PLR 1029002: The IRS approved dividing a charitable remainder trust after divorce

Plain-English summary

The IRS approved a proposed division of a charitable remainder unitrust into two separate charitable remainder unitrusts after the divorce of the two lifetime beneficiaries. Each new trust would pay its respective former spouse and distribute the remainder to charitable beneficiaries. The IRS concluded that the division would not disqualify the trusts, trigger recognition of gain, create taxable gifts, terminate private-foundation status, or cause the specified payments to be self-dealing or taxable expenditures. It also ruled on the related estate-tax treatment, including inclusion of each trust’s assets in the corresponding beneficiary’s estate and a charitable deduction for the assets passing to charity, subject to the stated conditions.

Ruling snapshot

• Question: What federal tax consequences would follow from dividing the charitable remainder unitrust into separate trusts for the divorced beneficiaries?
• Outcome: approved, subject to the ruling’s stated facts, representations, and conditions
• Key authorities: IRC §§ 61, 1001, 1041, 1223, 2036, 2055, 2501, 4941, 4945, 4947, 507, and 664; Treas. Reg. §§ 1.1001-1, 1.1041-1, 1.507-1, 1.507-3, 20.2036-1, 20.2055-1, 25.2512-8, 53.4945-5, 53.4945-6, and 53.4947-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201029002 Third Party Communication: None
Release Date: 7/23/2010 Date of Communication: Not Applicable
Index Number: 664.03-02
Person To Contact:
---------------------------------- ------------------, ID No. -------------
---------------------------------- Telephone Number:
----------------------------------------- ---------------------
---------------------------------- Refer Reply To:
CC:PSI:B1
PLR-146360-09
Date:
April 14, 2010

LEGEND:

Trust = ---------------------------------------------------------------------

Date 1 = -------------------------

Date 2 = --------------------------

Date 3 = ----------------------

Date 4 = -----------------------

Date 5 = ------------------

State = -------------

Court = ------------------------------------------------------------------------------------------------

A = -------------------

B = -----------------------------

a = -----

b = ----

c = ----

Trust A = ------------------------------------------------------
PLR-146360-09 2

Trust B = ----------------------------------------------------------------

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

   This responds to your authorized representative’s letter dated ------------------, and

subsequent correspondence, in which you requested rulings regarding a proposed
division of a charitable remainder trust.

    The facts submitted and the representations made are as follows: On Date 1,

Trust was established. A and B represent Trust qualifies as a charitable remainder
trust, described in § 664(d)(2) of the Internal Revenue Code (the “Code”). A and B were
married prior to Date 1 and, thereafter, until Date 3, the date of their divorce. During
their marriage, A and B were residents of State, a community property state. A is the
trustee of Trust. While A and B took a deduction under section 170 of the Code at the
time Trust was established, Trust represents that no deduction was allowed under
sections 170(f)(2)(B), 642(c), 2055(e)(2)(B), or 2522(c)(2)(B) with respect to the income
interest of any lifetime beneficiary.

   Paragraph 2.1 of Trust provides for annual payments to be made to A, each

taxable year during A’s lifetime, a unitrust amount equal to a percent of the net fair
market value of its assets as valued on the first business day of that year. Upon A’s
death, if B survives A, the annual payments will be made to B during B’s lifetime. Trust
requires the unitrust payments to A and B to be made in monthly installments. Under
paragraph 2.5 of Trust, A has a right to revoke B’s beneficial interest in Trust, which
right he may exercise in his will.

    Paragraph 2.6 of Trust provides that, subject to A’s right to revoke B’s interest in

Trust, B’s interest in Trust will take effect upon A’s death, but only if B furnishes funds
for the payment of any federal estate tax or state death taxes for which the trustee may
be liable upon A’s death.

    Paragraph 2.7 of Trust provides that upon the death of the last to die of A and B,

or solely after A's death if A exercises his right to revoke B's interest, the trustee will
distribute all principal and undistributed income of Trust to charitable beneficiaries,
which must be charitable organizations described in §§ 170(b)(1)(A), 170(c), 2055(a),
and 2522(a). A has the power to designate the charitable beneficiaries during his life. If
A does not revoke B’s interest and B survives A, B has the power to designate the
charitable beneficiaries. A or B designates a charitable beneficiary and the proportion in
which it will receive the assets of Trust either by delivering a signed statement to the
trustee during his or her lifetime or by including the designation in his or her last will.
Trust includes a list of charitable organizations to which the trustee must distribute any
unappointed portions of the assets should both A and B fail, in whole or in part, to
exercise their powers. If, at the time when the assets are distributed, any designated
PLR-146360-09 3

charitable beneficiary is not an organization described in §§ 170(b)(1)(A), 170(c),
2055(a) and 2522(a), the trustee has sole discretion to choose one or more
organizations that are described in those provisions and determine the proportions in
which to distribute the trust assets to them.

    On Date 2, Court issued a judgment dissolving the marriage of A and B, as of

Date 3. In the judgment, Court expressly reserved jurisdiction for later determination of
all other pending marital issues, which includes the division of the marital property in
Trust. As part of the dissolution proceeding, the character of the property contributed to
Trust as community property or separate property was determined. On Date 4, A and B
finalized a settlement agreement which, in relevant part, resolved what percentage of
Trust was attributable to each party’s contribution to the Trust and thus, what each party
would be entitled to following the divorce. The parties agreed that b percent of the
value of Trust was attributable to A’s contribution and that c percent of the value of Trust
resulted from B’s contribution. Further, pursuant to the settlement agreement, the
parties agreed to divide the assets of Trust into two charitable remainder unitrusts, Trust
A and Trust B. Based upon the percentages agreed upon by the parties, and
authorized by Court on Date 5, Trust A will receive b percent of the assets of Trust and
Trust B will receive c percent of the assets of Trust. The proposed division of Trust in to
Trust A and Trust B will result in the division of Trust corpus and not merely a
distribution of income. Trust represents that it has not given notice of its intent to
terminate under section 507 of the Code. Court’s order incorporated A and B’s
settlement agreement with respect to the division of Trust. The Court’s order is
conditioned upon a favorable ruling from the Internal Revenue Service.

    In general, the terms of Trust A and Trust B are the same as those of Trust, with

the following exceptions. First, each year during their respective lifetime, A and B will
be the sole non-charitable beneficiary of their respective trusts and will be entitled to a
unitrust amount equal to a percent of fair market value of the assets of their respective
trusts. Second, A and B will maintain no interest in each other's trust. Third, upon A's
death, all remaining assets of Trust A will be distributed to charitable beneficiaries
designated by him or named in Trust A. Upon B's death, all remaining assets of Trust B
will be distributed to charitable beneficiaries designated by her or named in Trust B.

  Trust, A, and B have requested rulings on the effect of Trust’s division into Trust

A and Trust B.

LAW AND ANALYSIS

Ruling 1

 Section 664(c) provides, generally, that a charitable remainder unitrust shall be

exempt from federal income tax.
PLR-146360-09 4

    Section 664(d)(2) provides that a charitable remainder unitrust is a trust (A) from

which a fixed percentage (which is not less than 5 percent nor more than 50 percent) of
the net fair market value of its assets, valued annually, is to be paid, not less often than
annually, to one or more persons (at least one of which is not an organization described
in § 170(c) and, in the case of individuals, only to an individual who is living at the time
of the creation of the trust) for a term of years (not in excess of 20 years) or for the life
or lives of such individual or individuals, (B) from which no amount other than the
payments described in § 664(d)(2)(A) and other than qualified gratuitous transfers
described in § 664(d)(2)(C) may be paid to or for the use of any person other than an
organization described in § 170(c), (C) following the termination of the payments
described in § 664(d)(2)(A), the remainder interest in the trust is to be transferred to, or
for the use of, an organization described in § 170(c) or is to be retained by the trust for
such a use or, to the extent the remainder interest is in qualified employer securities (as
defined in § 664(g)(4)), all or part of such securities are to be transferred to an
employee stock ownership plan (as defined in § 4975(e)(7)) in a qualified gratuitous
transfer (as defined by § 664(g)), and (D) with respect to each contribution of property to
the trust, the value (determined under § 7520), of such remainder interest in such
property is at least 10 percent of the net fair market value of such property as of the
date such property is contributed to the trust.

     Therefore, based solely on the facts and the representations submitted, the

division of Trust into Trust A and Trust B will not cause either Trust, Trust A or Trust B
to fail to qualify as charitable remainder trusts under § 664.

Rulings 2

    Section 61(a) provides that, except as otherwise provided, gross income means

all income from whatever source derived. Under § 61(a)(3), gross income includes
gains derived from dealings in property.

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

   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.

   An exchange of property results in the realization of gain or loss under § 1001, if

the properties exchanged are materially different. Cottage Savings Ass'n v.
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Commissioner, 499 U.S. 554 (1991). In defining what constitutes a material difference
for purposes of § 1001(a), the Court stated that "properties are 'different' in the sense
that is 'material' to the Internal Revenue Code so long as their respective possessors
enjoy legal entitlements that are different in kind or extent." Id. at 565.

   Section 1041(a) provides that no gain or loss will be recognized on a transfer of

property from an individual to (or in trust for the benefit of) a spouse, or former spouse if
the transfer is incident to the divorce. Under § 1041(c), a transfer of property is incident
to the divorce if the transfer occurs (1) within one year after the date on which the
marriages ceases, or (2) is related to the cessation of the marriage.

    Section 1.1041-1T(b), Q&A-7, of the temporary Income Tax Regulations provides

that a transfer of property is related to the cessation of the marriage if the transfer is
pursuant to a divorce or separation instrument, as defined in § 71(b)(2), and the transfer
occurs not more than six years after the date on which the marriage ceases. A divorce
or separation instrument includes a modification or amendment to such decree or
instrument.

   In the present case, under the terms of Trust, A has a present unitrust interest to

receive a percent of Trust’s annual asset value. B has a future interest in Trust,
specifically a right to receive the same percentage of the annual asset value of Trust
after A’s death if A dies without revoking her interest. The proposed division of Trust
contemplates the transfer of b percent of the assets of Trust to Trust A and the transfer
of c percent of the assets of Trust to Trust B. A, as the sole present unitrust beneficiary
of Trust A, will see the value of the trust assets from which to compute his annual
unitrust amount decline by c percent. By contrast, B, as the sole present unitrust
beneficiary of Trust B, will immediately possess a unitrust interest with respect to the
remaining c percent of Trust’s assets.

   Based on the facts presented, we conclude that the legal rights and entitlements

that A and B possess before Trust’s division are materially different in kind and extent
from the legal rights and entitlements they will possess after the division. Therefore,
both A and B will realize gain or loss on their transfers of property resulting from the
proposed division under § 1001(a) and § 1.1001-1(a). However, we further conclude
that the transfers by A and B resulting from the proposed division are transfers of
property incident to a divorce within the meaning of § 1041. Therefore, under
§ 1041(a), neither A nor B will recognize gain or loss on the transfers. Under § 1223(2)
of the Code, the taxpayer's holding period for property, however acquired, includes the
period for which the property was held by any other person, if, for the purpose of
determining gain or loss from a sale or exchange, the property has the same basis in
whole or in part in the taxpayer's hands as it would in the hands of the other person.

  Section 1015(a) provides, that if property was acquired by gift after December

31, 1920, the basis shall be the same as it would be in the hands of the donor or the last
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preceding owner by whom it was not acquired by gift, except that if such basis (adjusted
for the period before the date of the gift as provided in § 1016) is greater than the fair
market value of the property at the time of the gift, then for the purpose of determining
loss the basis shall be such fair market value.

   Section 1015(b) provides that, if the property was acquired after December 31,

1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise),
the basis shall be the same as it would be in the hands of the grantor, increased in the
amount of gain or decreased in the amount of loss recognized to the grantor on the
transfer.

  Therefore, based solely on the facts and the representations submitted, Trust A

and Trust B will determine their basis in the assets by reference to the basis of the
assets in the hands of Trust under § 1015(a) or (b), and the holding periods of the
assets held by Trust A and Trust B will include the period for which the assets were held
by Trust.

Rulings 3, 4, and 5

Section 507(a) of the Code provides that, except as provided in Section 507(b), a
private foundation may terminate its private foundation status only under the specific
rules set forth in Section 507(a).

Section 507(b)(2) of the Code provides that in the case of the transfer of assets of any
private foundation to another private foundation pursuant to any liquidation, merger,
redemption, recapitalization, or other adjustment, organization or reorganization, the
transferee foundation shall not be treated as a newly created organization.

Section 507(c) of the Code imposes an excise tax on any private foundation which
voluntarily terminates its private foundation status under section 507(a)(1).

Section 507(d)(2) of the Code provides that the term substantial contributor means any
person who contributed or bequeathed an aggregate amount of more than $5,000 to the
private foundation, if such amount is more than 2 percent of the total contributions and
bequests received by the foundation before the close of the taxable year of the
foundation in which the contribution or bequest is received by the foundation from such
person. In the case of a trust, the term "substantial contributor" also means the creator
of the trust.

Section 4941(d)(1)(A) of the Code provides that the term “self-dealing” includes any
direct or indirect sale or exchange, or leasing, between a private foundation and a
disqualified person.
PLR-146360-09 7

Section 4941(d)(1)(E) of the Code provides that the term “self-dealing” includes any
direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the
income or assets of a private foundation.

Section 4945 of the Code imposes an excise tax on each taxable expenditure described
in section 4945(d) made by a private foundation.

Section 4945(d) of the Code defines the term “taxable expenditure” to include amounts
paid or incurred by a private foundation for certain activities, for a purpose other than
one specified in section 170(c)(2)(B), or as a grant to certain organizations unless the
private foundation exercises expenditure responsibility with respect to such a grant.

Section 4945(d)(4) of the Code provides that a taxable expenditure includes any
amount paid or incurred by a private foundation as a grant to an organization unless the
private foundation exercises expenditure responsibility with respect to such grant in
accordance with section 4945(h).

Sections 4946(a)(1)(A), (B), and (D) of the Code defines the term “disqualified person”
with respect to a private foundation as including (among others) a substantial
contributor to the private foundation (including the creator of a trust), a foundation
manager (including a trustee), and a member of the family of a substantial contributor or
foundation manager.

Section 4946(a)(2) of the Code provides that “substantial contributor” is defined as the
term is described in section 507(d)(2).

Section 4947(a)(2) of the Code provides that for a split interest charitable trust, sections
507, 508(e), 4941, 4943, 4944, and 4945 apply as if such trust were a private
foundation.

Section 4947(a)(2)(A) of the Code provides that the provisions of Section 4947(a)(2) do
not apply to any amounts payable under the terms of a split interest charitable trust to
income beneficiaries unless a deduction was allowed under sections 170(f)(2)(B),
642(c), 2055(e)(2)(B), or 2522(c)(2)(B).

Section 1.507-1(b)(6) of the Income Tax Regulations (“regulations”) provides, in part,
that if a private foundation transfers all or part of its assets to one or more other private
foundations pursuant to a transfer described in section 507(b)(2) of the Code and
section 1.507-3(c), such transferor foundation will not have terminated its private
foundation status under section 507(a)(1).

Section 1.507-3(a)(3) of the regulations provides, in general, that in the event of a
transfer of assets described in section 507(b)(2) of the Code, any person who is a
substantial contributor (within the meaning of section 507(d)(2)) with respect to the
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transferor foundation shall be treated as a substantial contributor with respect to the
transferee foundation.

Section 1.507-3(a)(7) of the regulations provides, in part, that, except as provided in
section 1.507-3(a)(9), if the transferor has disposed of all of its assets, then during any
period in which the transferor has no assets, sections 4945(d)(4) and (h) of the Code
shall not apply to the transferee or the transferor with respect to any “expenditure
responsibility” grants by the transferor.

Section 1.507-3(a)(9)(i) of the regulations provides that if a private foundation transfers
all of its assets to one or more private foundations which are effectively controlled,
directly or indirectly, by the same person or persons which effectively controlled the
transferor private foundation, for purposes of Chapter 42 (section 4940 et seq.) and part
II of subchapter F of Chapter 1 of the Code (sections 507 through 509) such a
transferee private foundation shall be treated as if it were the transferor private
foundation.

Section 1.507-3(c)(1) of the regulations provides, in pertinent part, that as used in
section 507(b)(2) of the Code, the terms “other adjustment, organization, or
reorganization” include any partial liquidation or any other significant disposition of
assets to one or more private foundations, other than transfers for full and adequate
consideration or distributions out of current income.

Section 1.507-3(c)(2)(ii) of the regulations provides that the term “significant disposition
of assets” means the transfer of twenty-five percent (25%) or more of the fair market
value of the net assets of the foundation at the beginning of the taxable year, which
disposition may be made in a single year or in a series of related dispositions over more
than one year.

Section 1.507-3(d) of the regulations provides that unless a private foundation
voluntarily gives notice pursuant to section 507(a)(1) of the Code, a transfer of assets
described in section 507(b)(2) will not constitute a termination of the transferor’s private
foundation status under section 507(a)(1).

Section 53.4945-5(b)(7) of the foundation regulations confirms that sections 1.507-
3(a)(7), 1.507-3(a)(8)(ii)(f), and 1.507-3(a)(9) of the regulations govern the extent to
which the expenditure responsibility rules contained in sections 4945(d)(4) and (h) of
the Code apply to transfers of assets described in section 507(b)(2).

Section 53.4945-6(b)(2) of the foundation regulations provides that expenditures for
unreasonable administrative expenses, including compensation, consultant fees, and
other fees for services will ordinarily be taxable expenditures under section 4945(d)(5)
of the Code.
PLR-146360-09 9

Section 53.4945-6(c)(3) of the foundation regulations states that a transfer of assets
described in section 1.507-3(c)(1) of the regulations applies only to organizations
described in section 501(c)(3) or “treated as so described under section 4947(a)(1).”

Section 53.4947-1(c)(1)(ii) of the foundation regulations provides that a split-interest
trust is subject to the provisions of sections 507 (except as provided in section 53.4947-
1(e)), 508(e) (to the extent applicable to a split-interest trust), 4941, 4943 (except as
provided in section 4947(b)(3)), 4944 (except as provided in section 4947(b)(3)), and
4945 of the Code in the same manner as if such trust were a private foundation.

Section 53.4947-1(c)(2)(i) of the foundation regulations provides, in general, that under
section 4947(a)(2)(A), section 4941 does not apply to any amounts payable under the
terms of a split interest trust to income beneficiaries unless a deduction was allowed
under sections 170(f)(2)(B), 642(c), 2055(e)(2)(B), or 2522(c)(2)(B) of the Code with
respect to the income interest of any such beneficiary.

Rev. Rul. 2002-28, 2002-1 I.R.B. 941, provides, in part, that, once a private foundation
distributes all of its assets to one or more other effectively controlled private foundations
under a plan of dissolution, the obligation to exercise expenditure responsibility under
section 4945(h) of the Code with respect to the transfers made by the transferor
foundation passes from that foundation to the transferee foundation(s).

Rev. Rul. 2008-41, 2008-30 I.R.B. 170, provides guidance regarding Sections 507,
4941, 4945, and 4947 of the Code when a charitable remainder trust (“CRT”) is divided
into two or more separate and equal CRTs.

As a split-interest trust, Trust is treated as if it were a private foundation under section
4947(a)(2) of the Code. Thus, except as provided in section 4947(a)(2)(A) and section
53.4947-1(c)(2)(i) of the foundation regulations, it is subject to the termination provisions
of section 507, as well as the provisions of sections 4941 and 4945. Under section
1.507-3(c) of the regulations, the proposed transfer of all of Trust’s assets to Trust A
and Trust B will constitute a significant disposition of Trust’s assets because the transfer
is greater than twenty-five percent (25%) of Trust’s assets. The proposed transfers will
not be for full and adequate consideration and will not be distributions out of current
income. The transferees will both be treated as private foundations with respect to
section 507 pursuant to section 4947(a)(2). Therefore, the proposed transfers are
described in section 507(b)(2). A transfer of assets described in section 507(b)(2) does
not constitute a termination of the transferor’s private foundation status under section
507(a)(1) unless the transferor voluntarily gives notice pursuant to section 507(a)(1).
Since Trust has not given notice of its intent to terminate, it retains its private foundation
status and the termination tax imposed by section 507(c) will not apply. Accordingly,
the division and distribution of Trust into Trust A and Trust B do not terminate Trust’s
status under section 507(a)(1) of the Code as a trust described in and subject to the
PLR-146360-09 10

private foundation provisions of section 4947(a)(2), and do not result in the imposition of
an excise tax under section 507(c).

As a charitable remainder unitrust under section 664(d)(2) of the Code, Trust is a split-
interest trust described in section 4947(a)(2) and treated as a private foundation for
purposes of section 4941. Section 4941 imposes an excise tax on acts of self-dealing.
A and B are disqualified persons with respect to Trust under section 4946 as substantial
contributors to Trust. However, the only interest A and B have in Trust is the right to the
payment of the unitrust amount. After division of Trust, the total unitrust amount
payment remains the same during the lives of A and B. Since the transferee trusts do
not have survivorship provisions, when A or B dies, the remainder of each of their trusts
is immediately distributed to qualified charities. Section 4947(a)(2)(A) and section
53.4947-1(c)(2) of the foundation regulations provide that section 4941 does not apply
to any amounts payable under the terms of a split interest trust to income beneficiaries
unless a deduction was allowed under sections 170(f)(2)(B), 642(c), 2055(e)(2)(B), or
2522(c)(2)(B) with respect to the income interest of any such beneficiary. Based on the
representation that no such deduction was allowed, payments to A from Trust A and to
B from Trust B as income beneficiaries will not be acts of self-dealing under section
4941 of the Code.

As a charitable remainder unitrust under section 664(d)(2) of the Code, Trust is a split-
interest trust described in section 4947(a)(2) and treated as a private foundation for
purposes of section 4945. Thus, an excise tax is imposed on taxable expenditures,
including any amount paid or incurred by a private foundation for a non-charitable
purpose. Trust A and Trust B, as charitable remainder unitrusts under section
664(d)(2) are also treated as private foundations for purposes of section 4945 under the
provisions of section 4947(a)(2). However, pursuant to section 4947(a)(2)(A), amounts
payable to income beneficiaries under the terms of such a CRT, are not subject to the
provisions of section 4945 unless a deduction was allowed for those amounts under
sections 170(f)(2)(B), 2055(e)(2)(B), or 2522(e)(2)(B). Based on the representation that
no such deduction was allowed, payments to A from Trust A and to B from Trust B as
income beneficiaries will not be taxable expenditures.

Trust will dispose of all of its assets through the above-described transfers to Trust A
and Trust B. Since its creation, Trust has made only distributions to income
beneficiaries. Trust has made no prior distributions for which expenditure responsibility
is required. It follows that Trust does not have any expenditure responsibility under
sections 4945(d)(4) and (h) of the Code pursuant to sections 1.507-3(a)(9) or 1.507-
3(a)(7) of the regulations, which are made applicable to the expenditure responsibility
rules for section 507(b)(2) transfers by section 53.4945-5(b)(7) of the foundation
regulations. See also, Rev. Rul. 2002-28 and 2008-41, supra. The transferee trusts are
not required to exercise expenditure responsibility with regard to the subject transfers.
PLR-146360-09 11

Section 53.4945-6(b)(2) of the foundation regulations provides that expenditures for
unreasonable administrative expenses will ordinarily be taxable expenditures under
section 4945(d)(5). While the terms of Trust provide that reasonable administrative and
legal costs may be paid by Trust, it is represented that all legal and other expenses and
costs incident to the division of Trust are to be paid by A or B. Thus, Trust principal
remains preserved for charitable interests and the administrative expenses of the
proposed division do not constitute taxable expenditures. Accordingly, the division of
Trust and the distribution of its assets to Trust A and Trust B do not constitute taxable
expenditures under section 4945 of the Code.

Rulings 6 and 7

   Section 2033 provides that the value of the gross estate shall include the value of

all property to the extent of the interest therein of the decedent at the time of his death.

   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 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 20.2036-1(c) of the Estate Tax Regulations provides that if the decedent

retained or reserved an interest or right with respect to all of the property transferred by
him, the amount to be included in his gross estate under § 2036 is the value of the
entire property, less only the value of any outstanding income interest which is not
subject to the decedent's interest or right and which is actually being enjoyed by another
person at the time of the decedent's death. If the decedent retained or reserved an
interest or right with respect to a part only of the property transferred by him, the amount
to be included in his gross estate under § 2036 is only a corresponding proportion of the
amount described in the preceding sentence.

    Section 2055(a) provides, for purposes of the tax imposed by § 2001, the value

of the taxable estate shall be determined by deducting from the value of the gross
estate the amount of all transfers for charitable purposes.

   Section 20.2055-1(a) provides that a deduction is allowed under § 2055(a) from

the gross estate of a decedent who was a citizen or resident of the United States at the
time of his death for the value of property included in the decedent's gross estate and
transferred by the decedent during his lifetime or by will for charitable purposes.
PLR-146360-09 12

   Section 2055(e)(2) provides, in relevant part, that where an interest in property

(other than an interest described in § 170(f)(3)(B)) passes or has passed from the
decedent to a person, or for a use, described in § 2055(a), and an interest (other than
an interest which is extinguished upon the decedent's death) in the same property
passes or has passed (for less than an adequate and full consideration in money or
money's worth) from the decedent to a person, or for a use, not described in § 2055(a),
no deduction shall be allowed under this section for the interest which passes or has
passed to the person, or for the use, described in § 2055(a) unless, in the case of a
remainder interest, such interest is in a trust which is a charitable remainder unitrust
(described in § 664).

    In the present case, A and B entered into a settlement agreement in which, in

relevant part, the parties’ agreed upon what percentage of the value of Trust resulted
from the contribution of each and as a result A and B were each entitled to after divorce.
Further, pursuant to the settlement agreement, the parties’ agreed to divide Trust into
Trust A and Trust B, with each trust receiving the agreed upon percentage of assets
from Trust. Pursuant to the parties’ agreement, Trust A will receive b percent of Trust’s
assets and Trust B will receive c percent of Trust’s assets. Trust A benefits A and
charitable organizations designated by A. Trust B benefits B and charitable
organizations designated by B. The transfers from Trust to Trust A and Trust B are
being made pursuant to the parties’ settlement agreement, Court’s conditional order,
and Date 2 judgment which dissolved A and B’s marriage. Accordingly, we conclude
that, for purposes of § 2036, A will be treated as having transferred the property
transferred to Trust A and B will be treated as having transferred the property
transferred to Trust B.

   A and B each retained the right to receive unitrust payments for life from their

respective trusts as well as the lifetime power over his or her respective trust to
substitute the charitable beneficiaries designated in the trust instrument with one or
more other charitable organizations described in §§ 170(b)(1)(A), 170(c), 2055(a), and
2522(a). Accordingly, based on the facts submitted and representations made, we
rule that upon the death of A, if A retains the right to receive unitrust payments for life
and the power to substitute the charitable beneficiaries designated in Trust A, the value
of the assets in Trust A will be includible in A’s gross estate under § 2036, and A’s
estate will be entitled to an estate tax charitable deduction under § 2055 for the value of
the assets passing to the charitable beneficiaries of Trust A. Further, we rule that upon
the death of B, if B retains the right to receive unitrust payments for life and the power to
substitute the charitable beneficiaries designated in Trust B, the value of the assets in
Trust B will be includible in B’s gross estate under § 2036, and B’s estate will be entitled
to an estate tax charitable deduction under § 2055 for the value of the assets passing to
the charitable beneficiaries of Trust B.

Ruling 8
PLR-146360-09 13

  Section 2501(a) imposes a gift tax for each calendar year on the transfer of

property by gift during the calendar year.

   Section 2511 provides that the gift tax shall apply whether the transfer is in trust

or otherwise, whether the gift is direct or indirect, and whether the property is real or
personal, tangible or intangible.

   Section 2512(b) provides that where property is transferred for less than an

adequate and full consideration in money or money's worth, the amount by which the
value of the property exceeded the value of the consideration shall be deemed a gift.

    Section 2516 provides that where a husband and wife enter into a written

agreement relative to their marital and property rights and divorce occurs within the 3-
year period beginning on the date 1 year before such agreement is entered into
(whether or not such agreement is approved by the divorce decree), any transfers of
property or interests in property made pursuant to such agreement (1) to either spouse
in settlement of his or her marital or property rights, (2) to provide a reasonable
allowance for the support of issue of the marriage during minority, shall be deemed to
be transfers made for a full and adequate consideration in money or money's worth.

   In the present case, the requirements of § 2516 are not satisfied because A and

B did not enter into a written agreement relative to their marital and property rights in
Trust within the time prescribed in § 2516. However, in the absence of the applicability
of § 2516, the principles presented in § 25.2512-8 of the Gift Tax Regulations and
Harris v. Commissioner, 340 U.S. 106 (1950) must be considered in determining the gift
tax consequences of the transaction. See Rev. Rul. 79-118, 1979-1 C. B. 315.

   Section 25.2512-8 states the general rule that the relinquishment of marital rights

in a spouse’s property does not constitute a consideration in money or money’s worth.
However, the rule in Harris provides an exception to this general rule. In Harris, the
U.S. Supreme Court held that if a transfer in exchange for a spouse’s marital rights is
effectuated pursuant to a divorce decree, then the exchange is not subject to gift tax.

    In the present case, pursuant to Date 2 judgment, which dissolved A and B’s

marriage, Court retained jurisdiction over the division of the marital property in Trust.
Subsequently, A and B entered into a settlement agreement in which they agreed upon
what percentage of marital property in Trust each party was entitled to following the
divorce and they also agreed to divide Trust into Trust A and Trust B. Based upon the
percentages agreed upon by the parties, Trust A, which benefits A and charitable
beneficiaries, will receive b percent of Trust’s assets and Trust B, which benefits B and
charitable beneficiaries, will receive c percent of Trust’s assets. The parties petitioned
Court for an order approving the division of Trust, the modification of Trust, and the
distribution of the assets of Trust to Trust A and Trust B, in accordance with the parties’
settlement agreement. Court issued a conditional order approving the division,
PLR-146360-09 14

modification, and distribution of Trust. Thus, the transfer of the assets of Trust into
Trust A and Trust B will be effectuated by Court’s conditional order, which was issued
pursuant to Date 2 judgment, in which Court retained jurisdiction over any issues
relating to A and B’s divorce. Therefore, the requirements under Harris are satisfied in
this case. Accordingly, based on the facts submitted and representations made, we rule
that the division of Trust and the distribution of Trust assets to Trust A and Trust B will
not result in any taxable gifts by A or B under § 2501.

   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. Furthermore, the estate tax rulings in this letter apply only to
the extent that the relevant sections of the Internal Revenue Code are in effect during
the period at issue.

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

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

  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 a power of attorney on file with this office, a copy of this letter is

being sent to Trust's authorized representative.

                                    Sincerely,

                                       /s/

                                    Faith P. Colson
                                    Senior Counsel, Branch 1
                                    Associate Chief Counsel
                                    (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes