Court-approved QTIP trust settlement received favorable rulings

Plain-English summary

A surviving spouse and bank trustee sought rulings before completing a court-approved settlement that would terminate an irrevocable QTIP trust and two marital QTIP trusts. The spouse would receive a support payment and cash equal to the actuarial value of the lifetime income interests, while the remaining assets would fund a charitable trust. The IRS confirmed the trusts' QTIP status and ruled that section 2519 applied to the remainder interests, but the spouse made no gift of the income interests because full value was received. The deemed remainder transfers qualified for charitable deductions, the transferred assets would not later enter the spouse's estate under section 2044, and settlement-based disclaimers of remote contingent interests were not gifts. The indirect exchange with the charitable trust also did not constitute self-dealing.

Ruling snapshot

• Question: How will the proposed QTIP trust settlement be treated for estate, gift, and private-foundation excise tax purposes?
• Outcome: approved
• Key authorities: IRC §§ 2044, 2056(b)(7), 2511, 2512, 2519, 2522, 2523(f), 4941, 4947; Treas. Reg. §§ 25.2512-5, 25.2512-8, 25.2519-1, 53.4941(d)-1

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202016003                                              Third Party Communication: None
Release Date: 4/17/2020                                        Date of Communication: Not Applicable
Index Number: 2044.00-00, 2056.07-00,                          Person To Contact:
                     2511.00-00, 2519.00-00,                   ---------------, ID No. -----------------
                     2522.00-00, 2523.06-01,                   Telephone Number:
                     4941.00-00                                --------------------
-------------------------------------------------              Refer Reply To:
------------------------------------------------------------   CC:PSI:04
----------                                                     PLR-111089-19
-------------------------------                                Date:
-------------------                                            October 30, 2019
------------------------------------

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



LEGEND

Date 1                       =   ----------------------
Decedent                     =   -----------------------------------------------------
Revocable Trust              =   -----------------------------------------------------
Date 2                       =   --------------------------
Date 3                       =   -------------------------
Date 4                       =   ---------------------------
Date 5                       =   -------------------------
Date 6                       =   ----------------------
Date 7                       =   -------------------------
Date 8                       =   -----------------------
Date 9                       =   -----------------------
Date 10                      =   -----------------------
Date 11                      =   -----------------------
Date 12                      =   ------------------------
Date 13                      =   -------------------------
Individual 1                 =   -------------------------
Individual 2                 =   --------------------
Individual 3                 =   -----------------
Spouse                       =   -------------------------------------------------
Marital Trust                =   ------------------------------
Bank                         =   ---------------------------------------------------
x                            =   ---
y                            =   -----------
z                            =   ---------
Charitable Trust             =   -------------------------------------------------
Irrevocable Trust            =   --------------------------------------------------
State                        =   ---------
PLR-111089-19                                         2

 Court 1                   =   -----------------------------------------------------------
 Court 2                   =   --------------------------------------------------------------
 Statute 1                 =   -----------------------------------------------------
 Statute 2                 =   ---------------------------------------------------

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

This letter responds to your authorized representative’s letter of March 28, 2019, and
subsequent correspondence, requesting rulings on the gift, estate, and excise tax
consequences of a proposed transaction.

FACTS

The facts and representations submitted are summarized as follows:

On Date 1, Decedent created Revocable Trust, which was amended and restated on
Date 2, and further amended on Date 3, Date 4, Date 5, and Date 6. Revocable Trust
became irrevocable upon Decedent’s death on Date 7.

Article V, Paragraph 5.1(e) of Revocable Trust, as amended, provides that upon
Decedent’s death, after making specific devises including gifts in further trust to
Individual 1, Individual 2, and Individual 3 (collectively, Individuals’ Trusts), the trustee
shall distribute the entire remaining trust estate, including undistributed income, if any to
Spouse to be held in further trust known as Marital Trust, as provided in
Paragraph 5.1(f). If Spouse is deceased, then the trustee shall hold the remaining trust
estate in trust and establish Charitable Trust. Bank is the current trustee (Trustee) of
Marital Trust, Charitable Trust, and Irrevocable Trust, discussed below.

Upon the death of Individual 1, and before the entire principal of Individual 1’s Trust
estate has been distributed, the trustee shall distribute the trust estate then held in trust
as provided in Paragraph 5.1(e), i.e., to Marital Trust while Spouse is living, and if
Spouse is deceased, to Charitable Trust. The provisions for Individual 2 and
Individual 3 are identical.

Paragraph 5.1(f) governs Marital Trust. The trustee shall pay the entire net income from
Marital Trust to Spouse annually in quarterly or more frequent installments during
Spouse’s lifetime and from the date of Decedent’s death. In addition, the trustee shall
pay to or for Spouse’s benefit such sums from the principal of Marital Trust as in the
sole discretion of the trustee shall be necessary or advisable from time to time for the
health, maintenance, and support of Spouse. Paragraph 5.1(f)(3) specifically authorizes
the personal representative of Decedent’s estate to elect to have all of Marital Trust
treated as qualified terminable interest property (QTIP) for federal estate tax purposes.

Upon the death of Spouse, the trustee of Marital Trust shall transfer the principal of the
trust estate to or for the benefit of such members of a class consisting of Spouse’s lineal
PLR-111089-19                                  3

descendants, as Spouse may by Spouse’s last will and testament appoint by specific
reference to this power provided that such amount does not exceed x percent of the
total value of the trust estate. This power shall not be exercised in favor of Spouse or
Spouse’s estate or Spouse’s creditors or the creditors of Spouse’s estate. The trustee
shall hold and dispose the balance of the trust estate in Charitable Trust, as provided in
Paragraph 5.2.

Paragraph 5.2 governs Charitable Trust. Under Paragraph 5.2(b), Charitable Trust is
created and shall be operated exclusively for religious, charitable, scientific, literary, or
educational purposes within the meaning of § 501(c)(3) of the Internal Revenue Code
(Code). The trustee is to distribute the net income annually, or more frequently to such
religious, charitable, educational, and scientific organizations that are qualified public
charities under §§ 501(c)(3) and 509 and in such amounts as a committee may
determine in its sole discretion.

Article VII, Paragraph 7.2(e) of Revocable Trust provides that the trustee of any trust
created by this trust agreement shall be authorized for tax, administrative or investment
purposes to: (i) divide any trust established hereunder, based upon the fair market
values of the trust property at the time of division, into two or more separate trusts, the
dispositive provisions of which shall, except as otherwise expressly provided here, be
identical to those applicable to the trust prior to division. The trustee may divide any
trust into separate trusts consisting of portions that for federal generation-skipping
transfer (GST) tax purposes either have inclusion ratios of zero or one.

On Date 5, Decedent created Irrevocable Trust for the benefit of Spouse. Irrevocable
Trust provides that the trustee shall pay the entire net income of the trust estate at least
annually to Spouse during Spouse’s life. In addition, the trustee shall pay, from the
principal of the trust estate, to or for Spouse’s benefit, such sums as may be required
for Spouse’s health, education, support, and maintenance. Spouse shall have the
power to require the trustee either to make property held in Irrevocable Trust productive
of income or to convert the same into productive property within a reasonable time.
Irrevocable Trust provides that Decedent, as settlor, will elect to treat the property in
Irrevocable Trust as QTIP that qualifies for the marital deduction by the timely filing of a
federal gift tax return. Upon Spouse’s death, the trustee shall distribute the trust estate
(or remainder thereof) then held in trust to the trustee of Charitable Trust. Bank and
Spouse were the initial co-trustees of Irrevocable Trust and, currently, Bank is the sole
Trustee.

On Date 8, Decedent timely filed Form 709, United States Gift (and Generation-
Skipping Transfer) Tax Return, to report the gifts to Irrevocable Trust. On the return,
Decedent elected to treat all of the property in Irrevocable Trust as QTIP under
§ 2523(f).
PLR-111089-19                                   4

On Date 9, Trustee divided Marital Trust into GST Exempt Marital Trust and GST Non-
Exempt Marital Trust. The terms of GST Exempt Marital Trust and GST Non-Exempt
Marital Trust are identical to Marital Trust.

On Date 10, Bank, as executor of Decedent’s estate, timely filed Decedent’s Form 706,
United States Estate (and Generation-Skipping Transfer) Tax Return. On Date 11,
Bank filed a supplemental Form 706. On the returns, Bank elected to treat all of the
property in Marital Trust, as divided into GST Exempt Marital Trust and GST Non-
Exempt Marital Trust, as QTIP under § 2056(b)(7).

Prior to Decedent’s death, Decedent and Spouse were living apart and became
estranged. After Decedent’s death, Bank opened Decedent’s probate estate in the
probate court in State. Spouse filed a Petition for Revocation in the probate court
challenging Decedent’s will on grounds of lack of testamentary capacity and undue
influence by the Bank. Subsequently, the parties filed actions in two circuit courts,
Court 1 and Court 2. After substantial litigation, the parties entered into a Settlement
Agreement, dated Date 11. The primary purpose of the Settlement Agreement is to
terminate Irrevocable Trust and Marital Trust and to preserve the trust funds to meet
Decedent’s intent to provide for Spouse and Charitable Trust.

Under the Settlement Agreement, the parties agree to the following:

1. Spouse shall receive a principal distribution from Irrevocable Trust in the amount of
$y in consideration for her resignation as co-trustee of Irrevocable Trust and in
resolution of Spouse’s claims for attorney’s fees, costs, demands for principal invasion,
and disputed co-trustee fees.

2. Spouse shall receive from Irrevocable Trust in exchange for her income interest
therein, cash equal to the present value of her lifetime income interest in Irrevocable
Trust as determined under § 25.2512-5 of the Gift Tax Regulations, as of the date of
termination of Irrevocable Trust based upon (i) the § 7520 interest rate then in effect,
(ii) the age of Spouse at that time, and (iii) the fair market value, as reported by Bank,
as Trustee, of the assets of Irrevocable Trust as of the date of termination, less any and
all liabilities and accrued and unpaid expenses of administration.

3. The balance of Irrevocable Trust shall be distributed to Charitable Trust.

4. Spouse shall receive from Marital Trust in exchange for her income interest therein,
cash equal to the present value of her lifetime income interest in Marital Trust as
determined under § 25.2512-5 as of the date of termination of Marital Trust based upon
(i) the § 7520 interest rate then in effect, (ii) the age of Spouse at that time, and (iii) the
fair market value, as reported by Bank, as Trustee, of the assets of Marital Trust as of
the date of termination, less any and all liabilities and accrued and unpaid expenses of
administration.
PLR-111089-19                                        5

5. The balance of Marital Trust shall be distributed to Charitable Trust.

6. Until the disposition of Spouse’s lifetime income interests, Spouse shall receive from
both Irrevocable Trust and Marital Trust a minimum income distribution of $z, with the
balance of the trust income to be paid at termination or in December of each year until
termination.

7. Spouse shall disclaim, effective immediately following the termination, all of her
interests in Revocable Trust and Individuals’ Trusts created thereunder, causing the
property remaining in such trusts upon the death of each Individual to pass to Charitable
Trust and not Spouse, even if Spouse is living at that time.

Courts 1 and 2 approved the Settlement Agreement on Date 12 and 13, respectively.
Except for the distribution of y to Spouse and Spouse’s resignation as co-trustee, the
terms of the Settlement Agreement are subject to the issuance of a favorable private
letter ruling by the Internal Revenue Service.

Bank and Spouse represent that no deduction has been or will be allowed under § 170,
545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for any contribution, bequest, legacy,
devise, or transfer to, or payment or set-aside by, Charitable Trust, made prior to the
contemplated exchange.1

Under Statute 1, a nonjudicial settlement agreement among the trustee and trust
beneficiaries is valid only to the extent the terms and conditions could be properly
approved by the court. A nonjudicial settlement may not be used to produce a result not
authorized by other provisions of this code, including, but not limited to, terminating or
modifying a trust in an impermissible manner. Any interested person may request the
court to approve or disapprove a nonjudicial settlement agreement.

Statute 2 provides that a person may disclaim, in whole or in part, conditionally or
unconditionally, any interest in or power over property, including a power of
appointment.

You request the following rulings:

1. The entire Irrevocable Trust constitutes QTIP under § 2523(f).

2. Each of GST Exempt Marital Trust and GST Non-Exempt Marital Trust constitute
QTIP under § 2056(b)(7).



1 Bank initially claimed an erroneous charitable deduction under § 170 with respect to a nominal

contribution to Charitable Trust made for the purpose of enabling Charitable Trust to be a party to the
Settlement Agreement; however, Bank timely filed an amended return that did not claim a deduction
under § 170.
PLR-111089-19                                   6

3. The principal distribution of $y from Irrevocable Trust to Spouse for maintenance and
support does not constitute a disposition under § 2519 by Spouse for any part of her
qualifying income interest in Irrevocable Trust.

4. Spouse’s proposed dispositions of her qualifying income interests in Irrevocable
Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust will constitute
dispositions to which § 2519 applies.

5. Spouse’s proposed dispositions of her qualifying income interests in Irrevocable
Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust will not result in
gifts by Spouse of those interests under § 2511 because Spouse will receive the
present value of her qualifying income interest in each trust.

6. Spouse will receive gift tax deductions under § 2522 for any property deemed gifted
by her to Charitable Trust pursuant to § 2519 upon the disposition of her qualifying
income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt
Marital Trust.

7. The disclaimer under State law by Spouse of her remote contingent remainder
interests in Individual 1 Trust, Individual 2 Trust, and Individual 3 Trust will not result in
any gifts by Spouse.

8. The property of Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt
Marital Trust deemed transferred under § 2519 will not be includible in Spouse’s gross
estate under § 2044.

9. The dispositions by Spouse of her qualifying income interests in Irrevocable Trust,
GST Exempt Marital Trust, and GST Non-Exempt Marital Trust do not constitute acts of
self-dealing under § 4941.

LAW

Rulings 1 through 8

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent
who is a citizen or resident of the United States.

Section 2044(a) provides that the value of the gross estate shall include the value of
any property in which the decedent had a qualifying income interest for life.

Section 2044(b) provides that § 2044(a) applies to any property if a deduction was
allowed with respect to the transfer of such property to the decedent under § 2056(b)(7)
and § 2519 did not apply with respect to a disposition by the decedent of part or all of
such property.
PLR-111089-19                                   7

Section 2056(a) provides that, for purposes of the tax imposed by § 2001, the value of
the taxable estate shall, except as limited by § 2056(b), be determined by deducting
from the value of the gross estate an amount equal to the value of any interest in
property which passes or has passed from the decedent to the surviving spouse, but
only to the extent that such interest is included in determining the value of the gross
estate.

Section 2056(b)(7)(B)(i) defines the term “qualified terminable interest property” as
property: (I) which passes from the decedent; (II) in which the surviving spouse has a
qualifying income interest for life as defined in § 2056(b)(7)(B)(ii); and (III) to which an
election under § 2056(b)(7) applies.

Section 2056(b)(7)(B)(ii) provides that the surviving spouse has a qualifying income
interest for life if: (I) the surviving spouse is entitled to all the income from the property,
payable annually or at more frequent intervals, or has a usufruct interest for life in the
property; and (II) no person has a power to appoint any part of the property to any
person other than the surviving spouse.

Section 2056(b)(7)(B)(v) provides that an election under § 2056(b)(7) with respect to
any property shall be made by the executor on the return of tax imposed by § 2001.
Such an election, once made, shall be irrevocable.

Section 20.2056(b)-7(b)(4)(i) of the Estate Tax Regulations provides that, in general, the
election referred to in § 2056(b)(7)(B)(i)(III) and (v) is made on the return of tax imposed
by § 2001.

Section 2501(a)(1) imposes a tax on the transfer of property by gift by an individual.

Section 2511(a) provides, in part, that the tax imposed by § 2501 shall 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)(1) of the Gift Tax Regulations provides that the gift tax applies to
gifts indirectly made. Thus, 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.

Section 25.2511-2(a) provides that the gift tax is a primary and personal liability of the
donor, is an excise upon his act of making the transfer, is measured by the value of the
property passing from the donor, and attaches regardless of the fact that the identity of
the donee may not then be known or ascertainable.

Section 2512(a) provides that if the gift is made in property, the value thereof at the date
of the gift is considered the amount of the gift.
PLR-111089-19                                  8

Section 2512(b) provides that where property is transferred for less than an adequate
and full consideration in money or money’s worth, the amount by which the value of the
property exceeded the value of the consideration shall be deemed a gift.

Section 25.2512-8 provides that transfers reached by the gift tax are not confined to
those only which, being without a valuable consideration, accord with the common law
concept of gifts, but embrace as well sales, exchanges, and other dispositions of
property for a consideration to the extent that the value of the property transferred by
the donor exceeds the value in money or money’s worth of the consideration given
therefor. However, a sale, exchange, or other transfer of property made in the ordinary
course of business (a transaction which is bona fide, at arm’s length, and free from any
donative intent), will be considered as made for an adequate consideration in money or
money’s worth.

Section 2519(a) provides that for purposes of chapter 11 and chapter 12, any
disposition of all or part of a qualifying income interest for life in any property to which
§ 2519(a) applies is treated as a transfer of all interests in the property other than the
qualifying income interest. Section 2519(b) provides that § 2519(a) applies to any
property if a deduction was allowed with respect to the transfer of such property to the
donor under § 2056(b)(7), or under § 2523(f).

Section 25.2519-1(a) provides that a transfer of all or a portion of the income interest of
the spouse in QTIP is a transfer by the spouse under § 2511.

Section 25.2519-1(c)(1) provides that the amount treated as a transfer under § 2519
upon a disposition of all or part of a qualifying income interest for life in QTIP is equal to
the fair market value of the entire property subject to the qualifying income interest,
determined on the date of the disposition (including any accumulated income and not
reduced by any amount excluded from total gifts under § 2503(b) with respect to the
transfer creating the interest), less the value of the qualifying income interest in the
property on the date of the disposition. The gift tax consequences of the disposition of
the qualifying income interest are determined separately under § 25.2511-2.

Section 25.2519-1(e) provides that the exercise by any person of a power to appoint
qualified terminable interest property to the donee spouse is not treated as a disposition
under § 2519, even though the donee spouse subsequently disposes of the appointed
property.

Section 25.2519-1(g), Example 1, describes a situation where, under D’s will, a
personal residence valued for estate tax purposes at $250,000 passes to S for life, and
after S’s death to D’s children. D’s executor made a valid election to treat the property
as qualified terminable interest property. During 1995, when the fair market value of the
property is $300,000 and the value of S’s life interest in the property is $100,000, S
makes a gift of S’s entire interest in the property to D’s children. The example
concludes that pursuant to § 2519, S is treated as making a gift in the amount of
PLR-111089-19                                 9

$200,000 (i.e., the fair market value of the qualified terminable interest property of
$300,000 less the fair market value of S’s qualifying income interest in the property of
$100,000). In addition, under § 2511, S makes a gift of $100,000 (i.e., the fair market
value of S’s income interest in the property).

Section 25.2519-1(g), Example 2, the facts are the same as in Example 1 except that
during 1995, S sells S’s income interest in the property to D’s children for $100,000.
Pursuant to § 2519, S is treated as making a gift of $200,000 ($300,000 less $100,000,
the value of the qualifying income interest in the property). S does not make a gift of the
income interest under § 2511, because the consideration received for S’s income
interest is equal to the value of the income interest.

Section 2522(a) provides that in computing taxable gifts for the calendar year, there
shall be allowed as a deduction the amount of all gifts made during such year to or for
the use of charitable organizations described in § 2522(a).

Section 2522(c)(1) provides that no deduction is allowed under § 2522 for a gift to or for
the use of an organization or trust described in § 508(d) or § 4948(c)(4) subject to
conditions specified in such sections.

Section 2523(a) provides that where a donor transfers during the calendar year by gift
an interest in property to a donee who at the time of the gift is the donor’s spouse, there
shall be allowed as a deduction in computing taxable gifts for the calendar year an
amount with respect to such interest equal to its value.

Section 2523(b) provides, in part, that where, on the lapse of time, on the occurrence of
an event or contingency, or on the failure of an event or contingency to occur, such
interest transferred to the spouse will terminate or fail, no deduction shall be allowed
with respect to such interest if the donor retains in himself, or transfers or has
transferred (for less than an adequate and full consideration in money or money’s
worth) to any person other than such donee spouse (or the estate of such spouse), an
interest in such property, and if by reason of such retention or transfer the donor (or his
heirs or assigns) or such person (or his heirs or assigns) may possess or enjoy any part
of such property after such termination or failure of the interest transferred to the donee
spouse.

Section 2523(f)(1) provides that in the case of qualified terminable interest property, for
purposes of § 2523(a), such property shall be treated as transferred to the donee
spouse, and for purposes of § 2523(b)(1), no part of such property shall be considered
as retained in the donor or transferred to any person other than the donee spouse.

Section 2523(f)(2) provides that the term “qualified terminable interest property” means
any property which is transferred by the donor spouse, in which the donee spouse has a
qualifying income interest for life, and to which an election under § 2523(f)(4) applies.
PLR-111089-19                                 10

Section 2523(f)(3) provides that, for purposes of this subsection, rules similar to the
rules of clauses (ii), (iii), and (iv) of § 2056(b)(7)(B) shall apply.

Section 2523(f)(4)(A) provides that an election under § 2523(f) with respect to any
property shall be made on or before the date prescribed by § 6075(b) for filing a gift tax
return with respect to the transfer (determined without regard to § 6019(2)) and shall be
made in such manner as the Secretary shall by regulations prescribe.

Section 2523(f)(4)(B) provides that an election under this subsection, once made, shall
be irrevocable.

ANALYSIS

Ruling 1

In this case, the terms of Irrevocable Trust provide that Spouse is entitled to all the
income from the property in the trust, at least annually, during Spouse’s lifetime.
Further, no person will have a power to appoint any part of the property in Irrevocable
Trust to any person other than Spouse. On a timely filed Form 709, Decedent elected
to treat the assets of Irrevocable Trust as QTIP under § 2523(f). Accordingly, based
upon the facts submitted and the representations made, we conclude that the entire
Irrevocable Trust constitutes QTIP under § 2523(f).

Ruling 2

In this case, the terms of Marital Trust, which was divided into GST Exempt Marital
Trust and GST Non-Exempt Marital Trust, provide that Spouse is entitled to all the
income from the property in the trust, at least annually, during Spouse’s lifetime.
Further, no person will have a power to appoint any part of the property in Marital Trust
to any person other than Spouse. The terms of GST Exempt Marital Trust and
GST Non-Exempt Marital Trust are identical to Marital Trust. Decedent’s estate elected
to treat the assets of Marital Trust as QTIP under § 2056(b)(7)(i). Accordingly, based
upon the facts submitted and the representations made, we conclude that the entire
Marital Trust, as divided into GST Exempt Marital Trust and GST Non-Exempt Marital
Trust, constitutes QTIP under § 2056(b)(7)(B).

Ruling 3

Spouse and Bank, as Trustees of Marital Trust and Irrevocable Trust, have been
involved in substantial and continuing litigation. Pursuant to the provisions of
Irrevocable Trust, Trustee possessed the power to appoint property from
Irrevocable Trust to Spouse as may be required for Spouse’s health, education,
support, and maintenance. Under the terms of the Settlement Agreement, Trustee will
distribute to Spouse $y, pursuant to the discretionary authority granted by Irrevocable
Trust. The Courts’ Orders, approving the Settlement Agreement, provide that the
PLR-111089-19                                 11

distribution of principal to Spouse was authorized under the provisions of Irrevocable
Trust.

As discussed above, Irrevocable Trust constitutes QTIP under § 2523(f)(2). The
distribution to Spouse was made pursuant to a power to appoint QTIP to the donee
spouse. See § 25.2519-1(e). Accordingly, based upon the facts submitted and the
representations made, we conclude that the principal distribution of $y from
Irrevocable Trust to Spouse for maintenance and support does not constitute a
disposition under § 2519 by Spouse for any part of her qualifying income interest in
Irrevocable Trust.

Ruling 4

Section 2519(a) applies to any property if a deduction was allowed with respect to the
transfer of such property to the donor under § 2056(b)(7), or under § 2523(f). As
discussed above, a deduction was allowed under § 2056(b)(7) for property transferred
to Marital Trust and under § 2523(f) for property transferred to Irrevocable Trust.
Accordingly, based on the facts submitted and the representations made, Spouse’s
proposed disposition of her qualifying income interests in Irrevocable Trust, GST
Exempt Marital Trust, and GST Non-Exempt Marital Trust will constitute dispositions to
which § 2519 applies.

Rulings 5 and 6

In this case, pursuant to the Settlement Agreement, Spouse will receive from
Marital Trust in exchange for her income interest therein, cash equal to the present
value of her lifetime interest in Marital Trust as determined under § 25.2512-5 as of the
date of termination of Marital Trust based upon (i) the § 7520 interest rate then in effect,
(ii) the age of Spouse at that time, and (iii) the fair market value, as reported by Bank as
Trustee, of the assets of Marital Trust as of the date of termination, less any and all
liabilities and accrued and unpaid expenses of administration. Accordingly, Spouse
shall not transfer any portion of her income interest in the trusts. Based on the facts
submitted and the representations made, Spouse’s proposed disposition of her
qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and
GST Non-Exempt Marital Trust will not result in gifts by Spouse of those interests under
§ 2511 because Spouse will receive the present value of her qualifying income interest
in each trust.

In this case, Spouse is treated as having transferred all interests in the property held in
Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust, other
than the qualifying income interest in each trust. Pursuant to the Settlement
Agreement, these interests will be transferred to Charitable Trust. Charitable Trust will
receive property equal to the full value of the respective remainder interest in
Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust.
Assuming Charitable Trust is an organization described in § 2522(a), the transfers by
PLR-111089-19                                  12

Spouse under § 2519 will qualify for the gift tax charitable deduction under § 2522(a).
Accordingly, based on the facts submitted and the representations made, Spouse will
receive gift tax deductions under § 2522 for any property deemed gifts by her to
Charitable Trust pursuant to § 2519 upon the disposition of her qualifying income
interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital
Trust.

Ruling 7

Individual 1, Individual 2, and Individual 3 are the life beneficiaries of a trust created for
his or her benefit under Revocable Trust. Pursuant to the provisions of Settlement
Agreement, Spouse will disclaim under State law her interest in the remote contingent
remainder interests in each Individuals’ Trusts. The proposed disclaimer provides that
any remainder in each Individuals’ Trusts will pass directly to Charitable Trust. In
exchange for the disclaimer of Spouse’s interest in the remote contingent remainder
interests in each Individuals’ Trust, Spouse received the agreement of Charitable Trust
to the terms of the Settlement Agreement. The disclaimer was a bargained for element
of Settlement Agreement, which was bona fide, at arm’s length and free from any
donative intent, and the consideration received by Spouse for her disclaimer was
adequate and full consideration in money or money’s worth. See § 25.2512-8.
Settlement Agreement provides a result that is within a range of reasonable
settlements, that is, the interests to be received by the parties (both as to the nature of
the interests and their economic value) reflect the enforceable rights of the parties.
Therefore, Spouse is not deemed to have made a gift of any interest in the remote
contingent remainder interests of Individual 1 Trust, Individual 2 Trust, and Individual 3
Trust because Spouse received full and adequate consideration for Spouse’s disclaimer
of those interests.

Accordingly, based on the facts submitted and the representations made, the disclaimer
by Spouse under State law of her remote contingent remainder interests in Individual 1
Trust, Individual 2 Trust, and Individual 3 Trust will not result in any gifts by Spouse.


Ruling 8

As stated above, the termination of Irrevocable Trust, GST Exempt Marital Trust, and
GST Non-Exempt Marital Trust pursuant to the Settlement Agreement will result in
Spouse making a deemed gift, under § 2519, of the entire fair market value of the
assets in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital
Trust and Marital Trust, as determined on the date of the disposition, less the value of
the qualifying income interest. Section 2044(b)(2) provides that § 2044(a) does not
apply to any property if § 2519 applies to the disposition of part or all of that property
prior to Spouse’s death. Therefore, based on the facts submitted and the
representations made, the property of Irrevocable Trust, GST Exempt Marital Trust, and
PLR-111089-19                                13

GST Non-Exempt Marital Trust deemed transferred under § 2519 will not be includible
in Spouse’s gross estate under § 2044(a) because of the application of § 2044(b)(2).

Ruling 9

Section 509(a) provides that, with certain exceptions not relevant to this analysis, for
purposes of the Internal Revenue Code, the term “private foundation” means a domestic
or foreign organization described in section 501(c)(3).

Section 4941(a)(1) imposes a 10 percent tax on each act of self-dealing between a
disqualified person and a private foundation, which shall be paid by any disqualified
person (other than a foundation manager acting only as such) who participates in the
act of self-dealing.

Section 4941(d)(1)(A) provides that “self-dealing” includes any direct or indirect sale or
exchange, or leasing, of property between a private foundation and a disqualified
person.

Section 4946(a)(1) provides that for purposes of subchapter A of chapter 42, the term
“disqualified person” includes, with respect to a private foundation, a person who is a
substantial contributor to the foundation, and a member of the family of such a
substantial contributor.

Section 4946(a)(2) provides that “substantial contributor” means a person who is
described in § 507(d)(2). Section 507(d)(2)(A) provides that the term “substantial
contributor” means any person who contributed or bequeathed an aggregate amount of
more than $ 5,000 to the private foundation, if such amount is more than 2 percent of
the total contributions and bequests received by the foundation before the close of the
taxable year of the foundation in which the contribution or bequest is received by the
foundation from such person. In the case of a trust, the term “substantial contributor”
also means the creator of the trust.

Section 4947(a)(1) provides that for purposes of § 4941 and other provisions of
chapter 42 of the Code, a trust which is not exempt from taxation under § 501(a), all of
the unexpired interests in which are devoted to one or more of the purposes described
in section 170(c)(2)(B), and for which a deduction was allowed under § 170, 545(b)(2),
642(c), 2055, 2106(a)(2), or 2522, shall be treated as an organization described in
§ 501(c)(3).

Section 53.4941(d)-1(a) of the Foundation and Similar Excise Taxes Regulations
provides that the term “self-dealing” does not include a transaction between a private
foundation and a disqualified person where the disqualified person status arises only as
a result of such transaction. For example, the bargain sale of property to a private
foundation is not a direct act of self-dealing if the seller becomes a disqualified person
PLR-111089-19                                   14

only by reason of his becoming a substantial contributor as a result of the bargain
element of the sale.

Rev. Rul. 72-243, 1972-1 C.B. 233, provides that the proceeds received by the life
tenant of a trust, in consideration for the transfer of the life tenant’s entire interest in the
trust to the remainder beneficiary, are treated as an amount realized from the sale or
exchange of a capital asset under § 1222.

The transaction pursuant to the Settlement Agreement, in which Spouse will receive the
present value of her life income interests in Irrevocable Trust and Marital Trust, and
Charitable Trust will receive the remaining trust assets, may be regarded in substance
as an indirect exchange between Spouse and Charitable Trust similar to the one
described in Rev. Rul. 72-243. Charitable Trust was not funded upon Decedent’s death
by Decedent, and no deduction has been or will be allowed under § 170, 545(b)(2),
642(c), 2055, 2106(a)(2), or 2522 with respect to Charitable Trust prior to the
contemplated exchange. Therefore, prior to the exchange, Charitable Trust is not a
trust described in § 4947(a)(1).

As discussed above, Spouse will receive a gift tax deduction under § 2522 of more than
$5,000 for the property deemed transferred by her to Charitable Trust (which will
exceed 2 percent of all contributions to Charitable Trust), causing Charitable Trust to be
subject to § 4947(a)(1) at that time. Spouse will be a disqualified person with respect to
Charitable Trust when the Settlement Agreement is executed, as a substantial
contributor to Charitable Trust and as a family member of the creator of Charitable
Trust. Section 53.4941(d)-1(a) provides, however, that the term “self-dealing” does not
include a transaction between a private foundation and a disqualified person where the
disqualified person status arises only as a result of such transaction. Accordingly,
§ 4941 will not apply to the indirect exchange between Spouse and Charitable Trust
pursuant to the Settlement Agreement in which Spouse will receive the present value of
her life income interest in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-
Exempt Marital Trust, and Charitable Trust will receive the remaining trust assets.

Based on the facts submitted and the representations made, we conclude that the
indirect exchange between Spouse and Charitable Trust pursuant to the Settlement
Agreement will not be treated as an act of self-dealing under § 4941.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. 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.

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-111089-19                                  15


In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                       Sincerely,


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



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