Community-property trust gets incomplete-gift, power, and basis rulings with an income-tax caveat

Plain-English summary

A married couple in a community-property state created an irrevocable trust for themselves, family members, and friends, with distributions controlled through retained powers and a nonfiduciary power-of-appointment committee. The IRS found that the trust terms did not make either grantor or a committee member the income-tax owner under the grantor-trust provisions it could decide from the document, but it deferred the Section 675 administrative-control question until examination of the trust's actual operation. The couple's transfers to the trust are incomplete gifts because they retained powers to change beneficial interests. Distributions back to either grantor are returns of the couple's property, while distributions to other beneficiaries are completed gifts by the grantors, one-half by each, rather than gifts by committee members. The committee members' powers are not general powers of appointment and therefore do not pull trust property into their estates. Each grantor's own trust interest will be included in that grantor's estate, and all community property in the trust receives a fair-market-value basis adjustment when the first grantor dies.

Ruling snapshot

• Question: How do the income-tax ownership, gift-tax, power-of-appointment, estate-inclusion, and community-property basis rules apply to the trust?
• Outcome: Mixed (favorable gift, estate, and basis rulings; Section 675 ownership issue deferred to examination)
• Key authorities: IRC §§ 671-679, 1014(b)(6), 2036, 2038, 2041, 2501, 2511, 2514; Treas. Reg. §§ 25.2511-2, 25.2514-3, 20.2041-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201850001                                             Third Party Communication: None
Release Date: 12/14/2018                                      Date of Communication: Not Applicable
Index Number: 671.03-00, 1014.00-00,
              2501.00-00, 2514.02-00,                         Person To Contact:
              2041.03-00                                      ------------------------------, ID No. ------------
                                                              ---------
--------------------                                          Telephone Number:
-------------------------------------------------------       ----------------------
---------------------------------                             Refer Reply To:
                                                              CC:PSI:B04
RE: -----------------------------                             PLR-103855-18
                                                              Date:
                                                              July 31, 2018




Legend

Date                                = --------------------
Grantor                             = -----------------------------------------------
Spouse                              = -------------------------------------------------
Trust                               = ----------------------------------
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Son                                 = -------------------------------------------------
Daughter                            = ---------------------------------------------
Friend 1                            = --------------------------------------------------
Friend 2                            = ----------------------------------------------
Guardian                            = -----------------
Trustee                             = ------------------------------------
Power of Appointment
Committee                           = ------------------------------------------------------------------------------
                                      ------------------------------------------------------------------------------
                                      ------------------
State 1                             = -------------------
State 2                             = --------------



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

This letter responds to your authorized representative’s letter of January 31, 2018,
requesting rulings under §§ 671, 2501, 2514, 2041 and 1014 of the Internal Revenue
Code.



The facts submitted and representations made are as follows.

On Date, Grantor and Spouse (collectively Grantors) created Trust, an irrevocable trust,
for the benefit of Grantors, Grantors’ issue, and Friend 1 and Friend 2 (collectively the
“Beneficiaries”). A corporate trustee is Trustee of Trust. The situs of Trust is State 1.

Grantors are married and reside in State 2, a community property state. Trust provides
that all property transferred to Trust is community property. Moreover, any and all
property transferred to Trust prior to the death of the first spouse to die (Predeceased
Grantor) is and shall retain its character as community property.

During Grantors’ lifetimes, Trustee must distribute such amounts of net income and/or
principal to each Grantor and the Beneficiaries as directed by the Power of Appointment
Committee and/or Grantors, as follows:

(1) Trustee, pursuant to a writing executed by either of the Grantors and by a majority
of the other members of the Power of Appointment Committee, shall distribute to the
Beneficiaries and/or Grantors such amounts of income or principal (including the whole
thereof) as the Power of Appointment Committee appoints. (Grantor’s Consent Power);

(2) Trustee, pursuant to a writing executed by all then serving members of the Power of
Appointment Committee other than Grantors, shall distribute to or for the benefit of the
Beneficiaries and/or Grantors such amounts of income or principal (including the whole
thereof) as the Power of Appointment Committee appoints. (Unanimous Member
Power); and

(3) Each Grantor has the power, in a nonfiduciary capacity, at any time and from time
to time, to appoint to any one or more of the Beneficiaries, such amounts of the principal
(including the whole thereof) as such Grantor deems advisable to provide for the health,
education, maintenance, or support of the Beneficiaries. (Grantor’s Sole Power).

The Power of Appointment Committee may appoint income or principal equally or
unequally and to or for the benefit of either or both of Grantors, or 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 Power of Appointment Committee is composed of Grantors, Child 1, Guardian
acting on behalf of Child 2, Friend 1 and Friend 2. Daughter, while a minor, is
considered a member of the Power of Appointment Committee acting through her
Guardian. If at any time the Power of Appointment Committee includes three or more
members, other than the Grantors, then all the members of the Power of Appointment
Committee including the Grantors may by unanimous vote, at any time and from time to
time, add one or more members of the Power of Appointment Committee provided that


such members are Beneficiaries and, provided further that, if any one or more of them is
a minor, the members of the Power of Appointment Committee shall by unanimous vote
have designated an individual to serve as Guardian for such minor. The members of
the Power of Appointment Committee in their capacities as such shall not serve or act in
a fiduciary capacity. The Power of Appointment Committee ceases to exist upon the
first to occur of the death of the Survivor of the Predeceased Grantor, or the date the
Power of Appointment Committee is reduced to one member, other than Grantors.

If the Power of Appointment Committee ceases to exist prior to the Distribution Date the
Trustee may, pursuant to a written instrument, at any time distribute to the Beneficiaries
and/or Grantors such amounts of the net income or principal of Trust (including the
whole thereof) as the Trustee determines.

Any distribution from Trust to either Grantor prior to the death of the Predeceased
Grantor will be a distribution of community property. Any distribution of income or
principal from Trust to a beneficiary prior to the death of the Predeceased Spouse,
whether made by the Power of Appointment Committee, the Trustee, or a Grantor’s
exercise of the powers retained by Grantors will be a distribution of community property.

With respect to the lifetime powers of appointment retained by Grantors, prior to the
death of the Predeceased Grantor, any such appointment by Grantor of the principal of
Trust will be funded equally from each Grantor’s share of community property. Each
Grantor consents to all distributions by the other Grantor.

With respect to the testamentary power of appointment retained by the Predeceased
Spouse, any appointment by the Predeceased Spouse shall be funded solely from the
Predeceased Spouse’s one-half interest in the property held Trust.

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

Upon the death of the Predeceased Grantor, any remaining property held in Trust in the
Predeceased Grantor’s one-half interest that has not been effectively appointed by will,
shall be distributed five percent (5%) to each serving member of the Power of
Appointment Committee other than the Grantor’s issue, and any remaining balance
shall be distributed, per stirpes, to the Grantor’s issue who are then living and subject to
restrictions in the trust for beneficiaries article. If none, such remaining balance shall be
disposed of under an alternate disposition article which provides for distributions
according to applicable state law.


Upon the death of the Surviving Grantor, Trustee shall distribute the balance of Trust to
or for the benefit of any person or entity or entities, other than the Surviving Grantor’s
estate, the Surviving Grantor’s creditors, or the creditors of the Surviving Grantor’s
estate, as Surviving Grantor appoints by will (Surviving Grantor’s Testamentary Power).

Upon the death of the Surviving Grantor, any remaining property held in Trust that has
not been effectively appointed by will shall be distributed, five percent (5%) to each
serving member of the Power of Appointment Committee other than the Grantor’s issue,
and any remaining balance shall be distributed, per stirpes to the Grantors’ issue who
are then living subject to restrictions in the trust for beneficiaries article. If none, such
remaining balance shall be disposed of under an alternate disposition article which
provides for distributions according to applicable state law.

No distribution by the 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.

You have requested the following rulings:

1. As long as the Power of Appointment Committee is serving, no portion of the items
of income, deductions, and credits against tax of Trust shall be included in computing
under § 671 the taxable income, deductions, and credits of Grantors or any member of
the Power of Appointment Committee.

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 Power of Appointment Committee from Trust to
either Grantor will not be a completed gift, subject to federal gift tax, by any member of
the Power of Appointment Committee.

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

5. No member of the Power of Appointment 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 the 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, that 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 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 power in § 674(b)(5)
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.

Section 674(c) provides that § 674(a) shall not apply to a power exercisable (without the
approval or consent of any other person) by a trustee or trustees, none of whom is the
grantor, and no more than half of whom are related or subordinate parties who are


subservient to the wishes of the grantor (1) to distribute, apportion, or accumulate
income to or for a beneficiary or beneficiaries, or to, for, or within a class of
beneficiaries, or (2) to pay out corpus to or for a beneficiary or beneficiaries or to a class
of beneficiaries (whether or not income beneficiaries).

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
to 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.

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 solely on the facts submitted and representations made, we conclude that 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, or 677 as
long as the Power of Appointment Committee remains in existence and is serving
because none of the Power of Appointment Committee members has a power
exercisable solely by himself, to vest Trust income or corpus in himself, none shall be
treated as the owner of any portion of the 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 either Grantor under § 675. Thus, the circumstances attendant to 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.

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
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) 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 taxpayer’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, Grantors each 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.
Pursuant to Trust, upon the Predeceased Grantor's death, the Predeceased Grantor's
remaining interest in Trust (i.e., one-half) that the Predeceased Spouse did not
effectively appoint pursuant to his or her limited testamentary power of appointment


(Predeceased Grantor Balance) shall be distributed out of, and shall no longer be
subject to, the terms of Trust. Consequently, upon the death of the Predeceased
Grantor, the Power of Appointment Committee will no longer possess any powers over
the property transferred to Trust by the Predeceased Grantor. Under § 25.2514-3(b)(2),
a coholder of a power is only considered as having an adverse interest where he may
possess the power after the possessor's death and may exercise it at that time in favor
of himself, his estate, his creditors, or the creditors of his estate. Accordingly, upon the
Predeceased Grantor's death, the Power of Appointment Committee members would
not be takers in default and do not have interests adverse to the Predeceased Grantor
under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). They are merely
coholders of the power at the time of the Predeceased Spouse's death. Therefore, the
Predeceased Grantor is considered as himself or herself possessing the power to
distribute income and principal to any beneficiary because he or she retained the
Grantor's Consent Power. The retention of the power with respect to the Predeceased
Grantor causes the transfer of property to Trust to be wholly incomplete for federal gift
tax purposes.

Likewise, after the Predeceased Grantor's death, the Surviving Grantor continues to
retain the Grantor's Consent Power over the balance of Trust. The Committee
members are not takers in default for purposes of § 25.2514-3(b)(2). They are merely
coholders of the power. The Power of Appointment Committee ceases to exist upon the
death of the Surviving Grantor. Accordingly, upon the Surviving Grantor's death, the
Power of Appointment Committee members do not have interests adverse to the
Surviving Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e).
Therefore, the Surviving Grantor is considered as himself or herself possessing the
power to distribute income and principal to any beneficiary because he or she retained
the Grantor's Consent Power. The retention of the power with respect to the Surviving
Grantor causes the transfer of property to Trust to be wholly incomplete for federal gift
tax purposes.

If the Committee ceases to exist, the Trustee has the power to distribute net income to
the Beneficiaries. However, the 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, the 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 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 each


Grantor the power to change the interests of the beneficiaries. Even though each
Grantor's power is limited by an ascertainable standard, i.e., health, education,
maintenance and support, each Grantor's power is not a fiduciary power. Accordingly,
the retention of the Grantor’s Consent Power and Grantor’s Sole power cause the
transfer of property to Trust to be incomplete for federal gift tax purposes.

If the Power of Appointment Committee ceases to exist, the Trustee, in its fiduciary
capacity, also has the power to distribute principal to one or more beneficiaries. The
powers of the 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 Grantor retains dominion and control over the
principal of Trust until the Trustee exercises his or her power to appoint principal. See
Goldstein v. Commissioner, 37 T.C. 897 (1962). Thus, the 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 the
Grantor’s Consent Power and the Grantor’s Sole Power causes the transfer of property
to Trust to be incomplete for federal gift tax purposes.

Further, each Grantor retained either a Predeceased Grantor’s Testamentary Power or
a Surviving Grantor’s Testamentary Power (depending upon the order of death) to
appoint the property in Trust to any persons, other than to the Grantor’s estates,
Grantor’s creditors, or the creditors of Grantor’s estates. 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 for federal tax purposes.

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

Accordingly, based on the facts submitted and the representations made, we conclude
that the contribution of property to Trust by Grantors is not a completed gift subject to
federal gift tax. Any distribution from Trust to either Grantor prior to the death of the
Predeceased Grantor is a distribution of community property. Any distribution from
Trust to either Grantor is merely a return of each Grantor’s property. Therefore, we
conclude that any distribution of property from Trust by the Power of Appointment


Committee to either Grantor will not be a completed gift subject to federal gift tax, by
any member of the Power of Appointment Committee. Further, upon the Predeceased
Spouse's death, the fair market value of the Predeceased Spouse'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 possessor's estate.

Section 25.2514-1(c)(1) provides that a power of appointment is not a general power if
by its terms it is exercisable only in favor of one or more designated persons or classes
other than the possessor or his creditors, or the possessor's estate or the creditors of
the estate 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 coholder of a power 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.

Section 2041(b)(1)(C)(i) provides, however, that in the case of a power of appointment
created after October 21, 1942, if the power is not exercisable by the decedent except
in conjunction with the creator of the power, such power is not deemed a general power
of appointment.

Section 2041(b)(1)(C)(ii) provides, however, that in the case of a power of appointment
created after October 21, 1942, 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 Power of Appointment Committee members under the Grantor’s
Consent Power are powers that are exercisable only in conjunction with the creators,
either Grantor (or the survivor thereof). Accordingly, under §§ 2514(b) and 2041(a)(2),
the Power of Appointment Committee members do not possess general powers of
appointment by virtue of possessing these powers. Further, the powers held by the
Power of Appointment Committee members under the Unanimous Member Power 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 Power of Appointment
Committee members have substantial adverse interests in the property subject to this
power. Accordingly, any distribution made from Trust to a beneficiary, other than to
either Grantor, pursuant to the exercise of these powers, the Grantor's Consent Power
and the Unanimous Member Power, are not gifts by the Power of Appointment
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 Power of Appointment 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 Power of Appointment 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 Spouse, whether made by the
Power of Appointment Committee, the Disinterested Trustee or a Grantor's exercise of
the powers retained by such Grantor, to a beneficiary is and shall be a distribution out of
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 Power of Appointment Committee members are not general powers of appointment
for purposes of § 2041(a)(2) and, accordingly, the possession of these powers by the
Power of Appointment 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.

Grantors are married and reside in State 2, a community property state. Trust provides
that all transferred property to Trust is 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 of 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 the tax consequences of
the trust provisions permitting Trustee to distribute income or principal to trustees of
other trusts (decanting).


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

                                                      Sincerely,


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

Enclosure
      Copy for section 6110 purposes

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