Retained trust powers keep transfers incomplete for gift tax

Plain-English summary

A grantor created an irrevocable family trust whose corporate trustee could make distributions under powers involving the grantor and a distribution committee. The IRS concluded that the grantor's retained consent, distribution, and testamentary appointment powers made contributions to the trust wholly incomplete gifts. Distributions back to the grantor would be returns of the grantor's property, and committee members would not make taxable gifts by directing distributions. A distribution to another beneficiary would instead be a completed gift by the grantor. For income tax purposes, the specified trust terms did not make the grantor an owner under IRC §§ 673, 674, 676, or 677 while the committee existed, but possible owner treatment under § 675 depended on actual administration and was left for examination.

Ruling snapshot

• Question: How do the trust's retained powers affect grantor-trust treatment and gift tax on contributions and committee-directed distributions?
• Outcome: Mixed, the gift tax rulings were granted while the § 675 grantor-trust issue was reserved for factual examination
• Key authorities: IRC §§ 671-677, 2501, 2511, and 2514; Treas. Reg. §§ 25.2511-2 and 25.2514-3

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201628010                                               Third Party Communication: None
Release Date: 7/8/2016                                          Date of Communication: Not Applicable
Index Number: 671.02-00, 2501.00-00,
              2514.00-00                                        Person To Contact:
                                                                --------------------, ID No. ----------------
--------------------------------                                Telephone Number:
-------------------------------------------                     --------------------
 ------------------------------                                 Refer Reply To:
                                                                CC:PSI:B01
                                                                PLR-133956-15
                                                                Date:
                                                                April 11, 2016




                                                     Legend

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

Grantor                     = -------------------------------------------------------------------------------------
                              -------

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

State 1                     = ----------

Child 1                     = -------------------------------------------------------------------------------------
                              ----------------------------------------

Child 2                     = -------------------------------------------------------------------------------------
                              ----------------------------------

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

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



Dear -------------------:
PLR-133956-15                                 2

This responds to a letter dated September 29, 2015, and subsequent correspondence,
requesting rulings under the Internal Revenue Code.

                                           Facts

The information and representations submitted are as follows. On Date, Grantor
created Trust, an irrevocable trust. Trust is a domestic trust administered in State 1
and, pursuant to the Trust agreement, is governed by the laws of State 1. A corporate
trustee (Trustee) is the sole trustee of Trust.

Grantor transferred certain property to Trust. The Trust agreement defines
“beneficiaries” as the Grantor and the Grantor’s children and all of his children’s lineal
descendants. The Grantor’s children are defined as Child 1 and Child 2.

During Grantor’s lifetime, the Trustee shall make distributions of income and principal to
or for the benefit of the beneficiaries, 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, is expressly authorized to distribute to Grantor or Grantor’s descendants
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, is expressly authorized to
distribute to Grantor or Grantor’s descendants such amounts of the net income or
principal as directed by the Distribution Committee, other than Grantor (Unanimous
Member Power); and (3) at any time, Trustee shall distribute such portion of the
principal to any one or more of Grantor’s descendants as the Grantor directs, acting in a
non-fiduciary capacity, in such amount as Grantor deems advisable to provide for the
health, maintenance, support, or education of Grantor’s descendants (Grantor’s Sole
Power). The Distribution Committee and/or Grantor, as applicable, 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. Other than as provided above,
income and principal of Trust may not be distributed to Grantor.

The Distribution Committee is initially composed of Grantor, Child 1, Child 2, and an
unrelated third party. Trust provides that at all times at least two “Eligible Individuals”
must be members of the Distribution Committee. An “Eligible Individual” means a
member of the class consisting of adult descendants of Grantor, the parent of a minor
descendant, and the legal guardian of a minor descendant of Grantor, or such other
person or person who qualifies as an adverse party to the Grantor under § 672(a) of the
Internal Revenue Code. If at any time fewer than two Eligible Individuals are members
of the Distribution Committee, the Distribution Committee shall cease to function and no
distributions requiring consent of the Distribution Committee may be made unless and
until a sufficient number of “Eligible Individuals” are appointed to the Distribution
PLR-133956-15                                 3

Committee. Upon the death of the Grantor, the Distribution Committee is disbanded
and terminated, and, thereafter, distribution decisions are to be made by the Trustee.

Upon Grantor’s death, the remaining balance of Trust shall be distributed to or for the
benefit of any person or persons or entity, other than Grantor’s estate, Grantor’s
creditors, or the creditors of Grantor’s estate, as Grantor may appoint by will (Grantor’s
Testamentary Power). In default of the exercise of Grantor’s Testamentary Power, the
balance of Trust will be distributed to a marital trust for Grantor’s surviving spouse, if
such spouse survives Grantor, or if not, then in further trust for the benefit of Grantor’s
descendants.

You requested the following rulings:

    1. During the period the Distribution Committee is serving, and at any other time
      during the Grantor’s lifetime, no portion of the items of income, deductions, and
      credits against tax of Trust will be included in computing the taxable income,
      deductions, and credits of Grantor under § 671;

    2. The contribution of any property to Trust by Grantor will be an incomplete gift, not
      subject to federal gift tax;

    3. Any distribution of property to Grantor from Trust which is approved and directed
      by the members of the Distribution Committee will not be a completed gift by any
      member of the Distribution Committee to Grantor, and no member of the
      Distribution Committee will be subject to any federal gift tax by reason of such
      directed distribution from Trust; and

    4. Any distribution of property from Trust to any beneficiary of Trust other than
      Grantor which is approved and directed by the members of the Distribution
      Committee will not be a completed gift by any member of the Distribution
      Committee to any such beneficiary of Trust, and no member of the Distribution
      Committee will be subject to any federal gift tax by reason of such directed
      distribution from Trust.

                                     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
PLR-133956-15                                 4

be taken into account under chapter 1 in computing taxable income or credits against
the tax of an individual.

Section 672(a) provides, 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 non-exercise 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 the income
therefrom, if, as of the inception of that portion of the trust, the value of such interest
exceeds five (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 powers described in
§ 674(b) regardless of 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.

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
on 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.
PLR-133956-15                                5

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.

Based solely on the facts and representations submitted, 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 as long as the
Distribution Committee remains in existence.

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
PLR-133956-15                                 6

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 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
PLR-133956-15                                 7

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).

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 possessor’s estate.

Section 25.2514-1(c)(1) provides 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)(B) provides, that in the case of a power of appointment created after
October 21, 1942, which is exercisable by the possessor only in conjunction with
another person, 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 of appointment
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
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.

Section 25.2514-1(b)(2) provides that the term “power of appointment” does not include
the powers reserved by a donor to himself or herself. However, no provision of § 2514
or the applicable regulations is to be construed as limiting the application of any other
Code section or provision of the regulations.
PLR-133956-15                               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, 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
PLR-133956-15                                 9

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 co-holder of a power of appointment
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
creditor, 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-133956-15                                 10

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
Power 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 Power, are not gifts by the Distribution Committee
members. Instead, such distributions are gifts by the 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 or imply no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-133956-15                                  11


In accordance with the power of attorney on file with this office, copies of this letter are
being sent to the taxpayer's authorized representatives.


                                       Sincerely,



                                       Faith P. Colson
                                       Faith P. Colson
                                       Senior Counsel, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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



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