Merger preserves grandfathered GST status of two trusts

Plain-English summary

Separate trusts created under a wife's and husband's wills had both become irrevocable before September 26, 1985, and no later additions had been made. Their dispositive terms, beneficiaries, and termination dates were substantially identical. The trustees obtained court approval to merge one trust into the other under a state statute that protected beneficiary rights and the trusts' purposes. The IRS ruled that the merger would neither shift a beneficial interest to a lower generation nor extend vesting. The surviving trust would therefore retain the trusts' grandfathered exemption from generation-skipping transfer tax, provided no post-merger additions were made.

Ruling snapshot

• Question: Would merging two pre-September 26, 1985 trusts with the same beneficiaries and termination terms destroy their grandfathered GST-tax status?
• Outcome: Approved, provided no additions are made to the surviving trust after the merger
• Key authorities: IRC §§ 2601, 2611, and 2651; Treas. Reg. § 26.2601-1(b)(1) and (b)(4)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201448018 Third Party Communication: None
Release Date: 11/28/2014 Date of Communication: Not Applicable
Index Number: 2601.00-00
Person To Contact:
--------------------, ID No. ----------------
------------------------------------ Telephone Number:
------------------------------------ --------------------
------------------- Refer Reply To:
-------------------------- CC:PSI:B4
------------------------- PLR-126815-14
Date:
September 02, 2014

Legend

Trust 1 = --------------------------------------------------------------------

Trust 2 = ---------------------------------------------------------------------------
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Wife = ----------------------
Husband = ---------------------
Date 1 = ----------------
Date 2 = ---------------------
Date 3 = ---------------------
Date 4 = -----------------
Date 5 = -------------------------
Date 6 = ----------------
State = ---------
Court = ------------------------------------------------------------------------------------------

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

State Statute = ----------------------------------------------------------
Beneficiaries = ----------------------

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PLR-126815-14 2

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

This letter responds to a letter from your authorized representative dated July 10, 2014,
requesting a ruling on the generation-skipping transfer (GST) tax consequences of the
proposed consolidation of Trust 1 and Trust 2.

The facts and representations submitted are summarized as follows:

Article 8 of Wife’s will provides for the creation of Trust 1. On Date 1, a date prior to
September 26, 1985, Wife died and Trust 1 became irrevocable.

Article 8(a) of Wife’s will describes the property used to fund Trust 1. Article 8(b)
provides that, during the life of the trust, the trustee shall accumulate the net income or
pay to or apply so much of the net income to the use of the testator’s grandchildren
(including grandchildren born after the execution of testator’s will and after testator’s
death) in such amounts as the trustee, in his sole and absolute discretion, shall deem
advisable. The trustee is not required to make any distribution, but if he should decide
to do so, he must make payment simultaneously and equally to or for each grandchild of
the testator living at the time of the distribution.

Article 8(c) of Wife’s will provides that, upon the death of any grandchild of the testator
after the testator’s death, his share of the principal of the trust shall be paid and
distributed to or for the benefit of any one or more persons or corporations (outright, in
trust or otherwise) as such grandchild of the testator may appoint by specific reference
thereto in his will admitted to probate; provided, however, that such grandchild shall
have no power to appoint the same or any part thereof to himself or to his estate or to
his creditors or to the creditors of his estate. If a grandchild does not validly and
effectually exercise his special power of appointment, then such part as he shall not
effectually appoint is to be distributed per stirpes and in fee to the grandchild’s then
living descendants, and if none, unto the testator’s living descendants, per stirpes. A
grandchild’s share is defined as that proportion of the principal of the trust represented
by the fraction of which the numerator is one and the denominator is the number of
grandchildren of the testator living at the time immediately preceding the death of the
grandchild.

Article 8(d) of Wife’s will provides that the trust shall terminate upon the death of the last
to die of the grandchildren of the testator who were living at the time of the testator’s
death.

Article 8(e) of Wife’s will provides that if no grandchildren of the testator should survive
the testator or if at the termination of the trust there should remain any principal
undisposed of under the foregoing provisions, then such undisposed of part of the trust
PLR-126815-14 3

principal shall go to those persons entitled to inherit personal property from the testator
under State statutes of descent and distribution then in effect, and in the proportions
provided by said statutes, in the same manner as if the testator had then died without a
valid will.

Article 10 of Husband’s will provides for the creation of Trust 2. On Date 2, a date prior
to September 26, 1985, Husband died and Trust 2 became irrevocable.

Article 10(a) of Husband’s will describes the property used to fund Trust 2.
Articles 10(b), (c), (d) and (e) of Husband’s will are substantially identical to
Articles 8(b), (c), (d) and (e) of Wife’s will.

On Date 4, Court issued an order modifying Trust 1. On Date 5, Court issued an order
modifying Trust 2. The modifications of Trust 1 and Trust 2 relate solely to the trustee
provisions and have no effect on any dispositive provision of either Trust 1 or Trust 2.

State Statute provides, in pertinent part, that after notice to the qualified beneficiaries, a
trustee may combine two or more trusts into a single trust or divide a trust into two or
more separate trusts, if the result does not materially impair rights of any beneficiary or
adversely affect achievement of the purposes of the trust.

The trustees of Trust 1 and Trust 2 propose to merge Trust 1 with and into Trust 2, with
Trust 2 being the surviving trust in the merger. On Date 6, Court issued an order
approving the merger of Trust 1 and Trust 2 contingent on issuance of a favorable
response from the Internal Revenue Service to this request for a private letter ruling.

The trustees of Trust 1 and Trust 2 represent that the beneficiaries of Trust 1 are the
same as the beneficiaries of Trust 2 (Beneficiaries), both before and after the proposed
merger, and that no additions have been made to the principal of either Trust 1 or
Trust 2 after September 25, 1985.

RULING REQUESTED

You have requested a ruling that the proposed merger of Trust 1 with and into Trust 2
will not subject either Trust 1 or the newly merged Trust 2 to federal generation skipping
transfer (GST) tax under § 2601 by forfeiting the exempt status that Trust 1 and Trust 2
enjoy by virtue of becoming irrevocable prior to the effective date of Chapter 13 of the
Internal Revenue Code.

LAW AND ANALYSIS

Section 2601 imposes a tax on every GST which is defined under §2611 as a taxable
distribution, a taxable termination, and a direct skip.
PLR-126815-14 4

Section 1433(b)(2)(A) of the Tax Reform Act of 1986 and § 26.2601-1(b)(1)(i) of the
Generation-Skipping Transfer Tax Regulations provide that the GST tax shall not apply
to any GST under a trust that was irrevocable on September 25, 1985, but only to the
extent that such transfer was not made out of corpus added to the trust after
September 25, 1985 (or out of income attributable to corpus so added).
Section 26.2601-1(b)(1)(ii) provides that any trust in existence on September 25, 1985,
will be considered irrevocable unless the settlor had a power that would have caused
inclusion of the trust in settlor's gross estate under § 2038 or 2042 if the settlor had died
on September 25, 1985.

Section 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial
construction, settlement agreement, or trustee action with respect to a trust that is
exempt from the GST tax will not cause the trust to lose its exempt status. In general,
unless specifically provided otherwise, these rules are applicable only for purposes of
determining whether an exempt trust retains its exempt status for GST tax purposes.
Unless specifically noted, the rules do not apply in determining, for example, whether
the transaction results in a gift subject to gift tax, or may cause the trust to be included
in the gross estate of a beneficiary, or may result in the realization of capital gain for
purposes of § 1001.

Section 26.2601-1(b)(4)(i)(D) provides that a modification will not cause an exempt trust
to be subject to the GST tax if the modification does not shift a beneficial interest in the
trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the
person or persons who held the beneficial interest prior to the modification, and the
modification does not extend the time for vesting of any beneficial interest in the trust
beyond the period provided for in the original trust. A modification of an exempt trust
will result in a shift in a beneficial interest to a lower generation beneficiary if the
modification can result in either an increase in the amount of a generation-skipping
transfer or the creation of a new generation-skipping transfer. Furthermore, a
modification that is administrative in nature that only indirectly increases the amount
transferred (for example, by lowering administrative costs or income taxes) will not be
considered a shift in a beneficial interest in a trust.

Section 26.2601-1(b)(4)(i)(E), Example 6, considers a situation where, in 1980, Grantor
established an irrevocable trust (Trust) for the benefit of Grantor’s child, A, and A’s
issue. In 1983, Grantor’s spouse also established a separate irrevocable trust for the
benefit of the same child and issue. The terms of the spouse’s trust and Grantor’s trust
are identical. In 2002, the appropriate local court approved the merger of the two trusts
into one trust to save administrative costs and enhance the management of the
investments. The merger of the two trusts does not shift any beneficial interest in the
trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the
person or persons who held the beneficial interest prior to the merger. In addition, the
merger does not extend the time for vesting of any beneficial interest in the trust beyond
the period provided for in the original trust. Therefore, the trust that resulted from the
PLR-126815-14 5

merger will not be subject to the provisions of chapter 13.

In the present case, Trust 1 and Trust 2 were irrevocable on September 25, 1985. You
have represented that no additions, actual or constructive, have been made to either
Trust 1 or Trust 2 after that date. Accordingly, pursuant to § 1433(b)(2)(A) of the Tax
Reform Act of 1986 and § 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax
Regulations, the trusts are not subject to the GST tax.

The proposed merger is similar to Example 6 in § 26.2601-1(b)(4)(i)(E). State Statute
permits a trustee to merge the assets of the trust into a single trust estate after giving
notice to the qualified beneficiaries and provided that the result does not impair the
rights of any beneficiary or adversely affect achievement of the purposes of the trust.
You have represented that the beneficiaries of Trust 1 and Trust 2 are the same
persons, both before and after the proposed merger. Further, before the proposed
merger, Trust 1 and Trust 2 were to terminate on the date of death of the last to die of
the Beneficiaries; after the proposed merger, the surviving Trust 2 will terminate on the
date of death of the last to die of the Beneficiaries. Thus, the surviving Trust 2 will
terminate on the same date as Trust 1 or Trust 2 would have terminated absent the
proposed merger. Under these circumstances, the proposed merger will not shift a
beneficial interest to a beneficiary who occupies a lower generation (as defined in
§ 2651) than the person or persons who held the beneficial interest prior to the
modification. In addition, the proposed merger will not extend the time for vesting of any
beneficial interest in the trusts beyond the period provided for in the original trusts.

Accordingly, based on the facts submitted and the representations made, we conclude
that the proposed merger of Trust 1 with and into Trust 2 will not affect the
grandfathered status of these trusts and will not cause any distributions from Trust 1 or
the surviving Trust 2 to be subject to GST tax, provided there are no post-merger
additions to the surviving Trust 2.

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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the
Internal Revenue Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-126815-14 6

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.

                                 Sincerely,



                                 Melissa C. Liquerman
                                 Chief, Branch 4
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

Enclosures (2)

  Copy of this letter
  Copy for § 6110 purposes

cc: