Trust construction preserves grandfathering, but disclaimer creates a GST transfer

Plain-English summary

A pre-1942 irrevocable trust was divided under a court-approved family settlement, and a later declaratory judgment was proposed to resolve ambiguities about beneficiaries, income distributions, succession, and prior disclaimers. The IRS ruled that the judgment would not disturb the trust's grandfathered exemption from generation-skipping transfer tax, cause beneficiaries to make gifts, or create estate inclusion under sections 2036 through 2038. It also ruled that each beneficiary held a pre-October 22, 1942 general power of appointment whose release or lapse was not subject to gift or estate tax. A granddaughter's partial disclaimer qualified under section 2518 and did not produce gift tax or estate inclusion. The letter nevertheless states that the disclaimer will create a transfer subject to GST tax, so that part of the requested relief was not granted.

Ruling snapshot

• Question: What transfer-tax consequences would follow from the proposed trust construction and the granddaughter's disclaimer?
• Outcome: mixed, most requested rulings were favorable, but the letter states that the disclaimer creates a GST-taxable transfer
• Key authorities: IRC §§ 2033, 2036 through 2038, 2041, 2514, 2518, 2601, and 2611; Treas. Reg. §§ 26.2601-1 and 25.2518-1 through 25.2518-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201707005 Third Party Communication: None
Release Date: 2/17/2017 Date of Communication: Not Applicable
Index Number: 2033.00-00, 2041.01-00,
2501.01-00, 2514.01-00, Person To Contact:
2518.01-01, 2601.04-01 --------------------, ID No. -----------------
Telephone Number:
------------------------------ --------------------
-------------------------------- Refer Reply To:
---------------------------- CC:PSI:B04
PLR-115630-16
In Re: ---------------------------------------------------- Date:
------------------------------------------------------- October 12, 2016

Legend

Grantor = ------------
A = -------------
Son = ---------------------------
B = ---------------------------
Granddaughter = ------------------------------
C = ----------------------------
GGC1 = ----------------------------------
GGC2 = -----------------------
GGC3 = ------------------------------------
GGC4 = ------------------------------
Trust = ---------------------------------------------------------------------------------
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Trust A = --------------------------------------------------------
Trust B = --------------------------------------------------------
Trustee = ------------------------
Settlement = --------------------------------------------------------------------
Agreement ---------------------------------------------------------------------- ----------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
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Court = --------------------------------------------------------
----------------------------
PLR-115630-16 2

Petition = ---------------------------------------------------------------------------------
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Year = -------
Date 1 = --------------------------
Date 2 = ------------------
Date 3 = ------------------
Date 4 = ------------------
Date 5 = ------------------------
Date 6 = ------------------------
Date 7 = ------------------------
Date 8 = -----------------------
Date 9 = ------------------
Date 10 = --------------------------
Date 11 = -----------------------
a = ---
b = --
c = --
d = -----
e = ---
f = ---
g = ----
State = --------
State Statute 1 = ----------------------------------------------------------------------------------
State Statute 2 = ---------------------------------------------------------------------------------------------------------------
State Statute 3 = --------------------------------------------------------------------------------------------------------------------------

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

This letter responds to a letter dated April 29, 2016, from your authorized
representative, and subsequent correspondence, in which you request rulings on the
gift, estate, and generation-skipping transfer (GST) tax consequences of a proposed
declaratory judgment.

On Date 1, a date before October 21, 1942, Grantor and Grantor’s spouse, A,
established Trust, an irrevocable trust, for the primary benefit of Son.

Article I, section 1 of Trust provides that Trust will be administered by one Trustee
(Trustee), in conjunction with an Advisory Board. Currently, the Advisory Board
consists of Trustee and C, the spouse of Grantor’s granddaughter, Granddaughter.

Article III, section 3 provides that the term “Beneficiary” applies not only to Son but to all
his successors to a beneficial interest under the Trust Agreement.
PLR-115630-16 3

Article IV, section 4 provides that Beneficiary may receive from time to time during the
life of Trust, such portions of the net profits accruing from time to time to Trust, as
Trustee, acting with the advice and consent of the Advisory Board, may see fit to pay
over and deliver to Beneficiary. Article III, section 1 provides that the Beneficiary will
have no right to the corpus of Trust and that the Beneficiary shall have no right with
respect to Trust other than to receive distributions of net earnings awarded him by
Trustee with the consent of the Advisory Board and the right of distribution of the trust
estate made by Trustee at the termination of Trust.

Article IV, section 3 provides that Trust shall continue until the death of Son and for
twenty-one years after the date of his death. At the end of said period of time, Trustee
shall proceed to wind up the affairs, liquidate the assets, and distribute the same among
the then existing beneficiaries, but until such time no beneficiary shall ever be entitled to
the dissolution, termination, or disruption of said trust, or to maintain suits, in courts of
law or equity, against said estate, its trustees, or its property, or business operations of
any kind, it being hereby distinctly understood and agreed that full and complete title,
ownership, management, direction, control and dominion is vested in Trustee and his
successors, subject only to provisions with respect to the Advisory Board, for said term
of years.

Article III, section 3 provides that at the time of the death of Beneficiary, his equitable
interest in the trust estate, unless disposed of otherwise by the Beneficiary, will pass to
and vest in his heirs in accordance with the laws of descent and distribution then in
force, applicable to the equitable interest of Beneficiary in the trust estate.

In Year, Son commenced litigation in which he alleged, among other things, that
Trustee had abused Trustee’s discretionary authority by withholding income from Son.
At the time, Son had four children, including Granddaughter. On Date 2, Trustee, Son,
Son’s spouse, B, and Son’s lineal descendants, or guardians ad litem for Son’s then
current and future lineal descendants, entered into Settlement Agreement, subject to
approval by Court. On Date 4, Court issued a judgment approving Settlement
Agreement and ordered, among other things, that: (1) Trust is partitioned into Trust A
and Trust B, (2) both Trust A and Trust B use Trust as their trust instrument, (3) Trust B
consists of one-fourth of Trust and is designated for the benefit of Son, B,
Granddaughter and Granddaughter’s heirs, (4) Son will release his power of
appointment in Article III, section 3, with respect to Trust A and Trust B, (5) B will
release any power of appointment in Article III, section 3, that she may have over Trust
A and Trust B, (6) Granddaughter, C, and Granddaughter’s children will release their
rights in Trust A, and (7) Son’s other three children will release their rights in Trust B,
individually, and on behalf of their children. This private letter ruling pertains only to
Trust B.
PLR-115630-16 4

Section 2.12 of Settlement Agreement provides that Trust B will distribute to Son and all
subsequent beneficiaries, annually by April 15, a sum of at least a percent of the
minimum b percent net profits (Annual Distribution). Section 2.13 provides that,
following Son’s death, Trustee will distribute to B, if she survives Son, her statutory
portion of the Annual Distribution from Trust B for the period of her life, but not to
exceed twenty-one years from Son’s death. Section 2.13 further provides that the
portion of the Annual Distribution to B arises from her position as one of Son’s heirs at
law, as provided under Article III, section 3. Section 2.14 provides that pursuant to the
terms of Trust, neither the trustees of Trust A nor Trust B shall have the right to
distribute the corpus of either trust to any beneficiary.

On Date 3, Son released, renounced and disclaimed the power of appointment granted
to him under Article III, section 3, and B released, renounced, and disclaimed any power
of appointment granted to her under Article III, section 3. On Date 4, such releases
were offered to the Court and admitted to evidence.

Subsequently, on Date 5, B executed a Memorandum of Disclaimer (B’s Disclaimer).
B’s Disclaimer provides that B irrevocably and without qualification disclaims and
refuses to accept all of her rights, title, interests, and powers in and to certain interests
in and powers with respect to Trust B. B’s Disclaimer provides further that she
disclaims: (1) c percent of the income interest in Trust B (i.e., the right to receive
discretionary distributions) pursuant to Article III, section 3, (2) d percent of the
remainder interest in Trust B to which she would be entitled, pursuant to Article III,
section 3, and (3) any power of appointment created under Trust, as it relates to the
above-disclaimed income and remainder interests. B’s Disclaimer also provides that B
intends for B’s Disclaimer to cover the interests in and powers with respect to Trust B to
which B would be entitled under any circumstances including, but not limited to, as an
heir of Son. B’s Disclaimer includes an acknowledgement before a notary public and a
receipt of delivery to Trustee dated Date 6. Date 6 is a date less than nine months after
Date 4.

On Date 7, Granddaughter also executed a Memorandum of Disclaimer
(Granddaughter’s Disclaimer). Granddaughter’s Disclaimer provides that
Granddaughter irrevocably and without qualification disclaims and refuses to accept all
of her rights, title, interests, and powers in and to certain interests in and powers with
respect to Trust B. Granddaughter’s Disclaimer provides further that she disclaims: (1)
e percent of the income interest in Trust B (i.e., the right to receive discretionary
distributions) pursuant to Article III, section 3, and (2) f percent of the remainder interest
in Trust B to which she would be entitled, pursuant to Article III, section 3.
Granddaughter’s Disclaimer also provides that Granddaughter intends for
Granddaughter’s Disclaimer to cover the interests in and powers with respect to Trust B
to which Granddaughter would be entitled under any circumstances including, but not
limited to, as an heir of Son. Granddaughter’s Disclaimer includes an
acknowledgement before a notary public and a receipt of delivery to Trustee dated
PLR-115630-16 5

Date 7. Date 7 is a date less than nine months after Date 4. Granddaughter’s
Disclaimer was executed in accordance with State law. It is represented that
Granddaughter has not accepted the disclaimed interests or any benefits of the
disclaimed interests and, as a result of Granddaughter’s Disclaimer, the disclaimed
interests passed without any direction from Granddaughter and did not pass to the
person making the disclaimer.

On Date 8, Son died, survived by his spouse, B, four children, including Granddaughter,
grandchildren and great-grandchildren. Currently, with respect to Trust B, the term
“Beneficiary,” as used in Article III, section 3, includes B, Granddaughter, and
Granddaughter’s four children, GGC1, GGC2, GGC3 and GGC4 (collectively,
Beneficiaries). Pursuant to Article IV, Trust B will terminate 21 years after the date of
Son’s death on Date 8. Accordingly, Trust B will terminate on Date 11.

After Son’s death, Trustee realized that, when Trust, B’s Disclaimer, Granddaughter’s
Disclaimer, and Settlement Agreement are read together, ambiguities exist regarding
the identity of the beneficiaries of Trust B following Son’s death, the proper standard for
making distributions of income from Trust B, how the remaining estate of Trust B should
be distributed upon termination, and how a Beneficiary’s interest should pass in the
event the Beneficiary is not then living. On Date 9, pursuant to State Statutes 1 and 2,
Trustee filed a petition seeking a declaratory judgment to resolve these ambiguities. An
amended petition (Petition) was filed on Date 10. The parties to the Petition have
agreed to and approved a proposed declaratory judgment (Declaratory Judgment) that
declares the rights and legal relations with respect to Trust B.

Declaratory Judgment provides, among other things, that Son’s release of his power of
appointment and B’s release of her power of appointment were effective on Date 4.
Declaratory Judgment also clarifies that Granddaughter’s Disclaimer of e percent of the
income interest in Trust B relates to the total income (i.e., the g percent minimum under
the Settlement Agreement and the discretionary distributions under Trust). Thus, to
give effect to Granddaughter’s Disclaimer of e percent of the income interest,
Declaratory Judgment includes a limitation on the discretionary distribution so that
Granddaughter may not receive more than f percent of distributions of excess net profits
for the year. Declaratory Judgment also clarifies that: (1) the g minimum distribution
amount required under Settlement Agreement must be distributed each year; and (2) to
the extent net profits exceed that amount, Trustee may make discretionary distributions
under Trust. To take into consideration the current economic environment, Declaratory
Judgment also adds distribution schedules for years in which net profits are less than b
percent. In addition, Declaratory Judgment identifies the proper beneficiaries and
distribution standards following Son’s death and clarifies the applicable statute of
descent and distribution for determining Son’s heirs under Trust (State Statute 3).
Finally, Declaratory Judgment clarifies that an heir of Son will not be treated as a
Beneficiary to the extent he or she disclaims (or has disclaimed) his or her interest in
PLR-115630-16 6

Trust B, and that the interest of a Beneficiary passes to that Beneficiary’s heirs (not to
Son’s heirs) if the Beneficiary dies prior to termination of Trust B.

State Statute 1 provides that a person interested in the administration of a trust,
including a trustee, may have a declaration of rights or legal relations in respect to the
trust to: (1) ascertain any class of heirs or others; (2) to direct the trustees to do or
abstain from doing any particular act in their fiduciary capacity; or (3) to determine any
question arising in the administration of the trust, including questions of construction of
writings.

State Statute 2 provides that a statutory probate court has jurisdiction over all
proceedings by a trustee and all proceedings concerning trusts, including proceedings
to (1): construe a trust instrument; (2) determine the law applicable to a trust instrument;
(3) determine the powers, responsibilities, and duties of a trustee; (4) ascertain
beneficiaries; (5) make determinations of fact affecting the administration, distribution,
or duration of a trust; and (6) determine a question arising in the administration or
distribution of a trust, among others.

State Statute 3 provides that if a person who dies intestate leaves a surviving spouse,
the estate, other than a community estate, to which the person had title descends and
passes as provided by this section. If the person has one or more children or a
descendant of a child: (1) the surviving spouse takes one-third of the personal estate;
and (2) two-thirds of the personal estate descends to the person’s child or children, and
the descendants of a child or children.

It is represented that no additions, actual or constructive, have been made to Trust or
Trust B after September 25, 1985.

Rulings Requested

1. The rendering of Declaratory Judgment will not cause Trust B to lose its exempt

status for purposes of the GST tax under § 26.2601-1(b)(1)(i) of the Generation-
Skipping Transfer Tax Regulations.

2. The rendering of Declaratory Judgment will not cause a taxable gift of any portion

of Trust B for federal gift tax purposes by any of the Beneficiaries.

3. The rendering of Declaratory Judgment will not cause inclusion of any portion of
   Trust B in the gross estate of any Beneficiary whose death occurs prior to the
   termination of Trust B.

4. The power of appointment of each Beneficiary over his or her respective share of
   Trust B is a general power of appointment created before October 22, 1942, the release
   PLR-115630-16 7

or lapse of which is nontaxable for federal estate and gift tax purposes with respect to
the Beneficiary.

5. Granddaughter’s Disclaimer is a qualified disclaimer under § 2518, does not

create transfers subject to federal gift tax, will not cause any part of the disclaimed
interests to be includible in Granddaughter’s gross estate for federal estate tax
purposes, and will not create transfers subject to the GST tax.

Law and Analysis

Ruling Request 1

Section 2601 of the Internal Revenue Code imposes a tax on every GST. The term
GST is defined in § 2611 as a taxable distribution, a taxable termination, and a direct
skip.

Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a), the GST tax is
generally applicable to GSTs made after October 22, 1986. However, under
§ 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the GST tax does not apply to a
transfer under a trust that was irrevocable on September 25, 1985, but only to the
extent that such transfer is 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)(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 under § 26.2601-1(b) will not cause the trust to lose its
exempt status. Thus, 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
gain for purposes of § 1001.

Section 26.2601-1(b)(4)(i)(C) provides that a judicial construction of a governing
instrument to resolve an ambiguity in the terms of the instrument or to correct a
scrivener's error will not cause an exempt trust to be subject to the provisions of
chapter 13, if: (1) The judicial action involves a bona fide issue; and (2) The
construction is consistent with applicable state law that would be applied by the highest
court of the state.

Section 26.2601-1(b)(4)(i)(E), Example 3, considers a situation where, in 1980, Grantor
established an irrevocable trust for the benefit of Grantor's children, A and B, and their
issue. The trust is to terminate on the death of the last to die of A and B, at which time
the principal is to be distributed to their issue. However, the provision governing the
termination of the trust is ambiguous regarding whether the trust principal is to be
distributed per stirpes, only to the children of A and B, or per capita among the children,
PLR-115630-16 8

grandchildren, and more remote issue of A and B. In 2002, the trustee files a
construction suit with the appropriate local court to resolve the ambiguity. The court
issues an order construing the instrument to provide for per capita distributions to the
children, grandchildren, and more remote issue of A and B living at the time the trust
terminates. The court's construction resolves a bona fide issue regarding the proper
interpretation of the instrument and is consistent with applicable state law as it would be
interpreted by the highest court of the state. Therefore, the trust will not be subject to
the provisions of chapter 13.

In Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), the Court considered
whether a state trial court's characterization of property rights conclusively binds a
federal court or agency in a federal estate tax controversy. The Court concluded that
the decision of a state trial court as to an underlying issue of state law should not be
controlling when applied to a federal statute. Rather, the highest court of the state is the
best authority on the underlying substantive rule of state law to be applied in the federal
matter. If there is no decision by that court, then the federal authority must apply what it
finds to be state law after giving “proper regard” to the state trial court's determination
and to relevant rulings of other courts of the state. In this respect, the federal agency
may be said, in effect, to be sitting as a state court.

In the present case, Trust was irrevocable on September 25, 1985. It has been
represented that no additions, actual or constructive, have been made to Trust or
Trust B after that date. In a prior private letter ruling, the Internal Revenue Service
(IRS) ruled that Settlement Agreement did not cause Trust, Trust A, or Trust B to lose
its grandfathered exempt status for purposes of the GST tax. Subsequently, Trustee
recognized ambiguities exist when Trust, B’s Disclaimer, Granddaughter’s Disclaimer,
and Settlement Agreement are read together. For example, although Trust authorizes
discretionary distributions of net income to Beneficiaries, Settlement Agreement is silent
on whether Trustee is authorized to make discretionary distributions in addition to the
minimum net income distributions agreed upon in Settlement Agreement. Thus, Trust,
when read with Settlement Agreement, could be interpreted to allow only distributions of
the minimum net income or it could be interpreted to also allow discretionary
distributions of net income in excess of the minimum net income of Trust B. In addition,
Trust uses a loop approach in which “heirs” are substituted as Beneficiary. Thus, when
read with Settlement Agreement, Trust could be interpreted to refer only to Son’s heirs
or it could be interpreted to refer to the heirs of each person who becomes a Beneficiary
of Trust B.

These possible constructions, among others, created bona fide issues regarding the
dispositive provisions of Trust. Trustee filed the Petition to resolve these issues. The
Declaratory Judgment applies applicable State law and construes Trust, when read with
Settlement Agreement, B’s Disclaimer, and Granddaughter’s Disclaimer, in a manner
that is consistent with applicable State law that would be applied by the highest court of
State.
PLR-115630-16 9

Accordingly, based on the facts presented and the representations made, we rule that
the rendering of Declaratory Judgment will not cause Trust B to lose its grandfathered
exempt status under § 26.2601-1(b)(1).

Ruling Request 2

Section 2501(a) 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 provides that the gift tax shall apply 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 2512(a) provides that if the gift is made in property, the value thereof at the date
of the gift is considered the amount of the gift.

Section 2512(b) provides that where property is transferred for less than adequate and
full consideration in money or money's worth, then the amount by which the value of the
property exceeded the value of the consideration is deemed to be a gift, and is included
in computing the amount of gifts made during the calendar year.

In this case, Declaratory Judgment is a judicial construction that resolves ambiguities
that exist when Trust, B’s Disclaimer, Granddaughter’s Disclaimer, and Settlement
Agreement are read together. Beneficiaries will have the same interest in Trust B
before and after the Declaratory Judgment is rendered. Because the beneficial
interests of Beneficiaries are the same, no transfer of property will be deemed to occur
as a result of the rendering of Declaratory Judgment.

Accordingly, based on the facts submitted and the representations made, we conclude
that the rendering of Declaratory Judgment will not cause any Beneficiary to make a gift
of any portion of Trust B for gift tax purposes.

Ruling Request 3

Section 2033 provides that the value of the gross estate shall include the value of all
property to the extent of the interest therein of the decedent at the time of his death.

Section 2036(a) provides that the value of the gross estate shall include the value of
property to the extent of any interest therein of which the decedent has at any time
made a transfer (except in the case of a bona fide sale for an adequate and full
consideration in money or money’s worth), by trust or otherwise, under which the
decedent has retained for life or for any period not ascertainable without reference to
the decedent’s death -- (1) the possession or enjoyment of, or the right to the income
PLR-115630-16 10

from, the property, or (2) the right, either alone or in conjunction with any person, to
designate the persons who shall possess or enjoy the property or the income therefrom.

Section 2037(a) provides that the value of the gross estate shall include the value of all
property to the extent of any interest therein of which the decedent has at any time after
September 7, 1916, made a transfer (except in the case of a bona fide sale for an
adequate and full consideration in money or money’s worth), by trust or otherwise, if
(1) possession or enjoyment of the property can, through ownership of such interest, be
obtained only by surviving the decedent, and (2) the decedent has retained a
reversionary interest in the property (but in the case of a transfer made before
October 8, 1949, only if such reversionary interest arose by the express terms of the
instrument of transfer), and the value of such reversionary interest immediately before
the death of the decedent exceeds five percent of the value of such property.

Section 2038(a)(1) provides that the value of the gross estate shall include the value of
all property to the extent of any interest therein of which the decedent has at any time
made a transfer (except in the case of a bona fide sale for an adequate and full
consideration in money or money’s worth), by trust or otherwise, where the enjoyment
thereof was subject at the date of death to any change through the exercise of a power
(in whatever capacity exercisable) by the decedent alone or by the decedent in
conjunction with any other person to alter, amend, revoke, or terminate, or where any
such power is relinquished during the three-year period ending on the date of the
decedent’s death.

Sections 2036 through 2038 include in a decedent’s gross estate property only to the
extent that the decedent has made a transfer of the property during his life.
In this case, Beneficiaries did not transfer property to Trust or Trust B. In addition,
because the beneficial interests of Beneficiaries are the same, before and after
Declaratory Judgment is rendered, no transfer of property will be deemed to occur as a
result of the rendering of Declaratory Judgment.

Accordingly, based on the facts presented and the representations made, we rule that
the rendering of Declaratory Judgment will not cause inclusion, under §§ 2036 through
2038, of any portion of Trust B in the gross estate of any Beneficiary whose death
occurs prior to the termination of Trust B.

Ruling Request 4

Section 2041(a)(1) provides that the value of the gross estate shall include the value of
all property to the extent of any property with respect to which a general power of
appointment created on or before October 21, 1942, is exercised by the decedent (A) by
will, or (B) by a disposition which is of such nature that if it were a transfer of property
owned by the decedent, such property would be includible in the decedent’s gross
PLR-115630-16 11

estate under §§ 2035 to 2038, inclusive; but the failure to exercise such a power or the
complete release of such a power shall not be deemed an exercise thereof.

Section 2041(b)(1) defines the term “general power of appointment” as a power
exercisable in favor of the decedent, the decedent’s estate, the decedent’s creditors, or
creditors of the decedent’s estate, except that – (A) A power to consume, invade, or
appropriate property for the benefit of the decedent which is limited by an ascertainable
standard relating to the health, education, support, or maintenance of the decedent shall
not be deemed a general power of appointment, and (B) A power of appointment
created on or before October 21, 1942, which is exercisable by the decedent only in
conjunction with another person shall not be deemed a general power of appointment.

Section 20.2041-1(b)(1) of the Estate Tax Regulations provides that the term “power of
appointment” includes all powers which are in substance and effect powers of
appointment regardless of the nomenclature used in creating the power and regardless
of local property law connotations.

Section 20.2041-1(c)(1) provides that a power of appointment is not a general power if
by its terms it is either – (a) Exercisable only in favor of one or more designated persons
or classes other than the decedent or his creditors, or the decedent’s estate or the
creditors of his estate, or (b) Expressly not exercisable in favor of the decedent or his
creditors, or the decedent’s estate or the creditors of his estate.

Section 20.2041-1(e) provides that a power of appointment created by an inter vivos
instrument is considered as created on the date the instrument takes effect. The power
is not treated as created at some future date merely because it is not exercisable on the
date the instrument takes effect or because the identity of its holders is not
ascertainable until after the date the instrument takes effect.

Section 20.2041-2(d) provides that a failure to exercise a general power of appointment
created on or before October 21, 1942, or a complete release of the power is not
considered to be an exercise of a general power of appointment. The phrase “a
complete release” means a release of all powers over all or a portion of the property
subject to a power of appointment, as distinguished from the reduction of a power of
appointment to a lesser power. Thus, if the decedent completely relinquished all
powers over one-half of the property subject to a power of appointment, the power is
completely released as to that one-half.

Section 2514(a) provides that an exercise of a general power of appointment created on
or before October 21, 1942, shall be deemed a transfer of property by the individual
possessing the power; but the failure to exercise the power or the complete release of
the power shall not be deemed an exercise thereof.
PLR-115630-16 12

Section 25.2514-2(c) of the Gift Tax Regulations provides that a failure to exercise a
general power of appointment created on or before October 21, 1942, or a complete
release of the power is not considered to be an exercise of a general power of
appointment. The phrase “a complete release” means a release of all powers over all
or a portion of the property subject to a power of appointment, as distinguished from the
reduction of a power of appointment to a lesser power.

Section 25.2514-1(e) provides that a power of appointment created by an inter vivos
instrument is considered as created on the date the instrument takes effect.

In this case, the Trust was executed on a date prior to October 21, 1942. Under
Article III, section 3, each Beneficiary of Trust B is granted a testamentary general
power of appointment to appoint the income and corpus of Trust B. Specifically,
Article III, section 3 provides that “[a]t the time of the death of the Beneficiary, his
equitable interest in said Trust Estate unless disposed of otherwise by said Beneficiary,
shall pass to and vest in his heirs in accordance with the laws of descent and
distribution then in force, applicable to the equitable interest of such Beneficiary in said
Trust Estate. (The term ‘Beneficiary’ applies not only to Son but to all his successors to
beneficial interests under this trust).” (Emphasis added.) This language is not limited by
an ascertainable standard nor is the power exercisable only in conjunction with another
person. Further, the Beneficiary may exercise the power in favor of the Beneficiary, the
Beneficiary’s estate, the Beneficiary’s creditors, or the creditors of the Beneficiary’s
estate because the Article does not expressly provide otherwise.

Accordingly, based on the facts presented and the representations made, we rule that
the testamentary power of appointment of each Beneficiary over his or her respective
share of Trust B is a general power of appointment created before October 21, 1942.
Further we rule that for purposes of § 2514(a) and § 2041(a)(1), the release or lapse of
a Beneficiary’s general power of appointment is not deemed to be an exercise of a
general power of appointment. Accordingly, the release or lapse of the testamentary
power of appointment is not subject to federal gift or estate tax.

Ruling Request 5

Section 2518(a) provides that, if a person makes a qualified disclaimer of an interest in
property, the estate, gift, and GST tax provisions will apply to that interest as if the
interest had never been transferred to the person.

Section 2518(b) provides that the term “qualified disclaimer” means an irrevocable and
unqualified refusal by a person to accept an interest in property, but only if: (1) the
disclaimer is in writing; (2) the disclaimer is received by the transferor of the interest, his
legal representative, or the holder of legal title to the property to which the interest
relates not later than the date which is nine months after the later of the date on which
the transfer creating the interest in such person is made, or the day on which such
PLR-115630-16 13

person attains age 21; (3) the person disclaiming the interest has not accepted the
interest or any of its benefits; and (4) as a result of the disclaimer, the interest passes
without any direction on the part of the person making the disclaimer and passes either
to the spouse of the decedent or to a person other than the person making the
disclaimer.

Section 2518(c)(1) provides that a disclaimer with respect to an undivided portion of an
interest which meets the requirements of § 2518(b) shall be treated as a qualified
disclaimer of such portion of the interest. Section 2518(c)(2) provides that a power with
respect to property is treated as an interest in that property.

Section 25.2518-1(b) provides that if a person makes a qualified disclaimer as
described in § 2518(b) and 25.2518-2, for purposes of the federal estate, gift, and
generation-skipping transfer tax provisions, the disclaimed interest in property is treated
as if it had never been transferred to the person making the qualified disclaimer.
Instead, it is considered as passing directly from the transferor of the property to the
person entitled to receive the property as a result of the disclaimer. Accordingly, a
person making a qualified disclaimer is not treated as making a gift. Similarly, the value
of a decedent’s gross estate for purposes of the federal estate tax does not include the
value of property with respect to which the decedent, or the decedent’s executor or
administrator on behalf of the decedent, has made a qualified disclaimer.

Section 25.2518-2(b)(1) provides that a disclaimer is a qualified disclaimer only if it is in
writing. The writing must identify the interest in property disclaimed and be signed by
the disclaimant or the disclaimant’s legal representative. Section 25.2518-2(b)(2)
provides that the written disclaimer must be delivered to the transferor of the interest,
the transferor’s legal representative, the holder of the legal title of the property to which
the interest relates, or the person in possession of the property.

Section 25.2518-2(c)(1) provides that a disclaimer is a qualified disclaimer only if it is
delivered no later than the date which is nine months after the later of the date on which
the transfer creating the interest in the disclaimant is made, or the day on which the
disclaimant attains age 21.

Section 25.2518-2(c)(3) provides that the nine month period for making a disclaimer
generally is to be determined with reference to the transfer creating the interest in the
disclaimant. In the case of a general power of appointment, the holder of the power has
a nine month period after the transfer creating the power in which to disclaim. If a
person to whom an interest in property passes by reason of the exercise, release, or
lapse of a general power desires to make a qualified disclaimer, the disclaimer must be
made within a nine-month period after the exercise, release, or lapse regardless of
whether the exercise, release, or lapse is subject to estate or gift tax.
PLR-115630-16 14

Section 25.2518-3(a)(1)(i) provides that the disclaimer of all or an undivided portion of
any separate interest in property may be a qualified disclaimer even if the disclaimant
has another interest in the same property. In general, each interest in property that is
separately created by the transferor is treated as a separate interest.
Section 25.2518-3(a)(1)(iii) provides that a power of appointment with respect to
property is treated as a separate interest in the property and the power of appointment
with respect to all or an undivided portion of the property may be disclaimed
independently from any other interests separately created by the transferor in the
property.

Section 25.2518-3(b) provides that a disclaimer of an undivided portion of a separate
interest in property which meets the other requirements of a qualified disclaimer under
§ 2518(b) and the corresponding regulations is a qualified disclaimer. An undivided
portion of a disclaimant’s separate interest in property must consist of a fraction or
percentage of each and every substantial interest or right owned by the disclaimant in
the property and must extend over the entire term of the disclaimant’s interest in the
property and in other property into which such property converted.

In this case, Son was the sole Beneficiary of Trust B during his life. Under Article III,
section 3, Son had a general power to appoint the income and corpus of Trust B. If Son
did not exercise this power, the power would lapse at his death and Son’s heirs under
the laws of descent and distribution would succeed him as beneficiaries of the trust. An
heir of Son who, thus, became a Beneficiary (as the term is defined in Trust) has the
same power of appointment and the same income interest as Son had and also has a
remainder interest contingent on surviving Son for 21 years.

Son released his power of appointment on Date 4. On Date 4, Granddaughter’s income
interest in Trust B and Granddaughter’s power of appointment over her interests in
Trust B were contingent upon surviving Son. In addition, Granddaughter’s remainder
interest in Trust B was contingent on surviving 21 years after Son’s death.

Under § 25.2518-2(c)(3), Granddaughter’s contingent income and remainder interests in
Trust B, as well as her contingent power to appoint these interests, are deemed, for
purposes of § 2518, to have been created in Granddaughter when Son released his
power of appointment over Trust on Date 4. Under § 25.2518-2(c)(3), if Granddaughter
made a qualified disclaimer of her interests in Trust B (or an undivided portion of these
interests) then the interests (i.e., the income, remainder, and powers attributable to
these disclaimed interests) are treated as if they have never been transferred to
Granddaughter for federal estate and gift.

In this case, Granddaughter’s Disclaimer specified that she disclaimed e percent of her
income interest and f percent of her remainder interest in Trust B. Granddaughter also
disclaimed the portion of her testamentary power of appointment with respect to such
income and remainder interests. Further, Granddaughter disclaimed any interest in
PLR-115630-16 15

Trust B as an heir at law of Son in such disclaimed interests. Granddaughter’s
Disclaimer was received by Trustee on Date 7, a date less than nine months after Date

4. It is represented that Granddaughter had not accepted the disclaimed interests or
   any benefits of the disclaimed interests and, as a result of Granddaughter’s Disclaimer,
   the disclaimed interests passed without any direction from Granddaughter and did not
   pass to the person making the disclaimer.

Accordingly, based on the facts presented and the representations made, we rule that
Granddaughter’s Disclaimer is a qualified disclaimer under § 2518, and the disclaimer
did not create transfers subject to federal gift tax, will not cause any part of the
disclaimed interests in Trust B to be includible in Granddaughter’s gross estate for
federal estate tax purposes, and will create a transfer subject to the GST tax.

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.

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 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.

                                   Sincerely,



                                   Lorraine E. Gardner
                                   Lorraine E. Gardner
                                   Senior Counsel, Branch 4
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)

   Copy of letter
   Copy for § 6110 purposes

cc: