Foreign settlors own revocable trust and assets receive basis adjustments

Plain-English summary

Two non-U.S. spouses funded a foreign trust with separate property and retained revocation rights during their joint lives. The IRS ruled that each spouse would be treated as owner of the contributed portion under § 676 despite the foreign-grantor limitation. At the first spouse’s death, that spouse’s separate property and half of the community property would receive fair-market-value basis under § 1014(b)(2). At the survivor’s death, assets subject to the survivor’s testamentary general power of appointment would receive fair-market-value basis under § 1014(b)(4), to the extent the power was exercised.

Ruling snapshot

• Requests: Determine grantor ownership during the spouses’ joint lives and basis treatment at each spouse’s death
• Outcome: Approved on all four requested rulings, with the survivor’s-trust ruling limited to assets over which the testamentary power is exercised
• Key authorities: I.R.C. §§ 671, 672(f), 676(a), 1014(a), 1014(b)(2), 1014(b)(4)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201544002                                             Third Party Communication: None
Release Date: 10/30/2015                                      Date of Communication: Not Applicable
Index Number: 1014.00-00, 672.05-01
                                                              Person To Contact:
---------------------------------------                       --------------------------- -------------------------
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-------------------------------------------                   Telephone Number:
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-------------------------------------------------             Refer Reply To:
                                                            CC:PSI:B04
In Re: ---------------------------------------------------- PLR-101747-15
----------------------                                      Date:
                                                            June 30, 2015




Legend

Husband                          -----------------------------------------------------------------------------------
Wife                             -----------------------------------------------------------------------------------
Bank                             -----------------------------------------------------------------------------------
Country                          -----------------------------------------------------------------------------------
State                            -----------------------------------------------------------------------------------
Company                          -----------------------------------------------------------------------------------
Trust                            -----------------------------------------------------------------------------------
                                 -----------------------------------------------------------------------------------
                                 -----------------------------------------------------------------------------------
Date 1                           -----------------------------------------------------------------------------------
Date 2                           -----------------------------------------------------------------------------------
Children                         -----------------------------------------------------------------------------------
                                 -----------------------------------------------------------------------------------
                                 -----------------------------------------------------------------------------------
                                 -----------------------------------------------------------------------------------
Individuals                      -----------------------------------------------------------------------------------
                                 -----------------------------------------------------------------------------------
                                 -------------------------------------


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

     This letter responds to your authorized representative’s letter dated
December 31, 2014, requesting income and estate tax rulings with respect to Trust.

         The facts and representations submitted are summarized as follows:
PLR-101747-15                                 2

       Husband and Wife (collectively, the Settlors) are citizens and residents of
Country. The Settlors are neither citizens nor residents (within the meaning of Internal
Revenue Code § 7701(b)(1)(A)) of the United States. The Settlors are married under
the separate property regime of Country as provided by the law of Country. The
Settlors have four children, Children. The Children are dual citizens of both Country
and the United States and reside in Country.

       The Settlors created Trust on Date 1. Trust has been amended and restated
several times, most recently on Date 2. Bank, an unrelated party, is Trustee. The
beneficiaries of Trust are Husband, Wife, and Children. It is represented that Trust is a
foreign trust under § 7701(a)(31)(B). It is also represented that under the law of
Country, all property which has been transferred to Trust retains its character as
community property or separate property.

       Trust is funded with separate property transferred by Husband and separate
property transferred by Wife. Trust assets generally consist of: (i) interests in State
limited liability companies and foreign entities that own passive investments managed
by financial institutions in the United States and real estate located outside the United
States, and (ii) the shares of Husband and Wife in Company, a publicly traded
corporation in Country.

       Section 1.7 of Trust provides, in relevant part, that all community property, if any,
transferred to the trustee shall retain its character as community property.

        Section 1.8 provides that all separate property transferred to the trustee shall
retain its character as separate property of the transferring Settlor.

         Section 2.1.1 provides, in relevant part, that while Husband and Wife are both
living, the trustee is to distribute or apply for the benefit of Husband and/or Wife, as
much income or principal out of the community property as Husband and Wife direct or
as the trustee in trustee’s discretion deems appropriate for their care, support, comfort,
enjoyment, and welfare. In addition, the trustee may distribute income or principal from
the community property for the education and support of Children.

         Section 2.1.2 provides, in relevant part, that while Husband and Wife are both
living, the trustee is to distribute to Husband as much income or principal out of his
separate property as he directs or as the trustee in trustee’s discretion deems
appropriate for his care, support, comfort, enjoyment, and welfare. In addition, the
trustee may distribute income or principal from his separate property for the education
or support of Children. While Husband and Wife are both living, the trustee is to
distribute to Wife as much income or principal out of her separate property as she
directs or as the trustee in trustee’s discretion deems appropriate for her care, support,
comfort, enjoyment, and welfare. In addition, the trustee may distribute income or
principal from her separate property for the education or support of Children.
PLR-101747-15                                 3

       Section 2.3 provides, in relevant part, that the first spouse to die is referred to as
the “Deceased Spouse” and the other spouse is referred to as the “Surviving Spouse.”
On the death of the Deceased Spouse, the trustee is to pay out of Trust and any
additions to Trust by reason of the death of the Deceased Spouse any debts of the
Deceased Spouse, the last illness and funeral expenses of the Deceased Spouse, and
attorneys’ fees and other administration expenses of the Deceased Spouse’s estate.
The trustee may also pay out of Trust any estate taxes arising because of the Deceased
Spouse’s death and attributable to the trust estate and the Deceased Spouse’s probate
estate.

      Section 2.3.3 provides, in relevant part, that the remaining trust estate, including
any additions to Trust by reason of the Deceased Spouse’s death and including all
community property, the Deceased Spouse’s separate property, and the Surviving
Spouse’s separate property are to be distributed to the Surviving Spouse, held and
administered subject to the terms of the Survivor’s Trust.

      Section 2.4.1.1 provides that during the lifetime of the Surviving Spouse, upon
request from the Surviving Spouse, the trustee is to distribute to the Surviving Spouse
an amount up to the entire net income of the Survivor’s Trust.

       Section 2.4.2 provides, in relevant part, that on the death of the Surviving
Spouse, the trustee is to consider selling any interest held directly or indirectly in any
yachts, planes, boats, or real property (excluding real property described in Section
2.4.2.4 if applicable). The trustee is to distribute the Survivor’s Trust as follows:

       Section 2.4.2.1 provides that the Surviving Spouse is to have the power to
appoint the balance of the Survivor’s Trust to any one or more of the creditors of the
Surviving Spouse’s estate (excluding any taxing authority) by a will specifically
exercising this power of appointment. The trustee is to distribute the balance of the
Survivor’s Trust as appointed by the Surviving Spouse, to the extent this power of
appointment is exercised. In addition, the trustee is to distribute the balance of the
Survivor’s Trust not effectively appointed pursuant to this section.

       Section 2.6 provides, in relevant part, that property passing to a child is to be
held in a separate trust for such child who would otherwise receive property outright,
and the child is to be the beneficiary of his or her separate trust.

       Section 3.1 provides, in relevant part, that during the joint lifetimes of Settlors,
either Husband or Wife may revoke Trust in whole or in part with respect to community
property and with respect to separate property, if any, contributed by the revoking
Settlor. Revocation is to be made by written instrument delivered to the trustee and the
other settlor.
PLR-101747-15                                4

     Section 3.2 provides that the Settlors may at any time during their joint lifetimes
amend any of the terms of Trust.

        Section 3.3 provides, in relevant part, that after the death of the Deceased
Spouse, the Surviving Spouse, while competent, may amend or revoke the Survivor’s
Trust in part or in whole, but only with the written consent of any two Individuals who are
then living and competent as well as a Subordinate Party as defined in § 672(c). Any
amendment or revocation pursuant to this section is to be effected by a written
instrument signed by Surviving Spouse and the Subordinate Party and delivered to the
trustee. Individuals are related to Husband and Wife.

      Section 3.4 provides that after the death of the Surviving Spouse, each trust
created under the Trust instrument shall be irrevocable and may not be amended or
terminated, except by distributions made pursuant to this instrument.

       You have requested the following rulings:

   1. Husband and Wife will be treated as the owners of Trust for purposes of § 671
      during their joint lifetimes.

   2. Upon the death of the Deceased Spouse, the Surviving Spouse will be
      considered as acquiring the Deceased Spouse’s separate property under
      § 1014(b)(2) and will receive a step-up (or step-down) in basis of the Deceased
      Spouse’s separate property equal to the fair market value of the assets as of the
      date of death of the Deceased Spouse.

   3. Upon the death of the Deceased Spouse, the Surviving Spouse will be
      considered as acquiring the Deceased Spouse’s one-half share of all community
      property that is part of Trust assets under § 1014(b)(2) and will receive a step-up
      (or step-down) in basis of the Deceased Spouse’s one-half share of all
      community property that is part of Trust assets equal to the fair market value of
      the assets as of the date of death of the Deceased Spouse.

   4. Upon the death of the Surviving Spouse, all of the assets owned by the
      Survivor’s Trust will receive a step-up (or step-down) in basis pursuant to
      § 1014(b)(4) equal to the fair market value of the assets as of the date of death of
      the Surviving Spouse.

LAW AND ANALYSIS

Ruling 1

      Section 671 provides, in relevant 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
PLR-101747-15                                  5

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 this chapter in computing taxable income
or credits against the tax of an individual. Any remaining portion of the trust shall be
subject to subparts A through D of subchapter J.

        Section 1.671-2(e)(1) of the Income Tax Regulations provides, in part, that a
grantor includes any person to the extent such person either creates a trust, or directly
or indirectly makes a gratuitous transfer of property to a trust. However, a person who
creates a trust but makes no gratuitous transfers to the trust is not treated as an owner
of any portion of the trust under §§ 671 through 677 and § 679.

       A gratuitous transfer is defined in § 1.671-2(e)(2)(i) as any transfer other than a
transfer for fair market value.

       Section 672(f)(1) and § 1.672(f)-1 provide that subpart E of subchapter J (§§ 671
through 679) apply only to the extent such application results in an amount (if any)
being currently taken into account (directly or through one or more entities) in computing
the income of a citizen or resident of the United States or a domestic corporation.

      Section 672(f)(2)(A) provides, in relevant part, that § 672(f)(1) shall not apply to
any portion of a trust if (i) the power to revest absolutely in the grantor title to the trust
property to which such portion is attributable is exercisable solely by the grantor without
the approval or consent of any other person.

       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 subpart E of subchapter J, 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.

        Under the terms of Trust, during the joint lifetimes of Settlors, each Settlor retains
the absolute power to revest title in him or herself to any community property and any
separate property that he or she contributed to Trust. Accordingly, based solely upon
the information submitted and the representations made, we conclude that under
§ 676(a), during their joint lifetimes, each Settlor will be treated as the owner of that
portion of Trust constituted of his or her interest in community property, if any, and the
separate property that he or she contributed. Furthermore, we conclude that § 672(f)(1)
will not prevent each Settlor from being treated under § 676(a) as the owner of that
portion of Trust.

Rulings 2 and 3

      Section 1014(a)(1) provides, in relevant part, that the basis of property in the
hands of a person acquiring the property from a decedent or to whom the property
PLR-101747-15                                6

passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before
the decedent's death by such person, be the fair market value of the property at the
date of the decedent's death.

         Section 1014(b)(2) provides that if property transferred by the decedent during
his lifetime in trust to pay the income for life to or on the order or direction of the
decedent and the decedent reserved at all times before his death the right to revoke the
trust, then such property is considered, for purposes of § 1014(a), to have been
acquired from or to have passed from the decedent.

        Section 672(c) defines the term "related or subordinate party" to mean any
nonadverse party who is (1) the grantor's spouse if living with the grantor; or (2) any one
of the following: the grantor's father, mother, issue, brother or sister; an employee of
the grantor; a corporation or any employee of a corporation in which the stock holdings
of the grantor and the trust are significant from the viewpoint of voting control; a
subordinate employee of a corporation in which the grantor is an executive.

        In this case, Trust provides that during the joint lifetimes of both Settlors the
trustee is to distribute to the Deceased Spouse as much income or principal from the
community property or from the Deceased Spouse’s separate property as the Deceased
Spouse directs. The Deceased Spouse has also reserved the right to revoke Trust with
respect to community property and with respect to the Deceased Spouse’s separate
property at any time prior to the death of the Deceased Spouse. The Deceased
Spouse’s separate property and the community property are within the description of
property acquired from a decedent under § 1014(b)(2). Accordingly, based solely upon
the information submitted and the representations made, we conclude that upon the
death of the Deceased Spouse, the Surviving Spouse will be considered as acquiring
the Deceased Spouse’s separate property under § 1014(b)(2) and will receive a step-up
(or step-down) in basis of the Deceased Spouse’s separate property equal to the fair
market value of the assets as of the date of death of the Deceased Spouse. We also
conclude that upon the death of the Deceased Spouse, the Surviving Spouse will be
considered as acquiring the Deceased Spouse’s one-half share of all community
property that is part of Trust assets under § 1014(b)(2) and will receive a step-up (or
step-down) in basis of the Deceased Spouse’s one-half share of all community property
that is part of Trust assets equal to the fair market value of the assets as of the date of
death of the Deceased Spouse.

Ruling 4

       Section 1014(b)(4) provides that property passing without full and adequate
consideration under a general power of appointment exercised by the decedent by will
is considered, for purposes of § 1014(a), property acquired from or to have passed from
the decedent.
PLR-101747-15                                 7

       In this case, under section 2.4.2.1 of Trust, Surviving Spouse has a general
power of appointment over the property in Survivor’s Trust, exercisable by will.
Accordingly, based upon the information submitted and the representations made, we
conclude that the property in the Survivor’s Trust fits within the description of property
acquired from a decedent under § 1014(b)(4). Thus, to the extent that Surviving
Spouse exercises the general power of appointment by will, upon the death of the
Surviving Spouse, all of the assets owned by the Survivor’s Trust will receive a step-up
(or step-down) in basis pursuant to § 1014(b)(4) equal to the fair market value of the
assets as of the date of death of the Surviving Spouse.

       Please note that section 5 of Rev. Proc. 2015-3, 2015-1 IRB 129, sets forth a list
of those areas of the Internal Revenue Code under the jurisdiction of, in relevant part,
the Associate Chief Counsel (Passthroughs and Special Industries) relating to issues on
which the Internal Revenue Service will not issue letter rulings until the Service resolves
the issue through publication of a revenue ruling, a revenue procedure, regulations, or
otherwise. Rev. Proc. 2015-37, 2015-26 IRB 1196, amplifies Rev. Proc. 2015-3 by
adding the following to section 5.01:

       Basis of Property Acquired from a Decedent. Whether the assets in a
       grantor trust receive a section 1014 basis adjustment at the death of the
       deemed owner of the trust for income tax purposes when those assets are
       not includible in the gross estate of that owner under chapter 11 of subtitle
       B of the Internal Revenue Code.

Rev. Proc. 2015-37 is effective for all letter ruling requests received after
June 15, 2015. Because the Service received this ruling request prior to
June 15, 2015, Rev. Proc. 2015-37 does not apply.

      In accordance with the Power of Attorney on file with this office, we have sent a
copy of this letter to your authorized representatives.

       Except as expressly provided herein, we neither express nor imply any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

      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-101747-15                                8

      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,



                                         _________________________
                                         Leslie H. Finlow
                                         Senior Technician Reviewer, Branch 4
                                         Office of the Associate Chief Counsel
                                         (Passthroughs and Special Industries)



      Enclosures
            Copy for § 6110 purposes
            Copy of this letter

cc: