Retained powers make trust funding an incomplete gift

Plain-English summary

A grantor proposed an irrevocable family trust whose distribution committee could direct payments and whose grantor retained consent, sole-distribution, and limited testamentary appointment powers. The IRS ruled that the retained powers left the initial funding wholly incomplete for gift-tax purposes, so a return of property to the grantor would not be a gift by committee members and the trust property would enter the grantor's estate at death. Distributions to other beneficiaries would be completed gifts by the grantor, not by committee members, because the committee's joint powers were not general powers of appointment. For income tax, the IRS found no grantor or committee-member ownership under §§ 673, 674, 676, 677, or 678 on the stated terms. It deferred whether administrative controls caused grantor ownership under § 675 because that factual question had to be examined in operation.

Ruling snapshot

• Question: How do the proposed trust's retained and committee-held powers affect grantor-trust ownership and completed-gift treatment?
• Outcome: Mixed. The gift-tax rulings were favorable and several grantor-trust provisions did not apply, but the § 675 ownership issue was deferred to examination.
• Key authorities: IRC §§ 671-678, 2501, 2511, 2514; Treas. Reg. §§ 25.2511-2, 25.2514-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201436011 Third Party Communication: None
Release Date: 9/5/2014 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:B02
PLR-134661-13
Date:
December 27, 2013

Grantor = ------------------------------------------------ ------
Distribution Committee = -----------------------------------------------------------------------------

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

Trust = ------------------------------------------------
State = ----------
Trustees = ------------------------------------------------------

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

  This responds to a letter dated July 24, 2013, and subsequent correspondence,

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

    The information submitted states that Grantor proposes to create an irrevocable

trust (Trust) for the benefit of himself, his parents, siblings and issue which he intends to
execute upon receipt of a favorable private letter ruling from the Internal Revenue
Service. Two independent trustees are the trustees (Trustees) of Trust. During
Grantor’s lifetime, the beneficiaries of Trust are Grantor and his siblings. However, if
Grantor’s siblings are not living, the class of permissible beneficiaries will include
Grantor’s parents.

   Trustees must make distributions of income and principal as directed by

Distribution Committee and/or Grantor, as follows:

   (1) At any time, Trustees, pursuant to the direction of a majority of Distribution

Committee, with the written consent of Grantor, shall distribute to Grantor or the
beneficiaries such amounts of the net income or principal as directed by Distribution
Committee (Grantor’s Consent Power);
PLR-134661-13 2

   (2) At any time, Trustees, pursuant to the direction of all Distribution Committee

members, other than Grantor, shall distribute to the beneficiaries such amounts of the
net income or principal as directed by 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 other than himself, such
amounts of the principal (including the whole thereof) as Grantor deems advisable to
provide for the health, maintenance, support and education of Grantor’s issue (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. Distribution Committee will be initially composed of Grantor,
Grantor’s son, Grantor’s siblings and Grantor’s nephew, and will cease to exist upon
Grantor’s death.

    Trust provides that at all times the Distribution Committee must consist of at least

two adults (other than Grantor) either (1) who are members of the class of persons
eligible to receive distributions of income or principal under Trust or (2) if there are not
two adult members of such class who are willing and able to serve, who are the parent
or guardian of a member of such class of eligible distributes (Eligible Individuals). If at
any time fewer than two Eligible Individuals are members, the Distribution Committee
shall be deemed not to exist.

    A vacancy on Distribution Committee must be filled in the following order: (1) the

oldest of the Grantor’s adult issue who willing to serve and is not already serving as a
member of Distribution Committee; (2) the oldest of the adult issue of Grantor’s parents
who is willing to serve and who is not already serving as a member of Distribution
Committee; (3) the legal guardian, if any, or the parent of the oldest of the Grantor’s
minor issue who is not already serving as a member of Distribution Committee; (4) the
legal guardian, if any, or the parent of the oldest minor issue of Grantor’s parents who is
willing to serve and is not already serving as a member of Distribution Committee; (5)
Grantor’s father; or (6) Grantor’s mother. If at any time Distribution Committee does not
include at least two members, Distribution Committee shall be deemed not to exist. The
Distribution Committee will cease to exist upon Grantor’s death.

   Upon Grantor’s death, the Trustee will dispose of the then-remaining principal

and undistributed income of Trust as Grantor directs by a will specifically referring to this
power of appointment (the Testamentary Power), provided that no such appointment
may be made to Grantor’s estate, Grantor’s creditors, or the creditors of Grantor’s
estate. Grantor’s power includes the power to appoint outright or in trust and to create
new powers. In default of the exercise of Grantor’s Testamentary Power, the balance of
PLR-134661-13 3

Trust will be distributed, per stirpes, to Grantor’s then living issue in further trust. If none
of Grantor’s issue is then living, but any descendant of Grantor’s parents is then living,
Trustees are to allocate income and principal per stirpes among Grantor’s parents issue
in further trust. If no descendant of Grantor’s parents is then living, Trustees are to
distribute the remaining income and principal pursuant to State law as if Grantor had
died intestate and unmarried.

   You have requested the following rulings:

   1. During the period Distribution Committee is serving, no portion of the items of

income, deductions and credits against tax of the Trust will be included in computing the
taxable income, deductions and credits of the Grantor under § 671.

  2. The contribution of property to Trust by Grantor will not be 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 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.

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.

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

treated as the owner of a portion of a trust.

   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
PLR-134661-13 4

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, in general, 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 674(b) provides that § 674(a) shall not apply to the power in § 674(b)(5)

regardless of by whom held. Section 674(b)(5)(A) describes 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.

   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.

   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 re-vest 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
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.
PLR-134661-13 5

   Based solely on the facts submitted and representations made, we conclude 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. Because
none of the other Distribution Committee members has a power exercisable solely by
himself to vest Trust income or corpus in himself, none shall be treated as the owner of
any portion of the 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.

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

donor reserves the power to re-vest 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
PLR-134661-13 6

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. Commisisoner, 37
T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

   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
PLR-134661-13 7

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 co-holders of the power. The Distribution
Committee ceases to exist upon the death of Grantor. Under § 25.2514-3(b)(2), a co-
holder 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 anyone, including trusts, 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
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
PLR-134661-13 8

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 co-holder 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 co-holder 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. 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
PLR-134661-13 9

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).
PLR-134661-13 10

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

provides that it may not be used or cited as precedent. Pursuant to a power of attorney
on file, a copy of this letter is being sent to X’s authorized representative.

                                  Sincerely,



                                  Bradford R. Poston
                                  Senior Counsel, Branch 2
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes

cc: