IRS rules on trust ownership and gift-tax treatment of distributions

Plain-English summary

The IRS ruled on income-tax ownership and gift-tax consequences for an irrevocable trust controlled through a grantor and a distribution committee. It concluded that the grantor was not treated as the owner under §§ 673, 674, 676, or 677(a), and that the other committee members were not treated as owners under § 678(a). It also concluded that the contribution to the trust was not a completed gift, distributions to the grantor were not completed gifts by committee members, and distributions to other beneficiaries were not completed gifts by committee members but were completed gifts by the grantor. The treatment of administrative controls under § 675 remains a factual question to be determined on examination.

Ruling snapshot

• Question: Who is treated as the owner of the trust, and how are the contribution and committee-directed distributions treated for federal gift-tax purposes?
• Outcome: Mixed, favorable ownership and gift-tax rulings were issued with a § 675 factual issue reserved
• Key authorities: IRC §§ 671 through 678; IRC §§ 2501 and 2514; IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201410003 Third Party Communication: None
Release Date: 3/7/2014 Date of Communication: Not Applicable
Index Number: 671.00-00, 2501.00-00,
2514.00-00 Person To Contact:
---------------------, ID No. -----------------
------------------------------ Telephone Number:
------------------- -------------------
-------------------------------------------- Refer Reply To:
CC:PSI:B03
PLR-119611-13
Date:
October 21, 2013

                                               LEGEND

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

Grantor = ---------------------------------------------------------------------------------------------------------
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Beneficiary 1 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 2 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 3 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 4 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 5 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 6 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 7 = ---------------------------------------------------------------------------------------------------------
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Beneficiary 8 = ---------------------------------------------------------------------------------------------------------
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PLR-119611-13 2

Beneficiary 9 = ---------------------------------------------------------------------------------------------------------
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Distribution = ---------------------------------------------------------------------------------------------------------
Committee ---------------------------------------------------------------------------------------------------------
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Spouse = ----------------------------

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

Trustee = -------------------------

Date = ---------------------

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

   This letter responds to a letter dated April 23, 2013, submitted on your behalf by

your authorized representative, requesting rulings under §§ 671, 2501, and 2514 of the
Internal Revenue Code.

                                                FACTS

   The facts submitted and representations made are as follows. On Date, Grantor

created an irrevocable trust (Trust) for the benefit of herself, her stepchildren
(Beneficiary 1, Beneficiary 2, Beneficiary 3, and Beneficiary 4), and children
(Beneficiary 5, Beneficiary 6, Beneficiary 7, Beneficiary 8, and Beneficiary 9), and the
issue of Grantor’s children and stepchildren (hereinafter, collectively the “Beneficiaries”).
A corporate trustee (Trustee) is the sole trustee of Trust.

   During Grantor’s lifetime, Trustee must distribute such amounts of net income

and principal to Grantor and the Beneficiaries as directed by the Distribution Committee
and/or Grantor, as follows: (1) at any time, Trustee, pursuant to the direction of a
majority of the Distribution Committee members, with the written consent of Grantor,
shall distribute to Grantor or the Beneficiaries such amounts of the net income or
principal as directed by the Distribution Committee (Grantor’s Consent Power); (2) at
any time, Trustee, pursuant to the direction of all of the Distribution Committee
members, other than Grantor, shall distribute to Grantor or the Beneficiaries such
amounts of the net income or principal as directed by the Distribution Committee
(Unanimous Member Power); and (3) at any time, Grantor, in a nonfiduciary capacity,
may, but shall not be required to, distribute to any one or more of the Beneficiaries such
PLR-119611-13 3

amounts of the principal (including the whole thereof) as Grantor deems advisable to
provide for the health, maintenance, support and education of the Beneficiaries
(Grantor’s Sole Power). The Distribution Committee may direct that distributions be
made equally or unequally and to or for the benefit of any one or more of the
beneficiaries of Trust to the exclusion of others. Any net income not distributed by
Trustee will be accumulated and added to principal.

    The Distribution Committee is initially composed of Grantor, Grantor’s children

(through appointed guardians acting on their behalf until their majority), and Grantor’s
stepchildren. Trust provides that at all times the Distribution Committee must include at
least two members other than Grantor. If at any time the Distribution Committee does
not include at least two members other than the Grantor, then the vacancy on the
Distribution Committee must be filled by the eldest of Grantor’s adult issue other than
any issue already serving as a member of the Distribution Committee, or, if none of
Grantor’s issue not already serving as a member of the Distribution Committee is an
adult, then such vacancy shall be filled by the eldest of the adult issue of the Grantor’s
stepchildren. If at any time the Distribution Committee does not include at least two
members other than the Grantor, then the Distribution Committee shall be deemed not
to exist. In any event, the Distribution Committee will cease to exist upon Grantor’s
death.

    In addition, at any time or times prior to or upon the distribution date, the

Distribution Committee may direct the Trustee to distribute to the trustee or trustees of
any one or more qualified trusts (a trust defined to be created under a document other
than the Trust agreement) such amounts of the net income and/or principal of Trust
(including the whole thereof) as the Distribution Committee determines. Any such
distribution shall be added to the principal of such qualified trust and disposed of in
accordance with the terms of such qualified trust. No distribution or transfer may be
made to a qualified trust unless made pursuant to the direction of the Distribution
Committee.

    Upon the Grantor’s death, the Trustee shall distribute the balance held in trust to

or for the benefit of any person or persons or entity or entities, other than the Grantor’s
estate, the Grantor’s creditors, or the creditors of the Grantor’s estate, as the Grantor
appoints by will (Grantor’s Testamentary Power). The balance of the trust funds which
the Grantor has not effectively appointed by will shall be distributed, per stirpes, to
Spouse’s then living issue in further trust. If none of Spouse’s issue is then living, then
the Trustee will divide the trust assets into two parts. The Trustee will distribute the first
part as if the Grantor had died intestate, unmarried and survived by no issue. The
Trustee will distribute the second part to the individuals to whom and in the proportions
that the property of Spouse would be distributed if Spouse had died intestate, unmarried
and survived by no issue. To the extent there are no beneficiaries under one of those
two categories, the entire amount will be distributed under the other category. If,
PLR-119611-13 4

however, none of the individuals designated as distributees in either category are living,
then the amounts will be distributed to charities designated by the Trustee.

You have requested the following rulings:

   1. So long as the Distribution Committee is serving, no portion of the items of
   income, deductions, and credits against tax of Trust shall be included in
   computing under § 671 the taxable income, deductions, and credits of Grantor or
   any member of the Distribution Committee.

   2. The contribution of property to Trust by Grantor is not a completed gift subject
   to federal gift tax.

   3. Any distribution of property by the Distribution Committee from Trust to
   Grantor will not be a completed gift subject to federal gift tax by any member of
   the Distribution Committee.

   4. Any distribution of property by the Distribution Committee from Trust to any
   beneficiary of Trust, other than Grantor, will not be a completed gift subject to
   federal gift tax, by any member of the Distribution Committee, other than Grantor.

                               LAW AND ANALYSIS

Ruling 1

   Section 671 provides that where it is specified in subpart E of Part I 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 the trust which are attributable to that portion of the trust to the extent that
such items would be taken into account under chapter 1 in computing taxable income or
credits against the tax of an individual.

  Section 672(a) provides that, for purposes of subpart E, the term “adverse party”

means 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. Additionally, § 672(b) provides that the term “nonadverse party”
means any person who is not an adverse party.

   Sections 673 through 677 specify the circumstances under which the grantor is

treated as the owner of a portion of a trust.
PLR-119611-13 5

   Section 673(a) provides that the grantor shall be treated as the owner of any

portion of a trust in which the grantor has a reversionary interest in either the corpus or
the income therefrom, if, as of the inception of that portion of the trust, the value of such
interest exceeds 5 percent of the value of such portion.

   Section 674(a) provides that, in general, 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 674(b) provides that § 674(a) shall not apply to the powers described in
§ 674(b), regardless of by whom held.

   Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable

only by will, other than a power in the grantor to appoint by will the income of the trust
where the income is accumulated for such disposition by the grantor or may be so
accumulated in the discretion of the grantor or a nonadverse party, or both, without the
approval or consent of any adverse party.

  Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute

corpus to or for a beneficiary, provided that the power is limited by a reasonably definite
standard which is set forth in the trust instrument.

   Under § 675 and applicable regulations, the grantor is treated as the owner of

any portion of a trust if, under the terms of the trust agreement or circumstances
attendant to its operation, administrative control is exercisable primarily for the benefit of
the grantor rather than the beneficiary of the trust.

     Section 676(a) provides that the grantor shall be treated as the owner of any

portion of a trust, whether or not he is treated as such owner under any other provision
of part I, subchapter J, chapter 1, where at any time the power to revest in the grantor
title to such portion is exercisable by the grantor or a nonadverse party, or both.

    Section 677(a) provides, in general, that the grantor shall be treated as the owner

of any portion of a trust, whether or not he is treated as such owner under § 674, whose
income without the approval or consent of any adverse party is, or, in the discretion of
the grantor or a nonadverse party, or both, may be (1) distributed to the grantor or the
grantor’s spouse; (2) held or accumulated for future distribution to the grantor or the
grantor’s spouse; or (3) applied to the payment of premiums on policies of insurance on
the life of the grantor or the grantor’s spouse.

   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) such person has previously partially released or otherwise modified such a power
PLR-119611-13 6

and, after the release or modification, retains such control as would, within the principles
of §§ 671-677, inclusive, subject a grantor of a trust to treatment as the owner thereof.

   Based solely on the facts submitted and representations made, we conclude that

an examination of Trust reveals none of the circumstances that would cause Grantor to
be treated as the owner of any portion of Trust under §§ 673, 674, 676, or 677(a).
Because none of the other Distribution Committee members has a power exercisable
solely by him or herself to vest Trust income or corpus in him or herself, none shall be
treated as the owner of any portion of Trust under § 678(a).

   We further conclude that an examination of Trust reveals none of the

circumstances that would cause administrative controls to be considered exercisable
primarily for the benefit of Grantor under § 675. Thus, the circumstances attendant on
the operation of Trust will determine whether Grantor will be treated as the owner of any
portion of Trust under § 675. This is a 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 office with responsibility for such examination.

Rulings 2 and 3

   Section 2501(a)(1) provides that a tax is imposed for each calendar year on the

transfer of property by gift during such calendar year by any individual, resident or
nonresident. Section 2511(a) provides that the tax imposed by § 2501 applies 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 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete

as to any property, or part thereof or interest therein, of which the donor has so parted
with dominion and control as to leave in the donor no power to change its disposition,
whether for the donor’s own benefit or for the benefit of another. But if upon a transfer
of property (whether in trust or otherwise) the donor reserves any power over its
disposition, the gift may be wholly incomplete, or may be partially complete and partially
incomplete, depending upon all the facts in the particular case. Accordingly, in every
case of a transfer of property subject to a reserved power, the terms of the power must
be examined and its scope determined.

  Section 25.2511-2(b) also provides an example where the donor transfers

property to another in trust to pay the income to the donor or accumulate it in the
discretion of the trustee, and the donor retains a testamentary power to appoint the
remainder among the donor’s descendants. The regulation concludes that no portion of
the transfer is a completed gift. However, if the donor had not retained a testamentary
power of appointment, but instead provided that the remainder should go to X or his
heirs, the entire transfer would be a completed gift.
PLR-119611-13 7

 Section 25.2511-2(c) provides that a gift is incomplete in every instance in which a

donor reserves the power to revest the beneficial title in himself or herself. A gift is also
incomplete if and to the extent that a reserved power gives the donor the power to name
new beneficiaries or to change the interests of the beneficiaries as between themselves
unless the power is a fiduciary power limited by a fixed or ascertainable standard.

  Section 25.2511-2(e) provides that a donor is considered as himself having a

power if it is exercisable by him in conjunction with any person not having a substantial
adverse interest in the disposition of the transferred property or the income therefrom.

  Section 25.2511-2(f) provides that the relinquishment or termination of a power to

change the beneficiaries of transferred property, occurring otherwise than by death of
the donor, is regarded as the event which completes the gift and causes the gift tax to
apply.

  Section 25.2511-2(g) provides that if a donor transfers property to himself as

trustee (or to himself and some other person, not possessing a substantial adverse
interest, as trustees), and retains no beneficial interest in the trust property and no
power over it except fiduciary powers, the exercise or nonexercise of which is limited by
a fixed or ascertainable standard, to change the beneficiaries of the transferred
property, the donor has made a completed gift and the entire value of the transferred
property is subject to the gift tax.

    Section 25.2511-2(e) does not define “substantial adverse interest.” Section

25.2514-3(b)(2) provides, in part, that a taker in default of appointment under a power
has an interest that is adverse to an exercise of the power. Section 25.2514-3(b)(2)
also provides that a coholder of a power is considered as having an adverse interest
where he may possess the power after the possessor’s death and may exercise it at
that time in favor of himself, his estate, his creditors, or the creditors of his estate.

   In Estate of Sanford v. Commissioner, 308 U.S. 39 (1939), the taxpayer created a

trust for the benefit of named beneficiaries and reserved the power to revoke the trust in
whole or in part, and to designate new beneficiaries other than himself. Six years later,
in 1919, the taxpayer relinquished the power to revoke the trust, but retained the right to
change the beneficiaries. In 1924, the taxpayer relinquished the right to change the
beneficiaries. The Court stated that the taxpayer’s gift is not complete, for purposes of
the gift tax, when the donor has reserved the power to determine those others who
would ultimately receive the property. Accordingly, the Court held that the taxpayer’s
gift was complete in 1924, when he relinquished his right to change the beneficiaries of
the trust. A grantor’s retention of a power to change the beneficial interests in a trust
causes the transfer to the trust to be incomplete for gift tax purposes, even though the
power may be defeated by the actions of third parties. Goldstein v. Commissioner, 37
T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).
PLR-119611-13 8

   In this case, Grantor retained the Grantor’s Consent Power over the income and

principal of Trust. Under § 25.2511-2(e), a donor is considered as himself having a
power if it is exercisable by him in conjunction with any person not having a substantial
adverse interest in the disposition of the transferred property or the income therefrom.
The Distribution Committee members are not takers in default for purposes of
§ 25.2514-3(b)(2). They are merely coholders of the power. The Distribution
Committee ceases to exist upon the death of Grantor. Under § 25.2514-3(b)(2), a
coholder of a power is only considered as having an adverse interest where he may
possess the power after the possessor’s death and may exercise it at that time in favor
of himself, his estate, his creditors, or the creditors of his estate. In this case, the
Distribution Committee ceases to exist upon Grantor’s death. Accordingly, the
Distribution Committee members do not have interests adverse to Grantor under
§ 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). Therefore, Grantor is considered
as possessing the power to distribute income and principal to any beneficiary himself
because he retained the Grantor’s Consent Power. The retention of this power causes
the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.

   Grantor also retained the Grantor’s Sole Power over the principal of Trust. Under

§ 25.2511-2(c), a gift is incomplete if and to the extent that a reserved power gives the
donor the power to name new beneficiaries or to change the interests of the
beneficiaries. In this case, Grantor’s Sole Power gives Grantor the power to change the
interests of the beneficiaries. Accordingly, the retention of the Grantor’s Sole Power
causes the transfer of property to Trust to be wholly incomplete for federal gift tax
purposes.

   Further, Grantor retained Grantor’s Testamentary Power to appoint the property

in Trust to any person or persons or entity or entities, other than Grantor’s estate,
Grantor’s creditors, or the creditors of Grantor’s estate. Under § 25.2511-2(b) the
retention of a testamentary power to appoint the remainder of a trust is considered a
retention of dominion and control over the remainder. Accordingly, the retention of this
power causes the transfer of property to Trust to be incomplete with respect to the
remainder in Trust for federal gift tax purposes.

   Finally, the Distribution Committee possesses the Unanimous Member Power

over income and principal. This power is not a condition precedent to Grantor’s powers.
Grantor’s powers over the income and principal are presently exercisable and not
subject to a condition precedent. Grantor retains dominion and control over the income
and principal of Trust until the Distribution Committee members exercise their
Unanimous Member Power. Accordingly, this power does not cause the transfer of
property to be complete for federal gift tax purposes See Goldstein v. Commissioner,
37 T.C. 897 (1962); Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

  Accordingly, based on the facts submitted and the representations made, we

conclude that the contribution of property to Trust by Grantor is not a completed gift
PLR-119611-13 9

subject to federal gift tax. Any distribution from Trust to Grantor is merely a return of
Grantor’s property. Therefore, we conclude that any distribution of property by the
Distribution Committee from Trust to Grantor will not be a completed gift subject to
federal gift tax, by any member of the Distribution Committee. Further, upon Grantor’s
death, the fair market value of the property in Trust is includible in Grantor’s gross
estate for federal estate tax purposes.

Ruling 4

   Section 2514(b) provides that the exercise or release of a general power of

appointment created after October 21, 1942, shall be deemed a transfer of property by
the individual possessing such power.

  Section 2514(c) provides that the term “general power of appointment” means a

power which is exercisable in favor of the individual possessing the power (possessor),
the possessor’s estate, the possessor’s creditors, or the creditors of the individual’s
estate.

   Section 25.2514-1(c)(1) provides, in part, that a power of appointment is not a

general power if by its terms it is exercisable only in favor of one or more designated
persons or classes other than the possessor or his creditors, or the possessor’s estate
or the creditors of the estate.

  Section 2514(c)(3)(A) provides that, in the case of a power of appointment

created after October 21, 1942, if the power is exercisable by the possessor only in
conjunction with the creator of the power, such power is not deemed a general power of
appointment.

  Section 2514(c)(3)(B) provides that, in the case of a power of appointment created

after October 21, 1942, if the power is not exercisable by the possessor except in
conjunction with a person having a substantial interest in the property subject to the
power, which is adverse to the exercise of the power in favor of the possessor, such
power shall not be deemed a general power of appointment. For purposes of
§ 2514(c)(3)(b), a person who, after the death of the possessor, may be possessed of a
power of appointment (with respect to the property subject to the possessor’s power)
which he may exercise in his own favor shall be deemed as having an interest in the
property and such interest shall be deemed adverse to such exercise of the possessor’s
power.

  Section 25.2514-3(b)(2) provides, in part, that a coholder of a power has no

adverse interest merely because of his joint possession of the power nor merely
because he is a permissible appointee under a power. However, a coholder of a power
is considered as having an adverse interest where he may possess the power after the
PLR-119611-13 10

possessor’s death and may exercise it at that time in favor of himself, his estate, his
creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power
jointly to appoint among a group of persons which includes themselves and if on the
death of X the power will pass to Y and Z jointly, then Y and Z are considered to have
interests adverse to the exercise of the power in favor of X. Similarly, if on Y’s death the
power will pass to Z, Z is considered to have an interest adverse to the exercise of the
power in favor of Y.

   The powers held by the Distribution Committee members under the Grantor’s

Consent Power are powers that are exercisable only in conjunction with the creator,
Grantor. Accordingly, under § 2514(c)(3)(A), the Distribution Committee members do
not possess general powers of appointment by virtue of possessing this power. Further,
the powers held by the Distribution Committee members under the Unanimous Member
Powers are not general powers of appointment. As in the example in § 25.2514-3(b)(2),
the Distribution Committee members have substantial adverse interests in the property
subject to this power. Accordingly, any distribution made from Trust to a beneficiary,
other than Grantor, pursuant to the exercise of these powers, the Grantor’s Consent
Power and the Unanimous Member Powers, are not gifts by the Distribution Committee
members. Instead, such distributions are gifts by Grantor.

    Based upon the facts submitted and representations made, we conclude that any

distribution of property by the Distribution Committee from Trust to any beneficiary of
Trust, other than Grantor, will not be a completed gift subject to federal gift tax, by any
member of the Distribution Committee. Further, we conclude that any distribution of
property from Trust to a beneficiary, other than Grantor, will be a completed gift by
Grantor.

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

consequences of the transaction under the cited provisions or under any other
provisions of the Code. Specifically, we express no opinion on the trust provisions
permitting Trustee to distribute income or principal to trustees of other qualified trusts
(decanting).

  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.
PLR-119611-13 11

  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.

                                 Sincerely,


                                 /s/

                                 James A. Quinn
                                 Senior Counsel, Branch 3
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

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

cc: