Old trust's disclaimers and court changes preserve transfer-tax treatment

Plain-English summary

An irrevocable trust created before October 22, 1942, gave successive beneficiaries general powers of appointment and was scheduled to end 21 years after the original beneficiary's death. Descendants planned partial disclaimers, while a court modification would hold distributions for younger beneficiaries in continuing trusts and clarify how separate family-branch trusts should be administered. The IRS ruled that powers passing to great-grandchildren and more remote descendants remained pre-1942 powers, so their complete release or lapse would not trigger estate, gift, or generation-skipping transfer tax. It also concluded that the represented disclaimers would not produce gifts, estate inclusion for the disclaimants, or loss of the trust's GST-exempt status. Assets in a continuing trust would be included in a young beneficiary's estate if the beneficiary died before that trust ended, while the proposed judicial construction itself would neither subject the original trust to GST tax nor cause beneficiaries to make taxable gifts.

Ruling snapshot

• Question: What estate, gift, disclaimer, and GST consequences follow from proposed disclaimers and court-approved changes to a pre-1942 trust?
• Outcome: approved
• Key authorities: IRC §§ 2041, 2514, 2518, and 2601; Treas. Reg. §§ 20.2041-1, 25.2518-1 through 25.2518-3, and 26.2601-1

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201803003                                             Third Party Communication: None
Release Date: 1/19/2018                                       Date of Communication: Not Applicable
Index Number: 2041.00-00, 2055.00-00,
              2601.00-00, 2518.00-00                          Person To Contact:
                                                              --------------------------, ID No. ----------------
--------------------------------------------------------      -----------------
--------------------------------------------                  Telephone Number:
-----------------------------                                 ----------------------
                                                              Refer Reply To:
--------------------------------------------------            CC:PSI:B04
                                                              PLR-111794-17
                                                              Date:
                                                              October 6, 2017
         ------------------------------------------------




Legend

Grantor                             --------------
Spouse                              ---------------
Daughter                            --------------------
Trust                               --------------------------------------------------------------------------------
                                    --------------------------------------------------------------------------------
                                    -----------------------------------------------------------
Trustee                             -------------------------------------------
Date 1                              --------------------------------
Date 2                              ------------------------------
Date 3                              ----------------------------
County Court                        ----------------------------------------------
Year                                -------
State Statute 1                     -----------------------------------------------------------------
State Statute 2                     --------------------------------------------------------------
State Statute 3                     -------------------------------------------------------------------------------
State                               ----------
a                                   ----
b                                   ----
c                                   ----

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

       This letter responds to your authorized representative’s letter dated April 4, 2017,
and subsequent correspondence, requesting rulings concerning the gift, estate, and
generation-skipping transfer (GST) tax consequences of certain proposed transactions
involving Trust.
PLR-111794-17                                 2


       The facts and representations submitted are summarized as follows:

       On Date 1, a date that is prior to October 22, 1942, Grantor and Spouse,
Grantor's wife, created Trust, an irrevocable trust, for the benefit of Daughter (generally
referred to in the trust instrument as “the Beneficiary”). Trust has been amended and
restated twice by court order. The trust instrument states that “[Grantor] and [Spouse]
are the parents of [Daughter] . . . and it is the desire and purpose of the said [Grantor]
and [Spouse] to create an irrevocable trust, known as the [Daughter] Trust Estate, for
the use and benefit of [Daughter].” Trustee is currently acting as trustee of Trust.

        Article III, Section 1 of Trust provides that the Beneficiary has no right to the
corpus of Trust and does not have a right to partition, divide, or dissolve Trust. The
Beneficiary has no right with respect to Trust other than to receive distribution of net
earnings awarded her by the trustee with the consent of Trust’s advisory board and the
right to distribution of Trust estate made by the trustee at the termination of Trust.

        Article III, Section 2 provides that the death, insolvency or bankruptcy of the
Beneficiary or the transfer of her interest in any manner, or by descent or otherwise,
during the continuance of Trust, will not operate as a dissolution of, nor terminate the
Trust, nor will it have any effect whatever upon said Trust, its operation or mode of
business, nor will it entitle her heirs or assigns or representatives to take any action in
the courts of law or equity against Trust, its trustees or property or its business
operations of any kind, all of which will remain intact and undisturbed thereby; but they
will succeed only to the rights of the Beneficiary.

       Article III, Section 3 provides that at the time of the death of the Beneficiary, her
equitable interest in the Trust Estate, unless disposed of otherwise by said Beneficiary,
will pass to and vest in her heirs in accordance with the laws of descent and distribution
then in force, applicable to the equitable interest of such Beneficiary in said Trust. (The
term “beneficiary” applies not only to Daughter but to all her successors to beneficial
interests under this trust.)

       Article IV, Section 2 provides that the trust will continue during Daughter’s life
and for a period of 21 years after her death. On termination, the trustee is to distribute
the trust corpus among the then existing beneficiaries.

       Article IV, Section 3 provides, in relevant part, that the beneficiary may receive
from time to time, a portion of the net profits accruing from time to time to Trust, as the
trustee, acting with the advice and consent of the advisory board, may see fit to pay
over and deliver to the beneficiary. No duty is imposed upon the trustee to distribute
net profits, but the power is conferred upon the trustee, acting with advice and consent
of the advisory board, to do so, and in exercising this discretion, the trustee and
PLR-111794-17                                 3

Advisory Board will give full consideration to the interest of both the beneficiary and the
Trust Estate.

        In Year, certain beneficiaries of Trust (both children and grandchildren of
Daughter) sought a declaratory judgment concerning the operation, construction, and
effect of certain planned disclaimers by the beneficiaries. On Date 2, County Court
ruled, in relevant part, that, under the terms of Trust, Daughter and the successor
beneficiaries have a testamentary general power of appointment. Upon the death of
Daughter or a successor beneficiary, the heirs at law of the beneficiary will succeed to
the beneficiary’s interest in Trust. Each heir’s interest in Trust as a successor
beneficiary will be separate; the heirs will not be common beneficiaries of an undivided
trust.

         The County Court also found that after Daughter’s death, each successor
beneficiary will have three separate beneficial interests: an income interest for 21 years
after Daughter’s death, a remainder interest which vests in possession 21 years after
Daughter’s death, and a (pre-1942) general power of appointment, each of which may
be disclaimed independently of the others. In the event a successor beneficiary
survives Daughter but dies within 21 years after her death, both of the successor
beneficiary’s retained and disclaimed interests in Trust will pass to the heirs at law. In
the event a successor beneficiary survives Daughter and disclaims all or a part of his or
her income interest in Trust, the beneficial ownership of the disclaimed income interest
will pass at Daughter’s death to her heirs who are also lineal descendants of the
disclaimant. Further, County Court stated that the class of beneficiaries who are lineal
descendants of disclaimant will remain open to new members who are born during the
21 years after Daughter’s death. Finally, County Court construed Trust to provide that if
a beneficiary disclaims a greater remainder interest than income interest, the retained
and disclaimed interests would be administered as a distinct portion as follows:
(i) following the disclaimer, each portion of Trust as to which a person is a beneficiary of
both income and remainder interests is to be administered as a distinct portion, with the
undistributed income produced by a particular portion added to the principal of that
particular portion; and (ii) in addition, the portion of Trust as to which the disclaimant
retained an income interest but disclaimed the remainder interest, is to be administered
as another distinct portion, with the undistributed income produced by principal relating
to such remainder interest added to the principal of the particular remainder interest.

       Following the Date 2 court order, the grandchildren of Grantor (who are also the
children of Daughter) issued partial disclaimers of their future income and remainder
interests in Trust.

       Several years later, Daughter proposed to “partially release” her general power of
appointment. The release was intended to restrict the power of appointment in two
respects. First, the power to appoint Daughter’s beneficial interest in the trust was to be
exercisable in a manner such that the interest in the trust could be appointed only to her
PLR-111794-17                                 4

estate. Second, the power to appoint her beneficial interest could not be exercised in a
manner that would take effect during her life time.

        Daughter intends to allow her power of appointment over Trust to lapse at her
death. Several of the beneficiaries succeeding to her interest in Trust intend to disclaim
all or a portion of their beneficial interests in the trust within nine months of Daughter’s
death. Several great-grandchildren of Grantor (who are grandchildren of Daughter)
likewise intend to disclaim all or an undivided portion of his or her interest in the trust
within nine months of Daughter’s death. It is represented that a disclaiming
great-grandchild will not accept an interest in or any benefit from the property subject to
the disclaimer or voluntarily assign, convey, encumber, pledge, or transfer the interest
or property subject to the disclaimer. Each disclaimer will be irrevocable and in a writing
delivered to the trustee. As a result, the proposed disclaimer will pass without any
direction from the disclaiming great-grandchild and the interest will pass to someone
other than the disclaiming great-grandchild. Finally, a disclaiming great-grandchild will
not serve on the advisory board of Trust or as a trustee of Trust.

        On Date 3, Trustee petitioned County Court, with the consent of Daughter and
the other beneficiaries, to modify Trust to provide that when Trust terminates 21 years
after the death of Daughter, any share distributable to a beneficiary who is then under
the age of a is to be held in a continuing trust until the beneficiary reaches the age of a.
If the beneficiary survives Daughter but dies before reaching age a, the beneficiary will
have a general testamentary power of appointment over his or her continuing trust. If
the beneficiary dies before reaching age a and does not exercise his or her general
testamentary power of appointment, the continuing trust is to be includible in the
beneficiary’s estate (as a post-1942 general power of appointment). The proposed
modification provides that the trustee may distribute income and principal of the
continuing trust to the beneficiary for the beneficiary’s health, education, maintenance,
and support. The proposed modification also provides for a partial distribution of the
continuing trust’s principal when the beneficiary reaches the ages of b and c.

        The Date 3 petition also requests that County Court clarify Trust in a way that will
allow for ease of administration of the separate trusts created after Daughter’s death.
After the death of Daughter or another beneficiary, the trustee is to create the fewest
number of trusts under a particular family branch that can be established with only one
income beneficiary of each trust. When an income beneficiary of a separate trust dies
within the 21-year period following Daughter’s death with an heir at law who is already
an income beneficiary of a separate trust under Trust, such heir’s share of the deceased
income beneficiary’s trust is to be added to his or her existing trust. If a grandchild or
great-grandchild survives Daughter, and disclaims all or a part of his income or
remainder interest in Trust, and has another child within the 21-year term after
Daughter’s death, a new trust is formed for that child which will be funded from the
existing separate trusts.
PLR-111794-17                                  5

      State Statute 1 provides that a person other than a fiduciary may disclaim, in
whole or in part, any interest in or power over property, including a power of
appointment.

       State Statute 2 provides that if an interest in property passes because of the
death of a decedent, a disclaimer of the interest takes effect as of the time of the
decedent’s death, and relates back for all purposes to the time of the decedent’s death.
In addition, a disclaimed interest passes according to any provision in the instrument
creating the interest that provides for the disposition of the interest if the interest were to
be disclaimed, or the disposition of disclaimed interests in general. If the instrument
creating the disclaimed interest does not contain such a provision, the disclaimed
interest passes as if the disclaimant had died immediately before the time as of which
the disclaimer takes effect. A disclaimed interest that passes by intestacy passes as if
the disclaimant died immediately before the decedent.

       State Statute 3 provides that on the petition of a trustee or a beneficiary, a court
may order that the trustee be changed, that the terms of the trust be modified, that the
trustee be directed or permitted to do acts that are not authorized or that are forbidden
by the terms of the trust, that the trustee be prohibited from performing acts required by
the terms of the trust, or that the trust be terminated in whole or in part, if the order is
not inconsistent with a material purpose of the trust.

       You have requested the following rulings:

    1. Trust grants to the great-grandchildren (and more remote descendants) who
      succeed to Daughter’s interest in Trust a general power of appointment created
      on or before October 21, 1942, under §§ 2041(a)(1) and 2514(a), and therefore
      the complete release or lapse of such a power of appointment will not subject
      any portion of Trust to federal estate, gift, or GST tax.

    2. The proposed disclaimer by any one or more of the great-grandchildren (and
      more remote descendants): (a) will be a qualified disclaimer under § 2518; (b)
      will not result in a taxable gift by the disclaimant; (c) will not subject any portion of
      Trust to estate tax in the gross estate of the disclaimant; and (d) will not result in
      Trust losing GST tax exempt status.

    3. The assets of a continuing trust created pursuant to the proposed modification
      after Daughter’s death will be included in the gross estate for federal estate tax
      purposes of the continuing beneficiary if the beneficiary dies before the
      continuing trust terminates.

    4. The proposed construction of Trust will not cause Trust to be subject to GST tax
      pursuant to chapter 13.
PLR-111794-17                                6

    5. The proposed construction of Trust will not result in a taxable gift by any of the
      beneficiaries of Trust.

Ruling 1

       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 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.

      Section 20.2041-1(b) of the Estate Tax Regulations states that a power of
appointment includes all powers that are in substance and effect powers of
appointment, regardless of the nomenclature used in creating the power.

       Section 20.2041-2(d) provides that a failure to exercise a general power of
appointment created before October 22, 1942, or a complete release of the power is not
an exercise of the power. The phrase “a complete release” means a release of all
powers over all or part of the property subject to the 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.

       Under § 20.2041-1(e), Example 3, F created an irrevocable inter vivos trust
before October 22, 1942, providing for payment of income to G for life with remainder as
G shall appoint by will, but in default of appointment income to H for life with remainder
as H shall appoint by will. If G died after October 21, 1942, without having exercised his
power of appointment, H's power of appointment is considered a power created before
October 22, 1942, even though it was only a contingent interest until G’s death.

        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 such power, but the failure to exercise such a power or the
complete release of such a power shall not be deemed an exercise thereof.

       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 such a power is not considered to be an exercise of a general
PLR-111794-17                                7

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 possessor
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 2601 imposes a tax on every GST, which is defined under § 2611 as a
taxable distribution, a taxable termination, and a direct skip.

       Section 1433(b)(2)(A) of the Tax Reform Act of 1986 (the Act), 1986-3 (Vol. 1)
C.B. 1, and § 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations,
provide that the GST tax shall not apply to any GST under a trust that was irrevocable
on September 25, 1985, but only to the extent that such transfer was not made out of
corpus added to the trust after September 25, 1985 (or out of income attributable to
corpus so added).

        Section 26.2601-1(b)(1)(v) provides, in relevant part, that where any portion of a
trust remains in the trust after the post-September 25, 1985, release, exercise, or lapse
of a power of appointment over that portion of the trust, and the release, exercise, or
lapse is treated to any extent as a taxable transfer under chapter 11 or chapter 12, the
value of the entire portion of the trust subject to the power that was released, exercised,
or lapsed is treated as if that portion had been withdrawn and immediately retransferred
to the trust at the time of the release, exercise, or lapse.

        In this case, Trust provides Daughter with a general power of appointment. This
power was created before October 22, 1942. After Daughter dies, the grandchildren will
succeed to her power of appointment. To the extent that any grandchild disclaims his or
her interest in the pre-1942 power of appointment or dies during the 21-year period
following Daughter’s death, some great-grandchildren (or more remote beneficiaries)
will also succeed to her power of appointment. As in the case of § 20.2041-1(e),
Example 3, the power of appointment held by the great-grandchildren (and more remote
beneficiaries) is considered a power created before October 22, 1942, even though it is
only a contingent interest until Daughter’s death. The release or lapse of such a power
is not treated as an exercise of the power and will not result in an inclusion into the
powerholder’s estate for purposes of chapter 11 or a gift by the powerholder for
purposes of chapter 12. Further, because the release or lapse is not treated as a
taxable transfer under chapters 11 and 12, the release or lapse will not be treated as an
addition to trust for GST purposes. Therefore, based on the facts submitted and the
representations made, we conclude that the complete release or lapse of such a power
of appointment will not subject any portion of Trust to federal estate, gift, or GST tax.

Ruling 2
PLR-111794-17                                   8

         Section 2518(a) provides that if a person makes a qualified disclaimer with
respect to any interest in property, subtitle B shall apply with respect to such interest as
if the interest had never been transferred to such 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 refusal is in writing, (2) the writing is received by the transferor of the interest,
his legal representative, or the holder of the legal title to the property to which the
interest relates not later than the date that is nine months after the later of (A) the date
on which the transfer creating the interest in the person is made, or (B) the day on
which the person attains age 21, (3) the person has not accepted the interest or any of
its benefits, and (4) as a result of such refusal, the interest passes without any direction
on the part of the person making the disclaimer and passes either (A) to the spouse of
the decedent, or (B) 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 over
property is to be treated as an interest in that property.

        Section 25.2518-1(b) of the Gift Tax Regulations provides, in relevant part, 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(c)(3) provides, in relevant part, 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. With respect to inter vivos transfers, a transfer creating
an interest occurs when there is a completed gift for federal gift tax purposes regardless
of whether a gift tax is imposed on the completed gift. With respect to transfers made
by a decedent at death or transfers that become irrevocable at death, the transfer
creating the interest occurs on the date of the decedent’s death, even if an estate tax is
not imposed on the transfer.

      Section 25.2518-2(c)(3) further provides that if a person to whom any interest in
property passes by reason of the exercise, release, or lapse of a general power of
appointment desires to make a qualified disclaimer, the disclaimer must be made within
PLR-111794-17                                9

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. A person who receives an
interest in property as the result of a qualified disclaimer of the interest must disclaim
the previously disclaimed interest no later than nine months after the date of the transfer
creating the interest in the preceding disclaimant. Thus, if A were to make a qualified
disclaimer of a specific bequest and as a result of the qualified disclaimer the property
passed as part of the residue, the beneficiary of the residue could make a qualified
disclaimer no later than nine months after the date of the testator’s death.

       Section 25.2518-3(a)(2) states that a disclaimer of an undivided portion of an
interest in a trust may be a qualified disclaimer. Under § 25.2518-3(b), the disclaimer of
an undivided portion of a disclaimant’s separate interest in property will be a qualified
disclaimer if the undivided portion consists of a fraction or percentage of each and every
substantial interest or right owned by the disclaimant in the property and extends over
the entire term of the disclaimant’s interest in the property. A disclaimer of some
specific rights while retaining other rights with respect to an interest in the property is
not a qualified disclaimer of an undivided portion of the disclaimant’s interest in the
property.

       In the present case, Daughter’s power of appointment under Trust was created
before October 22, 1942, and is a general power of appointment described in
§§ 2041(a)(1) and 2514(a). Under the terms of Trust, Daughter’s heirs cannot succeed
to any interests in Trust until Daughter’s death. If Daughter releases any part of her
general power of appointment before her death, the release will, for purposes of § 2518,
create for each of the disclaimants interests in the trust that will be contingent upon
surviving Daughter. If Daughter does not exercise her power of appointment, the
income and contingent remainder interests and the power of appointment of each of the
disclaimants will be considered for purposes of § 2518 to be created in each of the
disclaimants on the date of Daughter's death, the date when Daughter’s general power
of appointment lapses.

       Daughter’s great-grandchildren propose to disclaim an undivided portion of their
interest in Trust to which he or she may be entitled at Daughter’s death. See State
Statute 1 and State Statute 2. It is represented that a disclaiming great-grandchild will
not accept an interest in or any benefit from the property subject to the disclaimer or
voluntarily assign, convey, encumber, pledge, or transfer the interest or property subject
to the disclaimer. Each disclaimer will be irrevocable and in a writing delivered to the
trustee. As a result, the proposed disclaimer will pass without any direction from the
disclaiming great-grandchild and the interest will pass to someone other than the
disclaiming great-grandchild. Finally, a disclaiming great-grandchild will not serve on
the advisory board of Trust or as trustee of Trust.

      Accordingly, based on the facts submitted and the representations made, we
conclude that the proposed disclaimer by any one or more of the great-grandchildren
PLR-111794-17                                 10

(and more remote descendants) will not result in a taxable gift by the disclaimant, will
not subject any portion of Trust to estate tax in the gross estate of the disclaimant, and
will not result in Trust losing GST tax exempt status.

Rulings 3 and 4

        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)(1), (b)(2), or (b)(3), will not cause the
trust to lose its exempt status. The rules of § 26.2601-1(b)(4) are applicable only for
purposes of determining whether an exempt trust retains its exempt status for GST tax
purposes. The rules do not apply in determining, for example, whether the transaction
results in a gift subject to gift tax, or may cause the trust to be included in the gross
estate of a beneficiary, or may result in the realization of capital gain for purposes of
§ 1001.

       Section 26.2601-1(b)(4)(i)(C) provides that a judicial construction of a governing
instrument to resolve an ambiguity in the terms of the instrument will not cause an
exempt trust to be subject to the provisions of chapter 13 if the judicial action involves a
bona fide issue and 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)(D)(1) provides that a modification of the governing
instrument of an exempt trust by judicial reformation, or nonjudicial reformation that is
valid under applicable state law, will not cause an exempt trust to be subject to the
provisions of chapter 13, if the modification does not shift a beneficial interest in the
trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the
person or persons who held the beneficial interest prior to the modification, and the
modification does not extend the time for vesting of any beneficial interest in the trust
beyond the period provided for in the original trust. A modification of an exempt trust
will result in a shift in a beneficial interest to a lower generation beneficiary if the
modification can result in either an increase in the amount of a GST or the creation of a
new GST.

       In the present case, the proposed modification of Trust, under State Statute 3,
provides that when Trust is set to terminate, 21 years after the death of Daughter, any
share distributable to a beneficiary who is then under the age of b is to be held in a
continuing trust until the beneficiary reaches the age of b. If the beneficiary survives
Daughter but dies before reaching age b, the beneficiary will have a general power of
appointment over the continuing trust. If the beneficiary survives the 21-year term
following Daughter’s death but dies without exercising the power of appointment, the
remaining assets in the continuing trust is to be distributed to the beneficiary’s estate
and will be subject to estate tax in the estate of the beneficiary. Accordingly, based on
the facts presented and the representations made, we conclude that the assets of a
PLR-111794-17                                  11

continuing trust created pursuant to the proposed modification after Daughter’s death
will be included in the gross estate for federal estate tax purposes of the continuing
beneficiary if the beneficiary dies before the continuing trust terminates.

        Furthermore, the proposed construction in the Date 3 petition to County Court will
clarify Trust in a way that will allow for ease of administration of the separate trusts
created after Daughter’s death. The proposed construction involves a bona fide legal
issue to clarify how to divide Trust in light of the proposed disclaimers. Moreover, the
construction is consistent with State law as it would be applied by the highest court of
State. Accordingly, based on the facts presented and the representations made, we
conclude that the proposed construction of Trust will not cause Trust to be subject to
GST tax pursuant to chapter 13.

Ruling 5

       Section 2501 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 tax imposed by § 2501 will 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 25.2511-1(c) provides that any transaction in which an interest in
property is gratuitously passed or conferred upon another, regardless of the means or
device employed, constitutes a gift subject to tax.

       Whether a construction to clarify how to divide Trust in light of the proposed
disclaimers is effective for gift tax purposes depends on whether the construction is
based on a valid enforceable claim asserted by the parties and, to the extent feasible,
produces an economically fair result. See Ahmanson Foundation v. United States, 674
F.2d 761, 774-75 (9th Cir. 1981), citing Commissioner v. Estate of Bosch, 387 U.S. 456
(1967). Thus, State law must be examined to ascertain the legitimacy of each party’s
claim. If it is determined that each party has a valid claim, the Service must determine
that the settlement reflects the result that would apply under State law. If there is a
difference, it is necessary to consider whether the difference may be justified because
of the uncertainty of the result if the question were litigated.

       As discussed above, the issues and ambiguities resolved by the proposed
construction in the Date 3 petition are bona fide issues based upon valid enforceable
claims by the interested parties. The terms of the proposed construction clarify
ambiguous terms of Trust and reflect the rights of the parties under applicable State
law. Accordingly, based on the facts submitted and representations made, we conclude
PLR-111794-17                                 12

that the proposed construction of Trust will not result in a taxable gift by any of the
beneficiaries of Trust.

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

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

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

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




                                           Sincerely,



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



       Enclosures:
             Copy for § 6110 purposes
             Copy of this letter


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