Incomplete-gift trust receives favorable tax rulings

Plain-English summary

A married couple in a community property state created an irrevocable domestic trust whose distribution committee could act unanimously or with a grantor's consent. The IRS ruled that the grantors' retained distribution and testamentary powers made their contributions wholly incomplete gifts, while later distributions to other beneficiaries would be gifts made one-half by each spouse. Committee members would not make gifts by approving distributions, and their joint powers would not cause trust property to enter their estates as general powers of appointment. The trust was not a grantor trust under the provisions the IRS could determine from its terms, but possible grantor treatment under section 675 depends on how the trust is actually administered and was left for examination. Because each spouse's trust interest would be included in that spouse's estate and the property retained its community character, all community property in the trust would receive a fair-market-value basis adjustment when the first spouse died. The IRS expressly gave no ruling on the trust's decanting provisions or other provisions not addressed in the letter.

Ruling snapshot

• Question: What income, gift, estate, power-of-appointment, and basis consequences follow from the couple's community-property trust arrangement?
• Outcome: mixed, favorable rulings were issued, but possible grantor-trust treatment under section 675 was deferred as a factual issue
• Key authorities: IRC §§ 671 through 679, 1014(b)(6), 2036, 2038, 2041, 2501, 2511, and 2514

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201751003                                             Third Party Communication: None
Release Date: 12/22/2017                                      Date of Communication: Not Applicable
Index Number: 671.00-00, 1014.00-00,
              2041.00-00, 2501.00-00,                         Person To Contact:
              2514.00-00                                      ----------------, ID No. ------------------
                                                              Telephone Number:
-------------------------------------                         ----------------------
-----------------------------------                           Refer Reply To:
------------------------------------------                    CC:PSI:04
                                                              PLR-104748-17
RE:                                                           Date:
         -------------------------------------                September 18, 2017




Legend

Date                                = --------------------
Grantor                             = ------------------------------------------------------
Spouse                              = --------------------------------------------------------
Guardian 1                          = ---------------------
Guardian 2                          = -----------------------
Guardian 3                          = --------------------------
Trust                               = --------------------------------------
State 1                             = -----------
State 2                             = --------------
Trustee                             = --------------------------
Power of Appointment
Committee                           = -----------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------
                                      -------------------------------------------

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

This responds to a letter dated January 30, 2017, and subsequent submissions,
requesting rulings under the Internal Revenue Code.

Facts

The facts submitted and representations made are as follows. On Date, Grantors
(Husband and Wife) created an irrevocable trust (Trust) for the benefit of Grantors and
PLR-104748-17                                 2

Beneficiaries, which means a class consisting of Grantors’ issue and the brothers of
Husband. Trust is a domestic trust governed by the laws of State 1. A corporate
trustee (Trustee) is the sole trustee of Trust. Grantors are married and reside in
State 2, a community property state.

The terms of Trust provide that until the death of the first Grantor to die (Predeceased
Grantor), at any time or times, Trustee shall distribute to the Beneficiaries and/or either
or both of the Grantors such amounts of the net income or principal of Trust as the
Power of Appointment Committee (Committee) appoints. While the Committee is in
existence, Trustee shall make no distributions except as the Committee appoints.

From and after the death of the Predeceased Grantor and until the death of the
Surviving Grantor, at any time or times, Trustee shall distribute to the Beneficiaries
and/or the Surviving Grantor such amounts of the net income or principal of Trust as the
Committee appoints. While the Committee is in existence, Trustee shall make no
distributions except as the Committee appoints.

Any appointment, direction, determination, or action by the Committee requires either
(1) the unanimous written consent of the then serving members of the Committee
(Unanimous Member Power), or (2) the written consent of either or both of the Grantors
(or the survivor of them) and a majority of the then serving members of the Committee
(Grantor’s Consent Power). The members of the Committee serve and act in a
non-fiduciary capacity. The Committee may direct that distributions be made equally or
unequally to or for the benefit of any one or more of the Beneficiaries to the exclusion of
others.

Trust provides that the members of the Committee shall initially consist of Guardian 1,
Guardian 2, and Guardian 3, or any other individual(s), who have legal authority to act
on behalf of Grantors’ issue. Guardian 1, Guardian 2, and Guardian 3 each represent
one of Grantors’ three minor children.

If at any time the Committee includes three or more members, then all the members of
the Committee may by unanimous vote, at any time and from time to time, add one or
more members to the Committee provided that such members are Beneficiaries and,
provided further that, if any one or more of them is a minor, then serving members of
the Committee shall, by unanimous vote, designate an individual who has legal
authority under Trust to serve as guardian. If at any time a Committee member resigns
or fails or ceases to so serve, then the position of such Committee member shall remain
vacant. The Committee shall cease to exist upon the first to occur of the death of the
Surviving Grantor (Distribution Date) or the date upon which the Committee is reduced
to one member.

If the Committee ceases to exist prior to the Distribution Date, Trustee may distribute to
the Beneficiaries such amounts of net income or principal as Trustee determines. If the
PLR-104748-17                                 3

Committee ceases to exist, then, until the death of the Predeceased Grantor, Trustee
may distribute to either or both Grantors such amounts of net income or principal as
Trustee determines. If the Committee ceases to exist, then, from and after the death of
the Predeceased Grantor, Trustee may distribute to the Surviving Grantor such
amounts of net income or principal of Trust as Trustee determines.

Trust provides that at all times Trustees of all trusts created under Trust must be
Independent Trustees who are not members of Grantors’ Family. “Independent
Trustee” is defined as any bank or individual who is not either of the Grantors and who
is not within the meaning of § 672(c) related or subordinate to either of the Grantors.
“Grantors’ Family” is defined to include: the issue of each of the Grantor’s grandparents
(including the Grantors) and Charities, as defined in Trust.

Any net income not distributed by Trustee will be accumulated and added to principal.

Each of the Grantors shall have the power, in a non-fiduciary capacity, at any time and
from time to time, to appoint to any one or more of the Grantors’ issue, amounts of
principal (including the whole thereof), as the Grantor deems advisable to provide for
the health, maintenance, support and education of Grantors’ issue (Grantor’s Sole
Power).

Upon the death of the Predeceased Grantor, Trustee shall distribute the Predeceased
Grantor’s entire interest in the property of Trust to or for the benefit of any person or
persons or entity or entities, other than the Predeceased Grantor’s estate, the
Predeceased Grantor’s creditors, or the creditors of Predeceased Grantor’s estate, as
the Predeceased Grantor may appoint by will (Predeceased Grantor’s Testamentary
Power).

Upon the death of the Predeceased Grantor, any property remaining of the
Predeceased Grantor’s entire one-half interest in Trust that has not been effectively
appointed by Will shall be distributed as follows: five percent to each member of the
Committee other than the Grantors’ issue if there are one or more Grantors’ issue then
living. The balance is to be distributed, per stirpes, to the Grantors’ issue who are then
living, or held in a trust for their benefit as provided by Trust. The Surviving Grantor’s
balance in Trust continues to be held by Trust and administered pursuant to the terms
of Trust until the Surviving Grantor’s death.

Upon the death of the Surviving Grantor, Trustee shall distribute the Surviving Grantor’s
balance of Trust to or for the benefit of any person or persons or entity or entities, other
than the Surviving Grantor’s estate, the Surviving Grantor’s creditors, or the creditors of
Surviving Grantor’s estate, as the Surviving Grantor may appoint by will (Surviving
Grantor’s Testamentary Power).
PLR-104748-17                                  4

Upon the death of the Surviving Grantor, any property remaining of the Surviving
Grantor’s balance of Trust that has not been effectively appointed by Will shall be
distributed as follows: five percent to each member of the Committee other than the
Grantors’ issue if there are one or more Grantors’ issue then living. The balance is to
be distributed, per stirpes, to the Grantors’ issue who are then living or held in a trust for
their benefit as provided by Trust.

Trust provides that all transferred property to Trust is community property and Grantors
may hereafter, either singly or jointly, transfer other property to Trust which either is
community property or is being transmuted into community property. Moreover, any
and all property transferred to Trust prior to the death of the Predeceased Grantor is
and shall retain its character as community property.

Any distribution pursuant to the terms of Trust to either Grantor prior to the death of the
Predeceased Grantor is and shall be a distribution of community property. All
distributions of the net income or principal prior to the death of the Predeceased
Grantor, whether made by the Committee, Trustee, or a Grantor’s exercise of the
powers retained by such Grantor, to a Beneficiary shall be a distribution out of
community property.

Prior to the death of the Predeceased Grantor, any exercise of either Grantor’s Sole
Power shall be funded equally from each Grantor’s share of community property held in
Trust. Each Grantor consents to all such distributions by the other Grantor.

With respect to each Grantor’s testamentary powers, any such appointment by the
Predeceased Grantor shall be funded solely from the Predeceased Grantor’s one-half
interest in property in Trust.

Each Grantor affirmatively agrees and confirms that, upon any distribution from Trust,
other than to one of the Grantors and other than the exercise of the Predeceased
Grantor’s Testamentary Power, such property shall be funded equally from each
Grantor’s share of community property in Trust.

It is represented that Trustee, Grantors, and members of the Committee are all United
States persons within the meaning of § 7701(a)(30)(A).

No distribution by Trustee to a beneficiary, and no distribution to a beneficiary pursuant
to the exercise of a power of appointment granted hereunder, shall discharge any
individual’s legal obligation to support the beneficiary.

Taxpayer has requested the following rulings:

1. As long as the Committee is serving, no portion of the items of income, deductions,
PLR-104748-17                                 5

and credits against tax of Trust shall be included in computing the taxable income,
deductions, and credits of the Grantors or any member of the Committee under § 671.

2. The contribution of property to Trust by Grantors will not be a completed gift subject
to federal gift tax.

3. Any distribution of property by the Committee from Trust to either Grantor will not be
a completed gift, subject to federal gift tax, by any member of the Committee.

4. Any distribution of property by the Committee from Trust to any beneficiary of Trust,
other than the Grantors, will not be a completed gift, subject to federal gift tax, by any
member of the Committee.

5. No member of the Committee upon his or her death will include in his or her estate
any property held in Trust because such member is deemed to have a general power of
appointment within the meaning of § 2041 over property held in Trust.

6. The basis of all community property in Trust on the date of death of the Predeceased
Grantor will receive an adjustment in basis to the fair market value of such property at
the date of death of the Predeceased Grantor.

Ruling 1

Section 671 provides that where it is specified in subpart E of part I of subchapter J that
the grantor or another person shall be treated as the owner of any portion of a trust,
there shall then be included in computing the taxable income and credits of the grantor
or the other person those items of income, deductions, and credits against tax of the
trust which are attributable to that portion of the trust to the extent that such items would
be taken into account under chapter 1 in computing taxable income or credits against
the tax of an individual.

Section 672(a) provides, for purposes of subpart E, the term “adverse party” means any
person having a substantial beneficial interest in the trust which would be adversely
affected by the exercise or nonexercise of the power which he possesses respecting the
trust.

Sections 673 through 677 specify the circumstances under which the grantor is treated
as the owner of a portion of a trust.

Section 673(a) provides that the grantor shall be treated as the owner of any portion of
a trust in which the grantor has a reversionary interest in either the corpus or 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.
PLR-104748-17                                 6

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 by 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.

Section 677(a) provides, in general, that the grantor shall be treated as the owner of any
portion of a trust, whether or not he is treated as such owner under § 674, whose
income without the approval or consent of any adverse party is, or, in the discretion of
the grantor or a nonadverse party, or both, may be (1) distributed to the grantor or the
grantor’s spouse; (2) held or accumulated for future distribution to the grantor or the
grantor’s spouse; or (3) applied to the payment of premiums on policies of insurance on
the life of the grantor or the grantor’s spouse.

Section 678(a) provides that a person other than the grantor shall be treated as the
owner of any portion of a trust with respect to which: (1) such person has a power
exercisable solely by himself to vest the corpus or the income therefrom in himself, or
(2) such person has previously partially released or otherwise modified such a power
and after the release or modification retains such control as would, within the principles
of §§ 671-677, inclusive, subject a grantor of a trust to treatment as the owner thereof.
PLR-104748-17                                 7

Section 679(a) provides that a United States person who directly or indirectly transfers
property to a foreign trust shall be treated as the owner for his taxable year of the
portion of such trust attributable to such property if for such year there is a United States
beneficiary of any portion of the trust.

Based on the facts submitted and representations made, we conclude than an
examination of Trust reveals none of the circumstances that would cause either Grantor
to be treated as the owner of any portion of Trust under §§ 673, 674, 676, 677, or 679
so long as Trust remains a domestic trust and the 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 either Grantor under § 675. Thus, the circumstances attendant on the
operation of Trust will determine whether either 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.

Also, because none of the members of the Committee has a power exercisable by
himself to vest trust income or corpus in himself, none shall be treated as the owner of
Trust under § 678(a).

Rulings 2 and 3

Section 2501(a)(1) provides for the imposition of a gift tax for each calendar year on the
transfer of property by gift during such calendar year by any individual. Section 2511(a)
provides that the gift tax 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, with respect to which the donor has so
parted with dominion and control as to leave the donor with no power to change the
disposition of the property, 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) provides an example, where the donor transfers property 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
PLR-104748-17                                8

gift. However, if the donor had not retained a testamentary power of appointment, but
had 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 to the property 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.

Under § 25.2511-2(e), a donor is considered as possessing a power if it is exercisable
by the donor in conjunction with any person not having a substantial adverse interest in
the disposition of the transferred property or the income therefrom. A trustee, as such,
is not a person having an adverse interest in the disposition of the trust property or its
income.

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.

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 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.

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
PLR-104748-17                                9

gift was complete in 1924, when he relinquished his right to change the beneficiaries of
the trust. A grantor’s retention of a power to change the beneficial interests in a trust
causes the transfer to the trust to be incomplete for gift tax purposes, even though the
power may be defeated by the actions of third parties. Goldstein v. Commissioner,
37 T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

In this case, each Grantor retained the Grantor’s Consent Power over the income 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
Committee members are not takers in default for purposes of § 25.2514-3(b)(2). They
are merely coholders of the power. 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 Committee ceases to exist
upon the death of the last Grantor to die. Accordingly, the Committee members do not
have interests adverse to either Grantor under § 25.2514-3(b)(2) and for purposes of
§ 25.2511-2(e).

If the Committee ceases to exist, Trustee has the power to distribute net income to a
beneficiary. However, Trustee’s power is not a condition precedent to each Grantor’s
Consent Power. Each Grantor’s Consent Power over income is presently exercisable
and not subject to a condition precedent. Thus, Trustee’s power to distribute net
income does not cause the transfer of property to be complete with respect to the
income interest in Trust for federal gift tax purposes. Therefore, each Grantor is
considered as possessing the power to distribute income to any beneficiary himself or
herself because he or she retained the Grantor’s Consent Power.

Each Grantor also retained the power to appoint such amounts of principal (including
the whole thereof) to any one or more of the Beneficiaries (Grantor’s Sole Power).
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 as between themselves unless the power is a fiduciary power limited by a
fixed or ascertainable standard. In this case, the Grantor’s Sole Power gives each
Grantor the power to change the interests of the beneficiaries. Finally, each Grantor
consented to allow the other Grantor to exercise the Grantor’s Sole Power alone. Even
though each Grantor’s Power is limited by an ascertainable standard, i.e., health,
education, maintenance and support, Grantors’ powers are not fiduciary powers. If the
Committee ceases to exist, Trustee, in its fiduciary capacity, also has the power to
distribute principal to one or more beneficiaries. Trustee is a corporate trustee and,
under the terms of the trust instrument, cannot be related or subordinate within the
meaning of § 672(c) to the Grantors. The powers of Trustee are not conditions
precedent to the Grantors’ powers. Each Grantor’s Sole Power over principal is
presently exercisable and not subject to a condition precedent. Accordingly, each
PLR-104748-17                                 10

Grantor retains dominion and control over the principal of Trust until Trustee exercises
his or her power to appoint principal. See Goldstein v. Commissioner, 37 T.C. 897
(1962). Thus, Trustee’s powers to distribute principal do not cause the transfer of
property to be complete with respect to the remainder in Trust for federal gift tax
purposes. Accordingly, the retention of Grantor’s Consent Power and Grantor’s Sole
Power causes the transfer of property to Trust to be wholly incomplete for federal gift
tax purposes.

Further, each Grantor retained either a Predeceased Grantor’s Testamentary Power or
the Surviving Grantor’s Testamentary Power (depending on the order of the deaths of
the Grantors), to appoint property in Trust to any person or persons or entity or entities,
other than his or her respective estate, his or her respective creditors, or the creditors of
his or her respective estate. Under § 25.2511-2(b)(2), 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
tax purposes.

Accordingly, based on the facts submitted and representations made, we conclude that
the contribution of property to Trust by the Grantors will not be a completed gift subject
to federal gift tax. However, any distribution made from Trust to a beneficiary is a
completed gift at the time of the distribution made one-half by each Grantor. Trust
provides that any distribution pursuant to the terms of Trust to either Grantor prior to the
death of the Predeceased Grantor is and shall be a distribution of community property.
Accordingly, any distribution from Trust to either Grantor is merely a return of each
Grantor’s property. Therefore, we conclude that any distribution of property by the
Committee from Trust to either Grantor will not be a completed gift subject to federal gift
tax, by any member of the Committee. Further, upon the Predeceased Grantor’s death,
the fair market value of the Predeceased Grantor’s interest in Trust is includible in the
Predeceased Grantor’s gross estate for federal estate tax purposes. Moreover, upon
the Surviving Grantor’s death, the fair market value of the balance in Trust is includible
in the Surviving Grantor’s gross estate for federal estate tax purposes.

Rulings 4 and 5

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.
PLR-104748-17                                 11

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
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 2041(a)(2) 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 the decedent has at the
time of death a general power of appointment created after October 21, 1942, or with
respect to which the decedent has at any time exercised or released such a power 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 estate under
§§ 2035 to 2038, inclusive.

Under § 2041(b)(1), the term “general power of appointment” is defined, in relevant part,
to mean a power which is exercisable in favor of the decedent, his estate, his creditors,
or the creditors of his estate.
PLR-104748-17                                  12

Section 2041(b)(1)(C)(ii) provides, however, that in the case of a power of appointment
created after October 21, 1942, which is exercisable by the decedent only in conjunction
with another person, if the power is not exercisable by the decedent 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 decedent - such
power shall not be deemed a general power of appointment. For purposes of
§ 2041(b)(1)(C)(ii), a person who, after the death of the decedent, may be possessed of
a power of appointment (with respect to the property subject to the decedent’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 decedent’s
power.

Section 20.2041-3(c)(2) of the Estate Tax Regulations 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 decedent’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.

The powers held by the Committee members under the Grantor’s Consent Power are
powers that are exercisable only in conjunction with the creators, the Grantors.
Accordingly, under §§ 2514(b) and 2041(a)(2), the Committee members do not possess
general powers of appointment by virtue of possessing this power. Further, the powers
held by the Committee members under the Unanimous Member Powers are not general
powers of appointment for purposes of §§ 2514(b) and 2041(a)(2). As in the examples
in §§ 25.2514-3(b)(2) and 20.2041-3(c)(2), the Committee members have substantial
adverse interests in the property subject to this power. Accordingly, any distribution
made from Trust to a beneficiary, other than Grantors, pursuant to the exercise of these
powers, the Grantor’s Consent Power and the Unanimous Member Powers, are not gifts
by the Committee members. Instead, such distributions are gifts by the Grantors.

Based upon the facts submitted and representations made, we conclude that any
distribution of property by the Committee from Trust to any beneficiary of Trust, other
than the Grantors, will not be a completed gift subject to federal gift tax, by any member
of the Committee. Further, we conclude that any distribution of property from Trust to a
beneficiary other than Grantors will be a completed gift by the Grantors. Trust provides
that all distributions of the net income or principal prior to the death of the Predeceased
Grantor, whether made by the Committee, Trustee or a Grantor’s exercise of the
powers retained by such Grantor, to a beneficiary is and shall be a distribution out of
PLR-104748-17                                 13

community property. Accordingly, distributions to beneficiaries, other than Grantors, will
be gifts made one-half by each Grantor. Finally, we conclude that the powers held by
the Committee members are not general powers of appointment for purposes of
§ 2041(a)(2) and, accordingly, the possession of these powers by the Committee
members will not cause Trust property to be includible in any Committee member’s
gross estate under § 2041(a)(2).

Ruling 6

Section 1014(a) provides, in part, that, except as otherwise provided in this section, the
basis of property in the hands of a person acquiring the property from a decedent or to
whom the property passed from a decedent will, 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)(6) provides that, in the case of decedents dying after
December 31, 1947, property which represents the surviving spouse’s one-half share of
community property held by the decedent and the surviving spouse under the
community property laws of any State, is considered, for purposes of § 1014(a), to have
been acquired from or to have passed from the decedent if at least one-half of the
whole of the community interest in such property was includible in determining the value
of the decedent’s gross estate.

Section 2036(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
made a transfer (except in case of a bona fide sale for adequate and full consideration
in money or money’s worth), by trust or otherwise, under which he has retained for his
life or for any period not ascertainable without reference to his death or for any period
which does not in fact end before his death (1) the possession or enjoyment of, or the
right to the income 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 2038(a)(1) provides that the value of the decedent’s 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 case of a bona fide sale for adequate and full
consideration in money or money’s worth), by trust or otherwise, where the enjoyment
thereof was subject at the date of his 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 (without regard to when or from what source the
decedent acquired such power), to alter, amend, revoke, or terminate, or where any
such power is relinquished during the three-year period on the date of the decedent’s
death.
PLR-104748-17                                 14

Grantors reside in State 2, a community property state. Trust provides that all
transferred property to Trust is community property or is being transmuted into
community property. Moreover, any and all property transferred to Trust prior to the
death of the Predeceased Grantor is and shall retain its character as community
property. As concluded above, upon the death of each Grantor, his or her respective
interest in Trust as either the Predeceased Grantor or the Surviving Grantor will be
includible in his or her respective gross estate for federal estate tax purposes.

Accordingly, based upon the facts submitted and representations made, we conclude
that the basis of all community property in Trust on the date of death of the
Predeceased Grantor will receive an adjustment in basis to the fair market value of such
property at the date of death of the Predeceased Grantor.

Except as specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code. Specifically, we express no opinion on the trust provisions
permitting Trustee to distribute income or principal to trustees of other trusts (decanting)
or any other trust provisions not referenced in this private letter ruling.

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.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.


                                       Sincerely,

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


Enclosures (2)

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