Continuing-trust modification preserves GST grandfathering

Plain-English summary

A trust irrevocable before September 25, 1985, and its successor trusts otherwise required outright distributions 21 years after a beneficiary’s death. A court-approved modification would instead hold distributions in continuing trusts for beneficiaries below a specified age, giving each a testamentary general power of appointment. The IRS ruled that the modification neither shifted a beneficial interest to a lower generation nor extended vesting, so the trusts retained their generation-skipping transfer tax exemption.

Ruling snapshot

• Question: Does adding age-based continuing trusts for terminating distributions cause grandfathered trusts to lose their GST-tax exemption?
• Outcome: approved
• Key authorities: IRC §§ 2041, 2601, 2651, 2652; Treas. Reg. § 26.2601-1(b)(4)

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202013005 Third Party Communication: None
Release Date: 3/27/2020 Date of Communication: Not Applicable
Index Number: 2601.00-00
Person To Contact:
----------------------------------------- -------------------------, ID No. ----------------
---------------------------------------- Telephone Number:
---------------------------- --------------------
Refer Reply To:
CC:PSI:B04
PLR-108640-19
Re: --------------------------- Date:
October 07, 2019

Legend

Father -------------
Mother --------------
Son ---------------------------
Wife ----------------------
Trust --------------------------------------------------
Trust A ----------------------------------------------------------------
--------------------------
Trust 1 --------------------------------------------
--------------------------
Trust 2 ---------------------------------------------
--------------------------
Trust 3 -----------------------------------------------------
-----------------------------
Trust 4 ----------------------------------------------
--------------------------
Trust 5 --------------------------------------------
--------------------------
Trust 6 -------------------------------------------------
--------------------------
Trust 7 -------------------------------------------
--------------------------
Trust 8 ---------------------------------------------
--------------------------
Trust 9 ----------------------------------------------
--------------------------
Date 1 --------------------------
Date 2 ------------------
Date 3 -----------------------
Date 4 --------------------------
Date 5 -----------------------
Date 6 -----------------------
PLR-108640-19 2

Date 7 --------------------------
County Court ------------------------------------------------
Probate Court ----------------------------------------------
State Statute --------------------------------------------------------------------
State --------
a ---
b ---

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

  This letter responds to your authorized representative’s letter dated March 28,

2019 requesting a ruling concerning the generation-skipping transfer (GST) tax
consequences of certain proposed modifications to several trusts.

    The facts and representations submitted are summarized as follows:

   On Date 1, a date that is prior to September 25, 1985, Father and Mother,

Father's wife, created Trust, an irrevocable trust, for the benefit of their son, Son. Trust
is subject to the laws of State.

    On Date 2, a settlement agreement was approved by County Court. The

settlement agreement provided, in relevant part, that Trust would be partitioned into two
trusts, Trust A and Trust B. With the exception of Son’s wife, Wife, the beneficiaries of
Trust A are different from the beneficiaries of Trust B. Pursuant to the settlement
agreement, Son and Wife released any power of appointment that they may have had
over Trust A. On Date 4, the original trust agreement for Trust was amended and
restated.

   Article III of the amended trust agreement provides, in relevant part, that during

the term of Trust A, the trustee could not make distributions of corpus to Son. At the
time of the death of Son, his equitable interest in said trust estate, unless disposed of
otherwise by Son, shall pass to and vest in his heirs in accordance with the laws of
descent and distribution then in force, applicable to the equitable interest of Son in said
Trust estate.

   Article IV, section 3 of the amended trust agreement provides, in relevant part,

that the trustee had the power, with the advice and consent of at least one member of
the Advisory Board, to make discretionary distributions of net profits of Trust A to Son.

  Article IV, section 2 provides that Trust A is to continue until 21 years after the

death of Son. At that time, the trustee is instructed to wind up the affairs, liquidate the
assets, and distribute the same among the then existing beneficiaries.

   On Date 3, the trustee of Trust A petitioned Probate Court to modify the trust to

provide that, upon the death of Son, Trust A is to be divided into separate shares for his
PLR-108640-19 3

heirs. If Wife survives Son, one-third of Trust A shall be allocated to her share and the
other two-thirds shall be divided into shares for the children and descendants of Son.
Each such share is separate, and the successor Trust A beneficiaries do not become
beneficiaries of an undivided trust. Consequently, the interests and powers of a
successor Trust A beneficiary with respect to his or her share extend only to that
successor Trust A beneficiary’s respective share and not to any share held for any other
beneficiary. During the 21 years following Son’s death, the successor Trust A
beneficiaries are not entitled to distributions of corpus, but may receive discretionary
distributions of net profits.

   Son died on Date 5. As a result of Son’s death, and various disclaimers made by

Son’s heirs, the following separate trusts were created from Trust A: Trust A, Trust 1,
Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, and Trust 9. Trusts 1 through
9 are collectively referred to as the Trust A Successor Trusts. The Trust A Successor
Trusts are governed by the same provisions as Trust A.

    On Date 6, the trustees and Advisory Board Members of Trust A and the Trust A

Successor Trusts, with the consent of the beneficiaries of the Trust A Successor Trusts,
petitioned Probate Court to modify the trust agreement with respect to Trust A. In
relevant part, Trust A will be modified to provide that if property is to be distributed upon
the termination of Trust A to a person who has not then attained b years of age, the
trustee shall make payment or distribution of that property to the trustee to be held in a
continuing trust for the continuing beneficiary. During the duration of a continuing trust,
the trustee shall distribute to or for the benefit of the continuing beneficiary so much of
the income and principal of such continuing Trust as the trustee, in the trustee’s sole
and absolute discretion, deems necessary and appropriate to provide for the continuing
beneficiary’s health, education, maintenance, and support in accordance with the
continuing beneficiary’s station in life, considering all other sources of income available
to the continuing beneficiary. In addition, if the continuing beneficiary has not attained
the age of a on the termination date of Trust, the trustee shall distribute one-half of the
assets of the continuing Trust when he or she attains the age of a. If the continuing
beneficiary has attained the age of a on the termination date of Trust, but has not
attained the age of b, the trustee shall distribute one-half of the assets of the continuing
trust to the continuing beneficiary on the termination date of Trust.

    The Date 6 petition further provides that the continuing trust shall terminate when

the continuing beneficiary attains age b or dies, whichever occurs first. At that time, the
trustee shall deliver all remaining property then on hand in the continuing trust to the
continuing beneficiary, or if the continuing beneficiary is not alive to whomever the
continuing beneficiary appoints by will (including the continuing beneficiary’s estate,
creditors, or creditors of the estate). If the continuing beneficiary is not then living and
fails to exercise the general power of appointment, the trustee shall deliver all property
in the continuing trust to the continuing beneficiary’s probate estate.
PLR-108640-19 4

  On Date 7, Probate Court issued an order, approving the petition, subject to a

favorable letter ruling from the Internal Revenue Service.

   State Statute 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 ruling:

   The proposed modification will not cause Trust A or the Trust A Successor Trusts
   to lose their exemption from the GST tax of chapter 13 of the Internal Revenue
   Code.

LAW AND ANALYSIS

   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, 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)(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)(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
PLR-108640-19 5

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 this case, Trust A was irrevocable prior to September 25, 1985. The amended

trust agreement provides for outright distribution to the beneficiaries upon the
termination of Trust A and the Trust A Successor Trusts, 21 years after the death of
Son. Under the proposed modification of the trust agreement, any share upon the
termination of Trust A and the Trust A Successor Trusts distributable to a beneficiary
who is under the age of b, will be held in a continuing trust for that continuing
beneficiary. Each continuing beneficiary will have a testamentary general power of
appointment with respect to the property. Under § 2041(a)(2), the continuing
beneficiary’s trust property will be includible in his or her estate at his or her death.
Further, each continuing beneficiary will be treated as the transferor of the trust corpus
for GST tax purposes under § 2652(a)(1). The proposed modification will not result in a
shift of any beneficial interest in any beneficiary who occupies a generation lower than
the persons holding the beneficial interests. Further, the proposed modification in
further trust will not extend the time for vesting of any beneficial interest in any trust.
Accordingly, based on the facts presented and the representations made, we rule that
the proposed modification will not cause Trust A or the Trust A Successor Trusts to lose
their exemption from the GST tax of chapter 13.

  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.
PLR-108640-19 6

   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,



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



   Enclosures:
         Copy for § 6110 purposes
         Copy of this letter

cc:
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