Incomplete non-grantor trust succeeds, contributions and committee distributions are not completed gifts

Plain-English summary

A person set up a trust for themselves and their four children, with
distributions steered by a "Distribution Committee" made up of the grantor and
two children. This is the increasingly common "incomplete non-grantor trust"
(sometimes called an ING or DING) planning structure, which aims for two
results at once: the trust's income is not taxed to the grantor, yet putting
money into the trust is not treated as a taxable gift. The grantor asked the
IRS to confirm both. The IRS agreed. First, because no committee member can
distribute trust assets to themselves alone, no one is treated as the trust's
owner under the grantor trust rules (sections 671 through 678), though whether
the trust is administered for the grantor's benefit under section 675 is left as
a factual question for audit. Second, because the grantor kept a "consent
power" over distributions and a testamentary power to redirect the remainder,
the grantor never fully parted with control, so contributions to the trust are
incomplete gifts, distributions back to the grantor are just a return of the
grantor's own property, and distributions to other beneficiaries are completed
gifts by the grantor (not by the committee members). The IRS relied on the gift
tax regulations under section 2511, the power-of-appointment rules of section
2514, and Estate of Sanford v. Commissioner. This matters to wealthy families
using these trusts for state income tax and gift/estate planning, and the IRS
noted the trust property will be in the grantor's gross estate at death.

Ruling snapshot

• Question: Is a trust steered by a distribution committee a non-grantor trust, and are contributions and committee-directed distributions completed gifts?
• Outcome: approved (all four requested rulings granted; section 675 status left to examination)
• Key authorities: IRC §§ 671-678, 2501, 2511, 2514; Treas. Reg. §§ 25.2511-2, 25.2514-3; Estate of Sanford v. Commissioner, 308 U.S. 39 (1939)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201848002
Release Date: 11/30/2018
Index Number: 671.00-00, 2501.00-00,
2514.00-00
Person To Contact:
--------------------- ----------------, ID No. ------------------
---------------------------- Telephone Number:
----------------------------- ----------------------
Refer Reply To:
CC:PSI:B04 – PLR-105061-18
Date:
August 20, 2018

     RE: ---------------------------

Legend

Date = -------------------
Grantor = -------------------------------------------------
Trust = ----------------------------------------------------------------

Child 1 = ---------------------
Child 2 = -------------------------------
Child 3 = ------------------------
Child 4 = ---------------------------
Trustee = ---------------------
State = -----------
Distribution Committee = ------------------------------------------------------------------------------
------------------------------------------------------------------------------------------

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

   This letter responds to your authorized representative’s letter dated February 1,

2018, requesting rulings under §§ 671, 2501, and 2514 of the Internal Revenue Code.

FACTS

  The facts submitted and representations made are as follows. On Date, Grantor

created Trust. Grantor will be the only person who transfers assets to Trust, and all
property contributed to Trust will be Grantor’s separate property under the law of the
PLR-105061-18 2

state in which Grantor resides. The beneficiaries of Trust are Grantor, Child 1, Child 2,
Child 3, and Child 4. Trustee, a private fiduciary, is the sole trustee of Trust. The situs
of Trust is State.

    The terms of Trust are as follows. During Grantor’s lifetime, Trustee must

distribute such amounts of income and/or principal to Grantor, Child 1, Child 2, Child 3,
and Child 4, as directed by the Distribution Committee and/or Grantor, as follows:

    (1) At any time, Trustee, pursuant to the direction of a majority of the
        Distribution Committee members, with the written consent of Grantor,
        shall distribute to any beneficiaries such amounts of the Trust’s
        corpus or income as directed by the Distribution Committee
        (Grantor’s Consent Power);

    (2) At any time, Trustee, pursuant to the direction of all of the Distribution
        Committee members, other than Grantor, shall distribute to any
        beneficiary such amounts of the net income or principal as directed
        by the Distribution Committee (Unanimous Member Power); and

    (3) At any time, Grantor, in a nonfiduciary capacity, may, but shall not be
        required to, direct Trustee to distribute to any one or more
        beneficiary, other than Grantor, such amounts of the principal
        (including the whole thereof) as Grantor deems advisable to provide
        for the health, maintenance, support and education of said
        beneficiaries (Grantor’s Sole Power).

The Distribution Committee may direct that distributions be made equally or unequally
and to or for the benefit of any one or more of the beneficiaries of Trust to the exclusion
of others. Any net income not distributed by Trustee will be accumulated and added to
principal.

    The Trustee, pursuant to the direction of (1) a majority of the Distribution

Committee members, with the written consent of the Grantor, or (2) pursuant to the
direction of all of the Distribution Committee members, other than the Grantor, shall at
any time or times prior to or upon the distribution date, distribute to the trustee or
trustees of any one or more qualified trusts such amounts of the net income and/or
principal of Trust (including the whole thereof) as the Distribution Committee
determines. Any such distribution shall be added to the principal of such qualified trust
and disposed of in accordance with the terms of such qualified trust. No distribution or
transfer may be made to a qualified trust unless made pursuant to the direction of the
Distribution Committee.
PLR-105061-18 3

     The Distribution Committee is initially composed of Grantor, Child 1, and Child 2.

At all times at least two “Eligible Individuals” must be members of the Distribution
Committee. “Eligible Individuals” include all beneficiaries (other than Grantor) who are
at least 18 years of age. A vacancy on the Distribution Committee must be filled by the
eldest Eligible Individual not already serving as a member of the Distribution Committee.
If at any time fewer than two Eligible Individuals are members of the committee, the
Distribution Committee shall be deemed not to exist. The Distribution Committee shall
cease to exist upon the death of Grantor.

    Upon Grantor’s death, Trust shall terminate and all of the trust property shall be

distributed to such persons, corporations, or entities, other than Grantor’s estate,
Grantor’s creditors, or the creditors of Grantor’s estate, as Grantor may appoint by will.
In default of the exercise of this limited power to appoint (Grantor’s Testamentary
Power), the balance of Trust will be distributed to Grantor’s then living descendants, per
stirpes. If none of Grantor’s descendants are living, the balance is to be distributed to
one or more entitles that qualify for the estate tax deduction under § 2055 as the
Trustee in its sole discretion may choose.

   You have requested the following rulings:

   1. During the period the Distribution Committee is serving, no portion of the

items of income, deductions, and credits against tax of Trust shall be included in
computing the taxable income, deductions, and credits of Grantor under § 671.

  2. The contribution of property to Trust by Grantor will not be a completed gift

subject to federal gift tax.

   3. Any distribution of property by the Distribution Committee from Trust to

Grantor will not be a completed gift, subject to federal gift tax, by any member of the
Distribution Committee.

    4. Any distribution of property by the Distribution Committee from Trust to any

beneficiary of Trust, other than Grantor, will not be a completed gift subject to federal
gift tax, by any member of the Distribution Committee.

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
PLR-105061-18 4

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.

   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.
PLR-105061-18 5

    Section 677(a) provides, in general, that the grantor shall be treated as the owner

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

   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.

   Based solely on the facts and representations submitted, we conclude an

examination of Trust reveals none of the circumstances that would cause Grantor to be
treated as the owner of any portion of Trust under §§ 673, 674, 676, or 677 as long as
the Committee remains in existence and serving. Because none of the members of
Committee have 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).

   We further conclude that an examination of Trust reveals none of the

circumstances that would cause administrative controls to be considered exercisable
primarily for the benefit of Grantor under § 675. Thus, the circumstances attendant on
the operation of Trust will determine whether Grantor will be treated as the owner of any
portion of Trust under § 675. This is a question of fact, the determination of which must
be deferred until the federal income tax returns of the parties involved have been
examined by the office with responsibility for such examination.

RULINGS 2 AND 3

    Section 2501(a)(1) provides that a tax is imposed for each calendar year on the

transfer of property by gift during such calendar year by any individual, resident or
nonresident. Section 2511(a) provides that the 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, of which the donor has so parted
with dominion and control as to leave in the donor no power to change its disposition,
whether for his own benefit or for the benefit of another. But if upon a transfer of
PLR-105061-18 6

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 to

another in trust to pay the income to the donor or accumulate it in the discretion of the
trustee, and the donor retains a testamentary power to appoint the remainder among
the donor’s descendants. The regulation concludes that no portion of the transfer is a
completed gift. However, if the donor had not retained a testamentary power of
appointment, but instead provided that the remainder should go to X or his heirs, the
entire transfer would be a completed gift.

   Section 25.2511-2(c) provides that a gift is incomplete in every instance in which

a donor reserves the power to revest the beneficial title in himself or herself. A gift is
also incomplete if and to the extent that a reserved power gives the donor the power to
name new beneficiaries or to change the interests of the beneficiaries as between
themselves unless the power is a fiduciary power limited by a fixed or ascertainable
standard.

    Under § 25.2511-2(e), a donor is considered as himself having 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 and the entire value of the transferred
property is subject to the gift tax.

  Section 25.2511-2(e) does not define “substantial adverse interest.” Section

25.2514-3(b)(2) provides, in part, that a taker in default of appointment under a power
has an interest that is adverse to an exercise of the power. Section 25.2514-3(b)(2)
PLR-105061-18 7

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
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, Grantor retained the Grantor’s Consent Power over the income and

principal of Trust. Under § 25.2511-2(e), a donor is considered as himself having a
power if it is exercisable by him in conjunction with any person not having a substantial
adverse interest in the disposition of the transferred property or the income therefrom.
The Distribution Committee members are not takers in default for purposes of
§ 25.2514-3(b)(2). They are merely co-holders of the power. Under § 25.2514-3(b)(2),
a co-holder of a power is only considered as having an adverse interest where he may
possess the power after the possessor’s death and may exercise it at that time in favor
of himself, his estate, his creditors, or the creditors of his estate. In this case, the
Distribution Committee ceases to exist upon the earlier of such time as there are fewer
than two members serving or the Grantor’s death. Accordingly, the Distribution
Committee members do not have interests adverse to Grantor under § 25.2514-3(b)(2)
and for purposes of § 25.2511-2(e). Therefore, Grantor is considered as possessing
the power to distribute income and principal to any beneficiary because Grantor
retained the Grantor’s Consent Power.

   Grantor also retained the Grantor’s Sole Power over the principal of Trust. Under

§ 25.2511-2(c), a gift is incomplete if and to the extent that a reserved power gives the
donor the power to name new beneficiaries or to change the interests of the
beneficiaries 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 Grantor
the power to change the interests of the beneficiaries. Even though Grantor’s power is
limited by an ascertainable standard, i.e., health, education, maintenance and support,
Grantor’s power is not a fiduciary power. Accordingly, the retention of Grantor’s
PLR-105061-18 8

Consent Power and the Grantor’s Sole Power over the income and principal causes the
transfer of property to Trust to be wholly incomplete for federal gift tax purposes.

    Further, Grantor retained the Grantor’s Testamentary Power to appoint the

property to or for the benefit of any person or persons or entity or entities, other than
Grantor’s estate, Grantor’s creditors, or the creditors of Grantor’s estate. Under
§ 25.2514-3(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 of Trust for federal tax purposes.

   Finally, the Distribution Committee members possess the Unanimous Member

Power over income and principal. This power is not a condition precedent to Grantor’s
powers. Grantor’s powers over the income and principal of Trust are presently
exercisable and not subject to a condition precedent. Grantor retains dominion and
control over the income and principal of Trust until the Distribution Committee members
exercise their Unanimous Member Power. Accordingly, the Unanimous Member Power
does not cause the transfer of property to be complete for federal gift tax purposes.
See Goldstein v. Commissioner, 37 T.C. 897 (1962); Estate of Goelet v. Commissioner,
51 T.C. 352 (1968),

   Accordingly, based on the facts submitted and the representations made, we

conclude that Grantor’s contribution of property to Trust is not a completed gift subject
to federal gift tax. Any distribution from Trust to Grantor is merely a return of Grantor’s
property. Therefore, we conclude that any distribution of property from Trust by the
Distribution Committee to Grantor will not be a completed gift subject to federal gift tax,
by any member of the Distribution Committee. Further, upon the death of Grantor, the
fair market value of the property in Trust is includible in Grantor’s gross estate for
federal estate tax purposes.

RULING 4

   Section 2514(b) provides that the exercise or release of a general power of

appointment created after October 21, 1942, shall be deemed a transfer of property by
the individual possessing such power.

   Section 2514(c) provides that the term “general power of appointment” means a

power which is exercisable in favor of the individual possessing the power (possessor),
the possessor’s estate, the possessor’s creditors, or the creditors of the possessor’s
estate.

  Section 25.2514-1(c)(1) provides that a power of appointment is not a general

power if by its terms it is exercisable only in favor of one or more designated persons or
PLR-105061-18 9

classes other than the possessor or his creditors, or the possessor’s estate or the
creditors of the estate or expressly not exercisable in favor or the possessor or his
creditors, or the possessor’s estate or the creditors of his 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.

  The power held by the Distribution Committee members under the Grantor’s

Consent Power is a power that is exercisable only in conjunction with the creator,
Grantor. Accordingly, under § 2514(b), the Distribution Committee members do not
possess general powers of appointment by virtue of possessing this power. Further, the
power held by the Distribution Committee members under the Unanimous Member
Power is not a general power of appointment for purposes of § 2514(b). As in the
example in § 25.2514-3(b)(2), the Distribution Committee members have substantial
adverse interests in the property subject to this power. Accordingly, any distribution
from Trust to a beneficiary, other than Grantor, pursuant to the exercise of these
powers, the Grantor’s Consent Power and the Unanimous Member Power, are not gifts
PLR-105061-18 10

by the Distribution Committee members. Instead, such distributions are gifts by
Grantor.

   Based on the facts submitted and the representations made, we conclude that

any distribution of property by the Distribution Committee to any beneficiary of Trust,
other than Grantor, will not be a completed gift subject to federal gift tax by any member
of the Distribution Committee. Further, we conclude that any distribution of property
from Trust to a beneficiary, other than to Grantor, will be a completed gift by 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,

                                      Melissa C. Liquerman

                                      Melissa C. Liquerman
                                      Chief, Branch 4
                                      Office of Associate Chief Counsel
                                      (Passthroughs and Special Industries)

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