PLR 1024027: IRS approved dividing a pre-1985 trust into five family-line trusts

Plain-English summary

The trustees proposed dividing a pre-September 25, 1985 irrevocable trust into five trusts, with each new trust serving a different family line. They also proposed creating revocable charitable subtrusts. The IRS ruled that the division and subtrusts would retain the trust's exemption from generation-skipping transfer tax, would not create taxable gifts or estate-tax inclusion for the identified 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 creating related charitable subtrusts?
• 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: 201024027 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-140635-09
------------------------------- Date:

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

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

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

Grandparent = ------------------------------------
Date 1 = --------------------------
Date 2 = -------------------
Date 3 = -------------------------
Date 4 = ----------------------
Grandchild 1 = ------------------------------
Grandchild 2 = ------------------------------------
Grandchild 2’s spouse = -----------------------------
Family Member 1 = ----------------------------
Family Member 2 = ------------------------------------
Original Trustee = ------------------------
Successor Trustee = -------------------
Law firm = -------------------------------
A = ---------------------
B = -------------------------
Corporate Trustee = --------------------------------------------------
Group = ---------------------------------------------------------------------

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

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PLR-140635-09 2

Charitable Subtrust = ----------------------------------------------------------------------------
x = ----
Great-grandchild 1 and spouse = -------------------------------------------------------
Great-grandchild 2 and spouse = -----------------------------------------------------
Great-grandchild 3 and spouse = --------------------------------------------------
Great-grandchild 4 and spouse = ---------------------------------------------------
Great-grandchild 5 = -----------------------
Great-great grandchild = --------------------------
Divided Trust 1 = ---------------------------------------------------------------------

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

Divided Trust 3 = ----------------------------------------------------------------------------
Divided Trust 4 = ------------------------------------------------------------------------------
Divided Trust 5 = ------------------------------------------------------------------------------
State = --------------
State Statute = -------------------------------------------------
Court = ---------------------------------------------------------------------

Primary Asset = ----------------------------------------

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.

The facts and representations are as follows. Grandparent irrevocably created Trust on Date
1, 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
situs of Trust will be that state in which all the Trustees acting under the Trust agreement
have their residence or, in the case of a corporate trustee, it has its principal place of
business. If there are three or more trustees, then the state in which a majority of trustees
have their residence or principal place of business will be the situs. The agreement was
executed in State. Compliance with the requirements of execution is to be determined
according to State law. The law of the state having situs of Trust from time to time will
govern in all other respects.

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,

PLR-140635-09 3

except as made to potential charitable beneficiaries, shall be made only among the members
of the lowest numbered class of individual beneficiaries (Individual Beneficiaries), as defined
in Section 3.03(1), which at the time of payment has one or more living and otherwise eligible
potential Individual Beneficiaries. The payments among the members of a class of Individual
Beneficiaries need not be equal and may be made to none, to one, to all or to any number of
members of the class in any proportions both as between Individual Beneficiaries and
charitable beneficiaries, as the trustees determine, in their sole discretion.

Paragraph 3.03 provides that the beneficiaries potentially eligible for any payments of
income, principal or otherwise shall include, at any time, one or more charitable beneficiaries
as defined in Section 3.03(2) and one or more members of the class of Individual
Beneficiaries then eligible under Section 3.03(1).

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

(i) Class One: The issue of Grandchild 1 then living, and all spouses of then living or
deceased issue of Grandchild 1; or

(ii) Class Two: The issue of Grandchild 2 then living, and all spouses of then living or
deceased issue of Grandchild 2 and, while any of such issue or spouses is living,
Grandchild 2, if living, and any spouse of Grandchild 2; or

(iii) Class Three: The issue of the children of Family Member 1 and Family Member 2
who are then living, and all spouses of then living or deceased issue of the children
of Family Member 1 and Family Member 2; or

(iv) Class Four: The children of Family Member 1 and Family Member 2 who are then
living, and all spouses of then living or deceased children of Family Member 1 and
Family Member 2; or

(v) Class Five: Family Member 1, if then living, any spouse of Family Member 1,
Family Member 2, if then living, and any spouse of Family Member 2; or

(vi) Class Six: Any spouse of Grandchild 2 and, with certain exceptions, the persons
who would be the heirs-at-law of Grandchild 1, if Grandchild 1 were then
deceased, who are then living.

Section 3.03(2) provides that the charitable beneficiaries shall be of a group as may be
selected by the trustees, in their sole discretion, consisting of corporations, associations and
institutions organized and operated exclusively for religious, charitable, literary, and
educational purposes and described in § 501(c)(3) of the Internal Revenue Code.

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

PLR-140635-09 4

required, 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 is intended to endure in perpetuity. Any assets governed
by a rule of law of situs under which a perpetual duration would render Trust invalid are to be
distributed on the last date on which the assets can validly remain in trust. If the governing
rule depends on specified lives in being, the duration of Trust is to be measured by the lives
of all persons described as potential Individual Beneficiaries in Classes One to Six as would
be determined on the date of execution of Trust.

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 Grandparent,
Grandchild 1, or Grandchild 2, 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 serve as 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 any two
partners of Law Firm. The power of designation shall be exercised in such manner 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 otherwise provided, there shall always be a
partner, associate, or member of Law Firm serving with the remaining trustees or trustee.

Paragraph 5.01 provides that the following persons shall have the power to 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. These powers shall be exercised by such of the following as qualify at the time of
exercise: (i) the individual trustee or trustees (as distinguished from any corporate trustee)
who are acting at the time; or (ii) if there are then no such individual trustees, a majority of
the potential Individual Beneficiaries who have attained age 35 and who are members of the
lowest-numbered class which contains any such Individual Beneficiaries as defined in
Section 3.03(1); or (iii) if there are then no such Individual Beneficiaries, a majority of the
potential Individual Beneficiaries who have attained the age of majority and who are
members of the lowest-numbered class which contains any such Individual Beneficiaries as
defined in Section 3.03(1); or (iv) if there are then no such Individual Beneficiaries, a court of
competent jurisdiction.

Paragraph 5.01 provides that the powers of appointment and determination that no
representative of Law Firm shall serve shall not be exercised by Grandparent, Grandchild 1,

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or Grandchild 2, or be exercised during the lifetime of any of them in such manner as to
result either (i) in Grandparent, Grandchild 1, or Grandchild 2 becoming a trustee, or (ii) in a
majority of the trustees being “related or subordinate parties,” within the meaning of § 672(c),
as to Grandparent, Grandchild 1, or Grandchild 2.

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) 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 Charitable Subtrust has not yet been funded. A and B are the
trustees of Charitable Subtrust.

Currently, there are no living members of Class One; that is, there is no living issue or
spouse of issue of Grandchild 1. Grandchild 1 is x years old and unmarried. It is unlikely that
there will ever be any issue or spouse of issue of Grandchild 1. Therefore, at the

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 such one or more 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.

PLR-140635-09 6

the present time, income and principal of Trust may be distributed to the members of Class Two,
the next lowest numbered of the classes of Individual Beneficiaries. In addition, income and
principal may be distributed to the charitable beneficiaries.

The twelve living members of Class Two are (i) Grandchild 2’s five adult children (Great-
grandchild 1, Great-grandchild 2, Great-grandchild 3, Great-grandchild 4, and Great-
grandchild 5), (ii) the spouses of four of them (Great-grandchild 1’s spouse, Great-grandchild
2’s spouse, Great-grandchild 3’s spouse, and Great-grandchild 4’s spouse), (iii) a child of
one of them (Great-great Grandchild), (iv) Grandchild 2, and (v) Grandchild 2’s spouse..

Proposed transaction

The trustees will divide the Trust assets and liabilities into five approximately equal shares
(Divided Trusts). 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 Two.

The Divided Trusts will have the same dispositive, termination, allocation, and administrative
provisions as Trust except that, under Section 3.03(1)(ii) of a respective Divided Trust, Class
Two will be redefined to limit that class of Individual Beneficiaries to the family line (Family
Line) of one of the children of Grandchild 2. A child’s Family Line will include the child, the
child’s spouse, the child’s issue, and the spouses of the issue of the child. In addition,
Grandchild 2 (while any issue or spouse of issue of Grandchild 2 is living) and Grandchild 2’s
spouse will be members of Class Two of each Divided Trust. Accordingly, Trust will be
divided into: (1) Divided Trust 1 for Great-grandchild 1’s Family Line, (2) Divided Trust 2 for
Great-grandchild 2’s Family Line, (3) Divided Trust 3 for Great-grandchild 3’s Family Line, (4)
Divided Trust 4 for Great-grandchild 4’s Family Line, and (5) Divided Trust 5 for Great-
grandchild 5’s Family Line.2

One or more revocable charitable subtrusts (Divided Charitable Subtrusts) will be created
under the Divided Trusts. 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 trustees of the Divided Trust to which it is
associated.

2
The Divided Trusts will provide that, if all the members of a child’s Family Line are deceased, their Divided Trust
will terminate. The assets and liabilities of that Divided Trust will be allocated among Grandchild 2’s then living
issue, per stirpes, and will be distributed to the respective Divided Trust held for that issue or to a separate trust
having the same terms and trustee as the Divided Trust for that issue. In addition, there will be a fractional
division of the Divided Trust assets if Grandchild 2 has a subsequent child. If the last surviving member of
Class Two dies during the Trust term, the assets of the Divided Trusts will be administered for the benefit of the
then living members of the next lowest numbered class of Individual Beneficiaries.

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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 Grandchild 2, Grandchild 2’s spouse, Grandchild 2’s
children 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 (upon creation) to be includible in the gross estate of Grandchild 2,
Grandchild 2’s spouse, Grandchild 2’s children or any member of their respective
Family Lines, for estate tax purposes.

(4) The allocation of assets and liabilities of Trust to the Divided Trusts will not cause
Trust, Grandchild 2, Grandchild 2’s spouse, Grandchild 2’s children 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 (if any) will be the same as the respective adjusted basis of the assets held by
Trust, for purposes of § 1015.

(6) The holding periods of the assets received by the Divided Trusts and Divided Charitable
Subtrusts (if any) will be the same as the holding periods of the assets in Trust, 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
attributable to corpus so added).

Section 26.2601-1(b)(1)(iv) provides that, if an addition is made after September 25, 1985, to
an irrevocable trust which is excluded from the application of Chapter 13 by reason of

PLR-140635-09 8

§ 26.2601-1(b)(1), a pro rata portion of subsequent distributions from (and terminations of interests in property held in) the trust is subject to the provisions of Chapter 13.

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, as described above, of Trust into the Divided Trusts and
the creation of the Divided Charitable Subtrusts 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 (if
any) will not be subject to the provisions of Chapter 13.

Issue 2

PLR-140635-09 9

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

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 creation of the Divided Charitable Subtrusts, 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 Grandchild 2, Grandchild 2’s spouse, any of Grandchild 2’s children 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

PLR-140635-09 10

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
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 creation of the Divided Charitable Subtrusts will not
constitute a transfer of property, for purposes of §§ 2036 through 2038, by Grandchild 2,
Grandchild 2’s spouse, any child of Grandchild 2, or a member of a child’s respective Family
Line. The beneficiaries of the trusts 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 creation of the Divided Charitable Subtrusts) will not cause the trust assets to be
includible the gross estate of Grandchild 2, Grandchild 2’s spouse, a child of Grandchild 2, or
a member of a child’s Family Line 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
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

PLR-140635-09 11

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

PLR-140635-09 12

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.

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 will be severed into the Divided Trusts on a pro rata basis to the
extent practical. The dispositive provisions of each Divided Trust are the same as those of
Trust. The proposed severance of Trust is authorized by the Trust agreement. In addition,
applicable State law permits severance transactions. Under the terms of Trust, the trustees
are authorized to assign assets and liabilities on a non-pro rata as well as a pro rata basis in
the event that they sever Trust.

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 satisfies those criteria.
Accordingly, the severance of Trust, accompanied by the pro rata funding of the Divided
Trusts 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

PLR-140635-09 13

held by any other person, if under Chapter 1 such property has, for the purposes of determining
gain or loss from a sale or exchange, the same basis in whole or in part in the taxpayer’s
hands as it would have in the hands of such other person.

Assuming the assets transferred from the dividing trust to the surviving trusts will have the
same basis before and after the division, we conclude that the holding periods for all the
assets held by each of the surviving trusts will include the holding periods of the assets of
Trust (the dividing trust) under § 1223.

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