Trust transfer remains an incomplete gift and committee powers avoid estate inclusion

Plain-English summary

A grantor created an irrevocable domestic trust for family members and retained several nonfiduciary powers over distributions, including a consent power, a support-related power, and a limited testamentary appointment power. The IRS ruled that the retained powers made the contribution to the trust wholly incomplete for gift-tax purposes, so a distribution back to the grantor would merely return the grantor's property and the trust property would be included in the grantor's estate at death. Distributions to other beneficiaries would be completed gifts by the grantor, not by members of the distribution committee. The committee members' joint powers were not general powers of appointment, so those powers would not cause trust assets to enter their estates. For income-tax ownership, the IRS found no grantor-trust trigger under sections 673, 674, 676, 677, 678, or 679 while the committee served and the trust remained domestic, but left the section 675 administrative-control question for examination based on actual operations.

Ruling snapshot

• Question: What income, gift, and estate tax consequences follow from the grantor's and distribution committee's powers over the irrevocable trust?
• Outcome: mixed (gift and power-of-appointment rulings granted; section 675 ownership deferred as a factual question)
• Key authorities: IRC §§ 671-679, 2041, 2501, 2511, 2514; Treas. Reg. §§ 20.2041-3, 25.2511-2, 25.2514-1, 25.2514-3

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202017018                                            Third Party Communication: None
 Release Date: 4/24/2020                                      Date of Communication: Not Applicable
 Index Number: 671.02-00, 2041.03-00,
               2501.00-00, 2514.00-00                         Person To Contact:
                                                              --------------------, ID No. -----------------
 --------------------------                                   Telephone Number:
 ---------------------------------                            --------------------
 --------------------------                                   Refer Reply To:
                                                              CC:PSI:B01
                                                              PLR-112945-19
                                                              Date:
                                                              November 29, 2019




                                                   Legend

 Date                    = ---------------------

 Grantor                 = -------------------------------------------------------------------------------------
                           ----------------------

 Trust                   = ----------------------------------------------------------------------------

 State 1                 = -------------------------------------------------------------------------------------
                           -------------------------------------------------------------------------------------
 State 2                 = ------------

 Trustee                 = ------------------

 Distribution            = -------------------------------------------------------------------------------------
 Committee                 --------------------------


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

This responds to a letter dated May 28, 2019, requesting rulings under the Internal
Revenue Code.

                                                    Facts

The information and representations submitted are as follows. Trust is an irrevocable
trust, for the benefit of Grantor, Grantor’s Spouse, Grantor’s issue, Grantor’s Parents,
and the other issue of Grantor’s Parents (collectively, the “Beneficiaries”) created as of
Date. Trust is a domestic trust administered in, and governed by, the laws of State 1. A
corporate trustee (Trustee) is the sole trustee of Trust. Grantor resides in State 2.

PLR-112945-19                                 2

Grantor transferred certain property to Trust all of which is treated as separate property
under the laws of State 2.

While Grantor is alive, the Distribution Committee is to be in existence. Pursuant to the
terms of Trust as amended, Trustee must distribute income and principal of the trust
estate as directed in writing by the Distribution Committee, Grantor, or both, as follows:
(1) Income or principal to any Beneficiary (other than Grantor’s Spouse) as determined
by a majority of the Distribution Committee, other than Grantor or Grantor’s Spouse,
acting in a non-fiduciary capacity, with the written consent of Grantor (“Grantor’s
Consent Power”); (2) Income or principal to any Beneficiary as determined by
unanimous decision of the Distribution Committee, other than Grantor or Grantor’s
Spouse, acting in a non-fiduciary capacity (“Unanimous Committee Power”); and, (3)
Principal to any Beneficiary (other than Grantor or Grantor’s Spouse) as determined by
Grantor, acting in a non-fiduciary capacity, for any one or more of such Beneficiary’s
support, health, or education (Grantor’s Sole Power).

Additionally, the Distribution Committee, either pursuant to the Grantor’s Consent Power
or the Unanimous Committee Power, has the power to direct Trustee to distribute
assets from Trust to any trust for the benefit of one or more Beneficiaries.

Grantor may appoint all or any part of the principal of Trust, outright or in trust, at his
death in favor of the issue of Grantor’s parents (other than Grantor, his estate, his
creditors, or the creditors of his estate), Grantor’s Spouse, or any one or more
charitable organizations as Grantor designates (“Grantor’s Testamentary Power”). Any
part of the principal of Trust not effectively appointed by Grantor upon his death will be
distributed to a designated trust.

The Distribution Committee and/or Grantor, as applicable, may direct that distributions
be made equally or unequally and to or for the benefit of any one or more of the
beneficiaries of Trust to the exclusion of others. Other than as provided above, income
and principal of Trust may not be distributed to Grantor.

The Distribution Committee is initially composed of Grantor, Grantor’s parents and
Grantor’s sister. Until the death of Grantor, the Distribution Committee must have at
least two members, other than Grantor or Grantor’s Spouse. If any member of the
Distribution Committee ceases to act, the remaining members will act. If there are less
than two remaining members, other than Grantor or Grantor’s Spouse, the Trust
Protector will appoint any one or more of the Beneficiaries other than Grantor’s Spouse
to the Distribution Committee, provided that the number of members does not exceed
four and that any member of the Distribution Committee is an adult, competent person.
Notwithstanding the above, if less than two individuals are eligible to serve, the Trust
Protector shall appoint a guardian or other adult to serve on behalf of a minor
Beneficiary.

PLR-112945-19                                 3

The members of the Distribution Committee in their capacities as such shall not serve or
act in a fiduciary capacity. As long as the Distribution Committee is acting, Trustee will
not have power to make distributions to the Beneficiaries without written guidance
received from the Distribution Committee, Grantor, or both, as applicable. The
Distribution Committee shall cease upon the death of Grantor, and Trustee shall have
the powers held by the Distribution Committee. Trust will be amended effective Date to
revise certain provisions of Trust so that the trust protector and Trustee do not hold any
powers that would cause Grantor to be treated as the owner of Trust during the period
that the Distribution Committee is in existence.

You requested the following rulings:

    1. During the period the Distribution Committee is serving, no portion of the items of
      income, deductions, and credits against tax of Trust will be included in computing
      the taxable income, deductions, and credits of Grantor or of any member of the
      Distribution Committee under § 671;

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

    3. Any distribution of property by the Distribution Committee from Trust to Grantor
      will not be a completed gift, subject to federal gift tax, by any member of the
      Distribution Committee;

    4. Any distribution of property by the Distribution Committee from Trust to any
      Beneficiary of Trust, other than to Grantor, will not be a completed gift, subject to
      federal gift tax, by any member of the Distribution Committee; and

    5. No member of the Distribution 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 and 2514
      over property held in Trust.

                                     Law and Analysis

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.

PLR-112945-19                                 4

Section 672(a) provides, for purposes of subpart E, the term “adverse party” means any
person having a substantial beneficial interest in the trust which would be adversely
affected by the exercise or non-exercise of the power which he possesses respecting
the trust.

Sections 673 through 677 specify the circumstances under which the grantor is treated
as the owner of a portion of a trust.

Section 673(a) provides that the grantor shall be treated as the owner of any portion of
a trust in which the grantor has a reversionary interest in either the corpus or the income
therefrom, if, as of the inception of that portion of the trust, the value of such interest
exceeds five (5) percent of the value of such portion.

Section 674(a) provides, in general, that the grantor shall be treated as the owner of any
portion of a trust in respect of which the beneficial enjoyment of the corpus or the
income therefrom is subject to a power of disposition, exercisable by the grantor or a
nonadverse party, or both, without the approval or consent of any adverse party.

Section 674(b) provides that § 674(a) shall not apply to the powers described in
§ 674(b) regardless of whom held.

Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable only by
will, other than a power in the grantor to appoint by will the income of the trust where the
income is accumulated for such disposition by the grantor or may be so accumulated in
the discretion of the grantor or a nonadverse party, or both, without the approval or
consent of any adverse party.

Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute corpus
to or for a beneficiary, provided that the power is limited by a reasonably definite
standard.

Under § 675 and applicable regulations, the grantor is treated as the owner of any
portion of a trust if, under the terms of the trust agreement or circumstances attendant
on its operation, administrative control is exercisable primarily for the benefit of the
grantor rather than the beneficiary of the trust.

Section 676(a) provides that the grantor shall be treated as the owner of any portion of
a trust, whether or not he is treated as such owner under any other provision of part I,
subchapter J, chapter 1, where at any time the power to revest in the grantor title to
such portion is exercisable by the grantor or a nonadverse party, or both.

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

PLR-112945-19                                 5

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 sections 671 to 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 such trust.

Based solely on the facts and representations submitted, we conclude an examination
of Trust, as amended, reveals none of the circumstances that would cause Grantor or
any member of the Distribution Committee to be treated as the owner of any portion of
Trust under sections 673, 674, 676, 677, 678, or 679 as long as the Distribution
Committee remains in existence and serving and Trust remains a domestic trust.

We further conclude that an examination of Trust, as proposed to be amended, reveals
none of the circumstances that would cause administrative controls to be considered
exercisable primarily for the benefit of Grantor under section 675. Thus, the
circumstances attendant on the operation of Trust will determine whether Grantor will be
treated as the owner of any portion of Trust under section 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 for the imposition of a gift tax on the transfer of property by
gift. 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 with respect to which the donor has so parted with dominion and control as
to leave the donor with no power to change the disposition of the property, whether for
the donor's 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,

PLR-112945-19                                  6

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 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
had 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.

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 non-exercise 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.

Under § 25.2511-2(e), a donor is considered as possessing 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. 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

PLR-112945-19                                7

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’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).

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

Grantor also retained 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, Grantor’s Sole Power gives Grantor the
power to change the interests of the beneficiaries. Grantor’s Sole Power is a non-
fiduciary power. Accordingly, the retention of Grantor’s Sole Power causes the transfer
of property to Trust to be wholly incomplete for federal gift tax purposes.

Further, Grantor retained Grantor’s Testamentary Power to appoint the property in trust
or outright to the issue of Grantor’s parents (other than Grantor’s estate, Grantor’s
creditors, or the creditors of Grantor’s estate), Grantor’s spouse, and any one or more
charitable organizations described in § 501(c)(3). 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 in Trust for federal tax purposes.

Finally, the Distribution Committee members possess Unanimous Committee Power
over income and principal. These powers are not conditions precedent to Grantor’s

PLR-112945-19                                 8

powers. Grantor’s powers over the income and principal are presently exercisable and
not subject to a condition precedent. Grantor retains dominion and control over the
income and principal of Trust until the Distribution Committee members exercise their
Unanimous Committee Power. Accordingly, Unanimous Committee Power does not
cause the transfer of property to be complete with respect to the income and principal
interests in Trust for federal gift tax purposes.

If the Distribution Committee ceases to exist, Trustee, in its fiduciary capacity, also has
the power to distribute net income or principal to one or more Beneficiaries. The
powers of Trustee are not conditions precedent to Grantor’s powers. Grantor’s Consent
Power over income and principal and Grantor’s Sole Power over principal are presently
exercisable and not subject to a condition precedent. Grantor retains dominion and
control over the principal of Trust until Trustee exercises its power to appoint income or
principal. Thus, Trustee’s power to distribute net income or principal does not cause the
transfer of property to Trust to be complete for federal gift tax purposes. Accordingly,
the retention of Grantor’s Consent Power and Grantor’s Sole Power causes the transfer
of property to Trust to be wholly incomplete for federal gift tax purposes.

Based on the facts submitted and the representations made, we conclude that the
contribution of property to Trust by Grantor is not a completed gift subject to federal gift
tax. Any distribution from Trust to Grantor is merely a return of Grantor’s property.
Further, upon Grantor’s death, the fair market value of the property in Trust is includible
in 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.

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

PLR-112945-19                                 9

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 section 2514(c)(3)(8), a
person who, after the death of the possessor, may be possessed of a power of
appointment (with respect to the property subject to the possessor’s power) which he
may exercise in his own favor shall be deemed as having an interest in the property and
such interest shall be deemed adverse to such exercise of the possessor’s power.

Section 25.2514-3(b)(2) provides, in part, that a co-holder of a power 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
sections 2035 to 2038, inclusive.

Under section 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)(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

PLR-112945-19                                  10

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 Distribution Committee members under Grantor’s Consent
Power are powers that are exercisable only in conjunction with the creator, Grantor.
Accordingly, under sections 2514(b) and 2041(a)(2), the Distribution Committee
members do not possess general powers of appointment by virtue of possessing this
power. The powers held by the Distribution Committee members under Unanimous
Committee 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
Distribution Committee members have substantial adverse interests in the property
subject to this power.

Accordingly, any distributions made from Trust to Beneficiary pursuant to the exercise of
Grantor’s Consent Power or Unanimous Committee Power are not gifts by the
Distribution Committee members.

Based on the facts submitted and representations made, we conclude that any
distribution of property by the Distribution Committee from Trust to any beneficiary of
Trust, other than Grantor, will not be a completed gift subject to federal gift tax, by any
member of the Distribution Committee. Further, we conclude that any distribution of
property from Trust to a beneficiary other than Grantor will be a completed gift by
Grantor. Finally, we conclude that the powers held by the Distribution Committee are
not general powers of appointment for purposes of section 2041(a)(2) and, accordingly,
no member of the Distribution 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 within the meaning of section 2041 over property held in Trust.

Except as specifically ruled herein, we express or imply no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

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.

PLR-112945-19                                  11


In accordance with the power of attorney on file with this office, copies of this letter are
being sent to the taxpayer’s authorized representative.

                                       Sincerely,



                                       Faith P. Colson
                                       Faith P. Colson
                                       Senior Counsel, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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


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