Trust and life insurance rulings for an irrevocable trust

Plain-English summary

A taxpayer requested rulings on two irrevocable trusts, including a trust that would acquire a life insurance policy from another trust. The IRS addressed grantor trust treatment, beneficiary withdrawal rights, the transfer-for-value rules for life insurance, incidents of ownership, and estate inclusion. It ruled favorably on the requested treatment, subject to the conditions and factual limitations stated in the letter. In particular, the IRS concluded that the power to substitute equivalent-value property would not by itself create incidents of ownership or cause the trust corpus to be included in the taxpayer's gross estate.

Ruling snapshot

• Question: How would the proposed trust structure and life insurance transaction be treated for income, transfer, and estate tax purposes?
• Outcome: Approved, subject to stated conditions and factual limitations.
• Key authorities: IRC §§ 101, 2033, 2036, 2038, 2042, 671, 674, 675, 678, and 2001.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201235006 Third Party Communication: None
Release Date: 8/31/2012 Date of Communication: Not Applicable
Index Number: 101.00-00, 675.00-00,
2042.00-00, 2036.00-00, Person To Contact:
2038.00-00 -------------------, ID No. ----------
Telephone Number:
-------------------------- ---------------------
-------------- Refer Reply To:
--------------------------- CC:PSI:4
PLR-136336-11
Date: FEBRUARY 27, 2012

RE: ----------------------------------------------

Legend:

Taxpayer - ------------------------------------------------
Grantors - -------------------------------
Trust A - ------------------------------------------------------------

Trust B - ------------------------
Date - --------------------------
State - --------
State Statutes 1-12 - --------------------------------------------------------------------------------------------------
State Statute 8 - ----------------------------------------------------------------------------

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

  This letter responds to your letter dated August 26, 2011, requesting rulings

under §§ 101, 675, 2033, 2036, 2038, and 2042 of the Internal Revenue Code.

    On Date, Grantors established Trust A, an irrevocable trust, for the primary

benefit of Taxpayer. Taxpayer’s brother was named initial trustee of Trust A. During
the life of Taxpayer, the trustee has discretion to distribute trust assets to Taxpayer and
Taxpayer’s descendents for their support, maintenance, health, and education in a
reasonable standard of living. Trust A will terminate upon the death of Taxpayer and
the remaining trust assets are to be distributed to Taxpayer’s descendents. Taxpayer
has not represented that Taxpayer or any other individual is treated as the owner of the
Trust A under subpart E of part 1 of subchapter J of the Code.

  Taxpayer established Trust B, an irrevocable trust, for the benefit of Taxpayer’s

descendents. Taxpayer has one daughter and one granddaughter. Daughter is the
PLR-136336-11 2

named trustee (Trustee) of Trust B. Taxpayer is prohibited from serving as a trustee.

    Article III(A)(1) of Trust B provides that during Taxpayer’s life, the trustee

(excluding any Insured Trustee) has discretion to distribute to Taxpayer’s descendents
net income and principal for their health, education, maintenance and support in their
accustomed manner of living. Article III(A)(2) provides that the trustee (excluding any
Trustee that is related to or subordinate to the Taxpayer and any Interested or Insured
Trustee) may also distribute to Taxpayer’s descendents so much of the net income
and/or principal of the trust as the trustee may from time to time select, for any purpose.
Article III(B) provides that upon Taxpayer’s death, the remaining trust estate is to be
divided into per stirpital shares for Taxpayer’s living descendents and held in further
trust.

     Article VIII provides that the trustee may acquire and retain life insurance on the

life of any individual (or the joint lives of any individuals) in which any beneficiary has an
insurable interest. The trustee, excluding any trustee related to or subordinate to the
Taxpayer and any Insured Trustee (who shall not participate in any decision involving a
life insurance policy on such trustee’s life or its proceeds), shall have all rights of an
owner over life insurance policies assigned to or otherwise owned by Trust B.

   Article IX provides the maximum duration of trust is the longest period that

property may be held in trust under the applicable rules governing perpetuities, vesting,
accumulations, the suspension of alienation and the like (including any applicable
period in gross such as twenty-one (21) years or ninety (90) years.)

    Article X provides that the trustee shall not reimburse Taxpayer from assets of

the trust for the Taxpayer’s income tax on the amount (if any) of the gross income of the
trust that is reportable directly on the Taxpayer’s return under § 671.

   Article XIII provides that Trust B is irrevocable. Taxpayer has no right to alter or

amend Trust B in any way. None of the income or principal from Trust B may be
payable to Taxpayer or be used to discharge any obligation of Taxpayer, Taxpayer’s
creditors, Taxpayer’s estate, or the creditors of Taxpayer’s estate.

    Article XV provides, in part, that a trustee may appoint successor trustees. No

successor trustee or co-trustee appointed by a beneficiary shall be a person or entity
that is related or subordinate to such beneficiary within the meaning of § 672(c) and the
regulations thereunder.

     Article XVI(F)(1) provides that the term “Interested Trustee” means a person who

is, or in the future may be, eligible to receive income or principal pursuant to the terms
of the trust. If all trustees serving under the terms of the trust are Interested Trustees, a
court may appoint a special trustee to serve and exercise the powers of a Disinterested
Trustee, i.e., a person who is not an Interested Trustee.
PLR-136336-11 3

    Article XVI(F)(2) provides that the term “Insured Trustee” means a Trustee who is

the insured (or one of the insured) under a policy of life insurance held in the trust. No
Insured Trustee may participate in the exercise of any incident of ownership over any
policy that insures the life of such Trustee.

    Article XVI(F)(12) provides that the trustee is prohibited from making, voting on or

otherwise participating in any discretionary distribution of income or principal from a
trust that would discharge or substitute for a legal obligation of that trustee, including the
obligation to support a beneficiary of the trust.

    Article XVI(H) provides that the grantor shall have no right, either alone or in

conjunction with any other person(s) to revoke, amend or modify this agreement or any
trust created by it.

   Article XVII provides that the trust shall be governed by the laws of State.

   Article XVIII grants a right of withdrawal to each of Taxpayer’s children and

grandchildren limited by the gift tax annual exclusion in effect at the time of each
contribution and subject to lapse at the end of each calendar year, or if earlier, thirty
(30) days after the contribution to which it relates in an amount equal to the greater of
the sums referred to in § 2514(e).

   Article XIX provides that Taxpayer has the power, exercisable at any time and

from time to time in a nonfiduciary capacity (within the meaning of § 675(4)), without the
approval or consent of any person in a fiduciary capacity within the meaning of
§ 675(4), to acquire or reacquire any asset or assets forming part of the trust estate by
substituting other property of an equivalent value. Taxpayer shall exercise this power to
substitute property by certifying in writing that the substituted property and the trust
property for which it is substituted are of equivalent value, and the Trustee shall have a
fiduciary obligation to ensure Taxpayer’s compliance with the terms of this power by
being satisfied in advance of completing the substitution that the properties acquired
and substituted are in fact of equivalent value, within the meaning of Rev. Rul. 2008-22.
This power cannot be exercised in a manner that can shift benefits among the trust
beneficiaries.

      Trust A owns a life insurance policy on the life of Taxpayer. Trust A intends to

sell its interest in the policy to Trust B for an amount equal to the value of Trust A’s
interest in the policy as determined under § 25.2512-6(a) of the Gift Tax Regulations.
The trustee of Trust A will obtain from the issuing insurance company the interpolated
terminal insurance reserve value for the policy as of the date of sale and use that
amount, plus the proportionate amount of premium last paid before the sale that covers
the premium extending beyond the date of sale as the purchase price. Taxpayer will
fund Trust B with the amount necessary to purchase the policy. The trustee of Trust B
PLR-136336-11 4

will be designated as the beneficiary of the policy. Trust B may incur debt or policy
loans as part of the administration of Trust B.

   State Statutes 1-12 invokes the prudent investor rules on trustees.

    State Statute 8 provides that if a trust has two or more beneficiaries, the trustee

shall act impartially in investing and managing the trust assets, taking into account any
differing interests of the beneficiaries.

   You request the following rulings:

1. Trust B will be treated as a grantor trust with respect to Taxpayer as a result of the
   application of either/both § 674 or/and § 675.

2. Taxpayer’s daughter and granddaughter will not be treated as grantors of Trust B
   during the life of Taxpayer as a result of any withdrawal right they may have with
   respect to contributions made to Trust B.

3. The proposed sale to Trust B of the policy is either not a transfer for valuable
   consideration under § 101(a)(2) or, in the alternative, will satisfy the requirements of
   § 101(a)(2)(B), and therefore, will not affect the application of § 101(a)(1) to policy
   proceeds that Trust B will receive under the insurance contract it proposes to
   purchase from the Trust A.

4. The death of Taxpayer will not be considered as a transfer that could result in a
   transfer for valuable consideration of the life insurance contract under the provisions
   of § 101(a)(2), and as a result, under § 101(a)(1) the proceeds from the life
   insurance contract payable by reason of Taxpayer’s death will not be included in the
   gross income of Trust B even if the life insurance contract is subject to debt or policy
   loans at the death of Taxpayer.

5. The power to reacquire the corpus of Trust B by substituting other property of an
   equivalent value will not result in Taxpayer possessing incidents of ownership under
   § 2042(2) in the policy

6. No portion of the principal of Trust B will be included in Taxpayer’s gross estate
   under §§ 2033, 2036, and 2038 at the death of Taxpayer.

Ruling Requests 1 and 2:

    Section 671 provides in part that where it is specified in subpart E of subchapter

J that the grantor or another person shall be treated as the owner of any portion of a
trust, there shall then be included in computing the taxable income and credits of the
grantor or the other person those items of income, deductions, and credits against tax of
PLR-136336-11 5

the trust which are attributable to that portion of the trust to the extent that such items
would be taken into account under this chapter in computing taxable income or credits
against the tax of an individual.

   Section 672(a) defines a nonadverse party as any person having a substantial

beneficial interest in the trust which would be adversely affected by the exercise or
nonexercise of the power which he possesses respecting the trust. A person having a
general power of appointment over the trust property shall be deemed to have a
beneficial interest in the trust.

   Section 674(a) provides that the grantor shall be treated as the owner of any

portion of a trust in respect of which the beneficial enjoyment of the corpus or the
income therefrom is subject to a power of disposition, exercisable by the grantor or a
nonadverse party, or both, without the approval or consent of any adverse party.

   Section 675(4) provides that the grantor shall be treated as the owner of any

portion of a trust in respect of which a power of administration is exercisable in a
nonfiduciary capacity by any person without the approval or consent of any person in a
fiduciary capacity.

   Section 675(4)(C) provides that the term “power of administration” means,

among other things, a power to reacquire the trust corpus by substituting other property
of an equivalent value.

   Treas. Reg. § 1.675-1(b)(4)(iii) of the Income Tax Regulations (flush language)

provides that if a power is not exercisable by a person as trustee, the determination of
whether the power is exercisable in a fiduciary or a nonfiduciary capacity depends on all
the terms of the trust and the circumstances surrounding its creation and administration.

    Section 678(a) provides that a person other than the grantor shall be treated as

the owner of any portion of a trust with respect to which (1) such person has a power
exercisable solely by himself to vest the corpus or the income therefrom in himself, or
(2) the person has previously partially released or otherwise modified such a power and
after the release or modification retains such control as would cause a grantor to be
treated as the owner of such portion of the trust within the principles of §§ 671 through
677.

  Section 678(b) provides that § 678(a) shall not apply with respect to a power over

income, as originally granted or thereafter modified, if the grantor of the trust is
otherwise treated as the owner under the provisions of subpart E other than § 678.

   The Trust B agreement authorizes Taxpayer to reacquire trust property by

substituting other property of an equivalent value. This general power of administration
may be sufficient under § 675(4) to treat Taxpayer as the owner of the trust property if
PLR-136336-11 6

the power is exercisable in a nonfiduciary capacity. The circumstances surrounding the
administration of the trust determine whether the grantor holds the power of
administration in a nonfiduciary capacity. This is question of fact, the determination of
which must be deferred until the federal income tax returns of the parties involved have
been examined by the Internal Revenue Service office where the returns are filed.
Therefore, we cannot determine at this time whether the grantor would be treated as the
owner of Trust B under § 675(4). Provided that the circumstances indicate that the
grantor holds a power of administration exercisable in a nonfiduciary capacity, the
grantor will be treated as the owner of Trust B under § 675(4).

   Under § 678(a), the withdrawal rights granted to the beneficiaries result in the

treatment of the beneficiaries as owners of the portions of Trust B subject to their
respective withdrawal powers, unless as provided in § 678(b), the grantor is treated as
the owner. If it is determined that Trust B is a grantor trust under § 675(4) with respect
to Taxpayer, then it is a grantor trust in its entirety with respect to Taxpayer
notwithstanding the withdrawal rights held by the beneficiaries that would otherwise
make them owners under § 678(a).

Ruling Requests 3 and 4:

  Section 101(a)(1) provides that, except as otherwise provided in § 101(a)(2),

101(d) and 101(f), gross income does not include amounts received under a life
insurance contract if such amounts are paid by reason of the death of the insured.

   Section 101(a)(2) provides, generally, if a life insurance contract, or any interest

therein is transferred for valuable consideration, the exclusion from gross income
provided by § 101(a)(1) is limited to an amount equal to the sum of the actual value of
the consideration and the premiums and other amounts subsequently paid by the
transferee.

   The term “transfer for valuable consideration” is defined for purposes of

§ 101(a)(1) in § 1.101-1(b)(4) as any absolute transfer for value of a right to receive all
or part of the proceeds of a life insurance policy.

    An exception to the general rule of § 101(a)(2) is provided in § 101(a)(2)(B) when

the contract is transferred to the insured, to a partner of the insured, to a partnership in
which the insured is a partner, or to a corporation in which the insured is a shareholder
or officer. In these cases, the general rule of § 101(a)(2) will not affect the application of
§ 101(a)(1) to the amount received by the beneficiaries.

   A “grantor trust” is generally disregarded for federal tax purposes.

Rev. Rul. 85-13, 1985-1 C.B. 184, provides that if a grantor is treated as the owner of
an entire trust, the grantor is considered to be the owner of the trust’s assets for federal
income tax purposes. Under Rev. Rul. 85-13, a transaction cannot be recognized as a
PLR-136336-11 7

sale or exchange for federal tax purposes if the same person is treated as owning the
purported consideration both before and after the transaction.

    Rev. Rul. 2007-13, 2007-11 C.B. 684, addresses two different factual situations

in which a life insurance contract is transferred between trusts. In Situation 1, a trust
(TR1) acquired a life insurance contract in exchange for cash from a separate trust
(TR2). TR1 and TR2 were both grantor trusts, which are treated as wholly owned by
the grantor under subpart E of part 1 of subchapter J of the Code. Grantor was the
insured under the life insurance policy subject to the transfer. Rev. Rul. 2007-13 holds
that in Situation 1 that the grantor is treated for federal income tax purposes as the
owner of the contract for applying the transfer for value limitations of § 101(a)(2).
Therefore, the transfer of the life insurance contract between the two grantor trusts that
are treated as owned by the same grantor is not a transfer for valuable consideration
under § 101(a)(2).

    In Situation 2 of Rev. Rul. 2007-13, a trust (TR1) acquired a life insurance policy

in exchange for cash from a separate trust (TR2). TR1 was a grantor trust, which is
treated as wholly owned by the grantor under subpart E of part I of subchapter J, but
TR2 was not a grantor trust. Grantor was the insured under the life insurance policy
subject to the transfer. Because the grantor is treated as the owner of all of TR1 but not
TR2 for federal income tax purposes, grantor is treated as the owner of the cash (but
not the life insurance contract) before the exchange and as the owner of the life
insurance contract (but not the cash) after the exchange. Accordingly, the transfer of
the life insurance contract was made for valuable consideration within the meaning of
§ 101(a)(2). Nevertheless, the transfer for value limitations of § 101(a)(2) do not apply.
The transfer of the life insurance contract to a grantor trust that is treated as wholly
owned by the insured is a transfer to the insured within the meaning of § 101(a)(2)(B)
and therefore is excepted from the transfer for value limitations of § 101(a)(2).

    In the present situation, Taxpayer will be the grantor of Trust B. Trust A owns the

life insurance policy on the life of Taxpayer that Taxpayer plans to acquire for Trust B.
Clearly, the present situation is unlike Situation 1 in Rev. Rul. 2007-13 because the
grantors of the respective trusts are not the same grantors. Therefore, based upon the
facts provided and representations made, we conclude that there has been a transfer of
the life insurance contract for valuable consideration within the meaning of § 101(a)(2).
However, the transfer for value limitations of § 101(a)(2) do not apply because the
transfer to Taxpayer is a transfer to the insured within the meaning of § 101(a)(2)(B).

    According to the facts, the trustee of Trust B will be the beneficiary of the life

insurance policy that will be owned by the trust on the life of Taxpayer. We assume that
when Taxpayer dies the proceeds of the life insurance policy will be paid to the trustee
beneficiary. Under § 101(a)(1), gross income does not include amounts received under
the life insurance contract if such amounts are paid by reason of the death of the
insured. Therefore, based upon the facts provided and the representations made, we
PLR-136336-11 8

conclude that the death of Taxpayer will not be considered a transfer that could result in
a transfer for valuable consideration under the provisions and, accordingly, under
§ 101(a)(1) the proceeds from the life insurance contract payable by the reason of
Taxpayer’s death will not be included in the gross income of Trust B.

Ruling Request 5:

   Section 2042(2) provides that the value of the decedent's gross estate includes

the proceeds of all life insurance policies on the decedent's life receivable by
beneficiaries other than the decedent's executor to the extent that the decedent
possessed at death any incidents of ownership, exercisable either alone or in
conjunction with any other person.

   Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that the term

“incidents of ownership” is not limited in its meaning to ownership of the policy in the
technical legal sense. Generally, the term has reference to the right of the insured or
the insured's estate to the economic benefits of the policy. It includes the power to
change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke
an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan
against the surrender value of the policy.

    Rev. Rul. 2011-28, 2011-48 C.B. 830, considers whether a grantor’s retention of

the power, exercisable in a nonfiduciary capacity, to acquire an insurance policy held by
a trust by substituting other assets of equivalent value will cause the value of the
insurance policy to be includible in the grantor’s gross estate under § 2042. In the
ruling, the grantor, D, established and funded a trust with cash. Thereafter, the trust
purchased a life insurance policy on D’s life. The trust is an irrevocable trust for the
benefit of D’s descendants. The proceeds of the policy are payable to Trust upon D’s
death. T is the trustee of Trust and the terms of Trust prohibit D from serving as trustee
of Trust. D cannot revoke, alter, amend, or terminate the trust. The governing
instrument of the trust provides D with the power, exercisable at any time, to acquire
any property held in the trust by substituting other property of equivalent value. The
trust instrument provides that the power is exercisable by D in a nonfiduciary capacity,
without the approval or consent of any person acting in a fiduciary capacity. To
exercise the power of substitution, D must certify in writing that the substituted property
and the trust property for which it is substituted are of equivalent value. In addition,
under local law, the trustee has a fiduciary obligation to ensure that the property that D
seeks to substitute is equivalent in value to the property distributed to D. Moreover, if a
trust has two or more beneficiaries, local law requires the trustee to act impartially in
investing and managing the trust assets, taking into account any differing interests of
the beneficiaries. Finally, under local law and without restriction in the trust instrument,
the trustee has the discretionary power to acquire, invest, reinvest, exchange, sell,
convey, control, divide, partition, and manage the trust property in accordance with the
standards provided by law.
PLR-136336-11 9

   The Revenue Ruling compares the facts in the ruling to the facts in Rev. Rul. 84-

179, 1984-2 C.B. 195, Rev. Rul. 2008-22, 2008-16 C.B. 796, and Estate of Jordahl v.
Comm’r, 65 T.C. 92 (1975), acq. in result, 1977-2 C.B. 1. The Revenue Ruling states
that the facts are similar to the situation in Rev. Rul. 2008-22, where the grantor’s power
of substitution was exercisable only in a nonfiduciary capacity. The Revenue Ruling
concludes that D’s retained power to substitute assets of equivalent value for a life
insurance policy held by the trust is not, by itself, an incident of ownership under § 2042,
provided the requirements under local law or the trust instrument, described in the
preceding paragraph, are satisfied.

    The facts in this case are similar to the facts in Rev. Rul. 2011-28. Under the

terms of Trust B, Taxpayer’s power to substitute assets is held in a nonfiduciary
capacity. The terms of Trust B prohibit Taxpayer from serving as trustee of the trust.
Taxpayer does not the power to revoke, alter, amend or terminate the trust. Under the
terms of the trust, the assets that Taxpayer may transfer into the trust must be
equivalent in value to the insurance policy that Taxpayer will receive. Under the terms
of Trust B, Trustee has a fiduciary obligation to ensure that the assets substituted are of
equivalent value. Accordingly, as in the revenue ruling, Taxpayer cannot exercise the
power to substitute assets in a manner that will reduce the value of the trust corpus or
increase Taxpayer’s net worth. Further, under the terms of Trust B and under Statutes
1-12, Trustee has the ability to reinvest the assets and Trustee has a duty of impartiality
to the trust beneficiaries. Accordingly, as in the revenue ruling, there will be no shifting
of benefits between or among the beneficiaries that could otherwise result from a
substitution of property by Taxpayer.

  Therefore, based upon the facts provided and representations made, we

conclude that Taxpayer’s power to reacquire the corpus of Trust B by substituting other
property of an equivalent value will not result in Taxpayer possessing incidents of
ownership under § 2042(2) in the policy.

Ruling Request 6:

 Section 2001 imposes a tax on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States.

   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 the case of a bona fide sale for an adequate and full
consideration in money or money's worth), by trust or otherwise, under which he has
retained for his life or for any period not ascertainable without reference to his death or
PLR-136336-11 10

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 from the property.

   Section 2036(b) provides, in part, that (1) for purposes of § 2036(a)(1), the

retention of the right to vote (directly or indirectly) shares of stock of a controlled
corporation shall be considered to be a retention of the enjoyment of transferred
property and (2) for purposes of § 2036(b)(1), a corporation shall be treated as a
controlled corporation if, at any time after the transfer of the property and during the
3-year period ending on the date of the decedent's death, the decedent owned (with the
application of § 318), or had the right (either alone or in conjunction with any person) to
vote, stock possessing at least 20 percent of the total combined voting power of all
classes of stock.

   Section 2038(a)(1) provides that the value of the gross estate shall include the

value of all property to the extent of any interest therein of which the decedent has at
any time made a transfer (except in case of a bona fide sale for 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, or terminate, either by the decedent alone or by the decedent in conjunction with
any other person, to alter, amend, or revoke, or where the decedent relinquished any
such power during the 3-year period ending on the date of the decedent's death.

   Rev. Rul. 95-58, 1995-2 C.B. 191, modified Rev. Rul. 77-182, 1977-1 C.B. 273.

Rev. Rul. 77-182 previously concluded that a decedent’s power to appoint a corporate
trustee only in the event of the resignation or removal by judicial process of the original
trustee did not amount to a power to remove the original trustee that would have
endowed the decedent with the trustee’s discretionary control over the trust income.
Rev. Rul. 95-58 holds that if the decedent possesses the power to remove the trustee
and appoint an individual or corporate successor trustee that was not related or
subordinate to the decedent (within the meaning of § 672(c)), the decedent has not
retained the trustee’s discretionary control over the trust income for purposes of §§
2036 and 2038.

    Rev. Rul. 2008-22, consideres whether corpus of a trust was includible in the

grantor’s gross estate under § 2036 or 2038 if the grantor retained the power,
exercisable in a nonfiduciary capacity, to acquire property held in the trust by
substituting other property of equivalent value. The facts in this ruling are similar to the
facts in Rev. Rul. 2011-28, except that in the latter ruling, the corpus consists of a life
insurance policy. The Service cited Restatement (Third) of Trusts, § 79 for the general
rule, that in situations where the grantor of a trust holds a nonfiduciary power to replace
trust assets with assets of equivalent value, the trustee has a duty to ensure that the
value of the assets being replaced is equivalent to the value of the assets being
PLR-136336-11 11

substituted. Further, as in Rev. Rul. 2011-28, under the terms of the trust, the assets D
transfers into the trust must be equivalent in value to the assets D receives in exchange
and the trustee has the fiduciary obligation to ensure that the assets exchanged are of
equivalent value. Accordingly, the Service stated that D cannot exercise the power to
substitute assets in a manner that will reduce the value of the trust corpus or increase
D’s net worth. Further, in view of the trustee’s ability to reinvest the assets and the
trustees duty of impartiality regarding the trust beneficiaries, the Service reasoned that
the trustee must prevent any shifting of benefits between or among the beneficiaries
that could otherwise result from a substitution of property by D. The Service concluded,
that under these circumstances, D’s retained power will not cause the value of the trust
corpus to be included in D’s gross estate under § 2036 or 2038.

   The circumstances in this case, as discussed above under Ruling Request 5,

mirror the circumstances in Rev. Rul. 2008-22. Accordingly, based upon the facts
provided and the representations made, we conclude that the corpus of Trust B is not
includible in Taxpayer’s gross estate under §§ 2033, 2036, and 2038.

  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.

   Except as specifically ruled herein, we express or imply no opinion on the federal

tax consequences of the transaction under the cited provisions or under any other
provisions of the Code.

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

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

                                     Sincerely,
                                     ______________________________
                                     Lorraine E. Gardner
                                     Senior Counsel, Branch 4
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purposes
Copy of this letter