example 5, illustrates a situation where a trust that is otherwise
exempt from the GST tax is divided into two trusts. Under the facts presented in the
example, the division of the trust into eight trusts does not shift any beneficial interest in the
trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the person
or persons who held the beneficial interests prior to the division, and the division does not
extend the time for vesting of any beneficial interest in the trust beyond the period provided
for in the original trust.

In this case, Trust was irrevocable on September 25, 1985, and it is represented that no
additions have been made since September 25, 1985. Based on the facts presented and the
representations made, the division of Trust into the Divided Trusts and Charitable Subtrust
into the Divided Charitable Subtrusts, as described above, will not result in a shift of any
beneficial interest to any beneficiary who occupies a generation lower than the persons
holding the beneficial interests prior to the division. Further, the proposed division will not
extend the time for the vesting of any beneficial interest in the new trusts beyond the period
provided for under the original trust. Accordingly, the Divided Trusts and Divided Charitable
Subtrusts will not be subject to the provisions of Chapter 13.

Issue 2

Section 2501 imposes a tax for each calendar year on the transfer of property by gift during
such calendar year by any individual.

PLR-140633-09 9

Section 2511 provides that the gift tax applies whether the transfer is in trust or otherwise,
direct or indirect, and whether the property transferred is real or personal, tangible or
intangible.

Section 2512(a) provides that if the gift is made in property, the value thereof at the date of
the gift is considered the amount of the gift.

Section 2512(b) provides that where property is transferred for less than an adequate
consideration in money or money's worth, then the amount by which the value of the property
exceeded the value of the consideration is deemed a gift that is included in computing the
amount of gifts made during the calendar year.

The division of Trust and Charitable Subtrust, as described above, will not result in any
change in the beneficial interests of any of the beneficiaries. Accordingly, based on the facts
submitted and representations made, the division will not cause any of Parent’s issue or any
member of their respective Family Lines to be treated as having made a transfer subject to
gift tax.

Issue 3

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

Section 2037 provides, generally, that the value of the gross estate shall include the value of
property to the extent of any interest therein of which the decedent has at any time made a
transfer (except in case of a bona fide sale for an adequate and full consideration in money
or money's worth) if: (1) possession or enjoyment of the property can, through ownership of
such interest, be obtained only by surviving the decedent, and (2) the decedent has retained a
reversionary interest in the property, and the value of the reversionary interest immediately
before the decedent’s death exceeds five percent of the value of the property.

Section 2038(a)(1) provides, generally, that the value of all property to the extent of any
interest therein of which the decedent has at any time made a transfer (except in case of a
bona fide sale for an adequate and full consideration in money or money's worth), by trust or
otherwise, where the enjoyment thereof was subject at the date of his death to any change
through the exercise of a power (in whatever capacity) by the decedent alone or in conjunction
with any other person (without regard to when or from what source the decedent acquired

PLR-140633-09 10

such power) to alter, amend, revoke, or terminate, or where any such power is relinquished
during the 3-year period ending on the date of the decedent's death.

Sections 2036 and 2037 provide for inclusion of property in a decedent’s gross estate if the
decedent gratuitously transferred the property during life and retained certain rights, powers,
or interests with respect to the property. Under § 2038, the transferred property is includible
in the decedent’s gross estate if the decedent held certain rights or powers at death. Thus,
the estate tax inclusion provisions of §§ 2036 through 2038 apply only in the case of property
transferred by the decedent during life.

In this case, the division of Trust and Charitable Subtrust will not constitute a transfer of
property, for purposes of §§ 2036 through 2038, by any of Parent’s issue or a member of
their respective Family Lines. The trust beneficiaries will have the same interests after the
division as they had prior to the division. We therefore conclude that the division of Trust into
the Divided Trusts (and the division of Charitable Subtrust into the Divided Charitable
Subtrusts) will not cause the trust assets to be includible the gross estate of any of Parent’s
issue or any member of their respective Family Lines under §§ 2036 through 2038.

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, 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 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) 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 appointment. For
example, if under the terms of a trust, 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. 79-353, 1979-2 C.B. 325, held that the value of property transferred to a trust is
includible in the decedent-grantor's gross estate, under §§ 2036(a)(2) and 2038(a)(1), if the
grantor retains the power to remove the corporate trustee, without cause, and appoint
another corporate trustee, and the trustee is endowed with broad discretionary powers. In

PLR-140633-09 11

Rev. Rul. 81-51, 1981-1 C.B. 458, the Service announced that Rev. Rul. 79-353 would be
applied prospectively only. Specifically, Rev. Rul. 81-51 held that, if on or before October 28,
1979 (the date of publication of Rev. Rul. 79-353), a grantor transferred property to an
irrevocable trust, and retained the power to remove, at will, and replace the corporate trustee
with another corporate trustee, no estate tax consequences will result on account of the
retained removal and replacement power.

The Service reconsidered the position on this issue in Rev. Rul. 95-58, 1995-2 C.B. 191.
This ruling revoked Rev. Rul. 79-353 and Rev. Rul. 81-51 and 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 power of
distribution over the property transferred by the decedent-settlor to the trust. Although Rev.
Rul. 79-353 and Rev. Rul. 81-51 were revoked, a trust that was exempt from the application
of Rev. Rul. 79-353 by reason of Rev. Rul. 81-51 does not lose this exemption even if the
trust otherwise fails to meet the standard set forth in Rev. Rul. 95-58.

In this case, an Individual Beneficiary may become a trustee of a Divided Trust held for his or
her Family Line. However, under Paragraph 4.05 of Trust, he or she may not participate in
any trustee decisions regarding discretionary distributions or as to the assets making up a
distributive share. Thus, the Individual Beneficiary would have no power to pay (directly or
indirectly) trust principal or income to himself or herself. Consequently, an Individual
Beneficiary will not be regarded as possessing a general power of appointment solely as a
result of his or her serving as a trustee.

Further, there are circumstances, under Paragraph 5.01, in which an Individual Beneficiary
may possess the power to remove, at will, and replace the trustees of the Divided Trust held
for his or her Family Line. Although Paragraph 5.01 does not include the standards of Rev.
Rul. 95-58 for exercising the replacement power, the exemption provided by Rev. Rul. 81-51
is applicable as Trust was created and funded before October 29, 1979. Therefore, an
Individual Beneficiary will not be considered to have a general power of appointment, within
the meaning of § 2041(a)(2), solely by reason of possessing a power to remove and replace
the trustees.

Issue 4

Section 61(a) defines gross income as "all income from whatever source derived." Under
§ 61(a)(3), gross income includes "[g]ains derived from dealings in property."

Section 1001(a) provides that the gain from the sale or other disposition of property is the
excess of the amount realized over the adjusted basis provided in § 1011 for determining
gain, and the loss is the excess of the adjusted basis provided in § 1011 for determining loss
over the amount realized. Under § 1001(c), the entire amount of gain or loss must be
recognized, except as otherwise provided.

PLR-140633-09 12

Section 1.1001-1(a) of the Income Tax Regulations provides that, except as otherwise
provided in subtitle A of the Code, the gain or loss realized from the exchange of property for
other property differing materially either in kind or in extent is treated as income or as loss
sustained.

Under § 1.1001-1(h)(1), the severance of a trust, occurring on or after August 2, 2007, is not
an exchange of property for other property differing materially either in kind or in extent, if (i)
an applicable state statute or the governing instrument authorizes or directs the trustee to
sever the trust; and (ii) any non-pro rata funding of the separate trusts resulting from the
severance, whether mandatory or in the discretion of the trustee, is authorized by an
applicable state statute or the governing instrument.

In the present case, Trust and Charitable Subtrust will be severed into the Divided Trusts and
the Divided Charitable Subtrusts on a pro rata basis to the extent practical. The dispositive
provisions of each Divided Trust agreement are the same as those of the Trust agreement.
Similarly, the dispositive provisions of each Divided Charitable Subtrust agreement are the
same as those of the Charitable Subtrust agreement.

The proposed severance of Trust is authorized by the Trust agreement. The proposed
severance of Charitable Subtrust is authorized by the Charitable Subtrust agreement. In
addition, applicable State Statute permits both severance transactions.

The severance of a trust occurring on or after August 2, 2007, is not an exchange of property
for other property differing materially in kind or in extent, if the severance satisfies the criteria
set forth in § 1.1001-1(h)(1). The proposed severance of Trust and Charitable Subtrust
satisfies those criteria. Accordingly, the severance of Trust and Charitable Subtrust,
accompanied by the (pro rata or non-pro rata) funding of the Divided Trusts and Divided
Charitable Subtrusts resulting from the severance, does not constitute an exchange of
property for other property differing materially in kind or in extent under §§ 61 and 1001.

Issue 5

Section 1015 provides that the basis in property acquired by a transfer in trust is the same as
it would be in the hands of the grantor, with adjustments for gain and loss recognized. The
basis in the assets in the trusts will be determined under § 1015. In this case, the basis of
each trust asset in the hands of the surviving trusts will be the same as the basis of each
such asset in the dividing trust prior to the division.

Issue 6

Section 1223 provides that in determining the period for which the taxpayer has held property
however acquired, there shall be included the period for which the property was held by any

PLR-140633-09 13

other person, if the property has the same basis in whole or in part in the taxpayer’s hands as
it would have in the hands of that other person.

Since the division of Trust and Charitable Subtrust is not a sale or other disposition of
property, and the property has the same basis in the hands of the resulting Divided Trusts
and Divided Charitable Subtrusts as it would have had in the hands of Trust and Charitable
Subtrust, the holding periods of the assets in the hands of the Divided Trusts and Divided
Charitable Subtrusts will include the holding periods of the assets in the hands of Trust and
Charitable Subtrust pursuant to § 1223(2).

The rulings in this letter pertaining to the federal estate and/or generation-skipping transfer
tax apply only to the extent that the relevant sections of the Code are in effect during the
period at issue. Except as specifically ruled upon above, we express no opinion as to the tax
consequences of the transaction described above under the cited provisions of the Code or
under any other provisions of the Code.

The rulings 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.

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

                                               Sincerely yours,



                                               James F. Hogan
                                               Chief, Branch 4
                                               Office of the Associate Chief Counsel
                                               (Passthroughs and Special Industries)

Enclosures
Copy for § 6110