IRS rules a merger of three GST-exempt trusts keeps them exempt from generation-skipping tax

Plain-English summary

A married couple set up three irrevocable trusts for their descendants and allocated
enough generation-skipping transfer (GST) tax exemption to each so that all three are fully
GST-exempt (an inclusion ratio of zero). The trustee wants to merge two of the trusts into
the third to cut administrative costs and simplify investment management, and asked the
IRS whether the merger would jeopardize the trusts' GST-exempt status. The trusts have
identical beneficiaries and substantially similar distribution and trustee-power terms. Under
the GST regulations, a modification like a merger keeps a trust's exempt status as long as
it does not shift a beneficial interest to a lower generation or extend the time for vesting
beyond the original trust. The IRS concluded the merger meets those conditions, so it will
not affect the trusts' GST-exempt status and will not make later distributions subject to GST
tax. The ruling addresses only GST status, not gift or income tax consequences.

Ruling snapshot

• Question: Will merging two GST-exempt trusts into a third affect the trusts' GST-exempt status or subject distributions to GST tax?
• Outcome: Approved (favorable ruling: exempt status preserved)
• Key authorities: IRC §§ 2601, 2611, 2631, 2642, 2651; Treas. Reg. § 26.2601-1(b)(4)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202215015                                              Third Party Communication: None
 Release Date: 4/15/2022                                        Date of Communication: Not Applicable
 Index Number: 2601.00-00
                                                                Person To Contact:
 ----------------------------                                   -------------------------- ID No. -----------------
 ------------------------------------                           -----------------------------------------------------
 --------------------------------                               Telephone Number:
 --------------------------                                     --------------------
                                                                Refer Reply To:
 ------------------------------------------------------------   CC:PSI:B04
 ----------                                                     PLR-121628-21
                                                                Date:
                                                                January 19, 2022




Legend

 Date 1                                        ------------------------------
 Date 2                                        --------------------------
 Year 1                                        -------
 Year 2                                        -------
 Husband                                       ------------------------------------------------
 Wife                                          --------------------------------------------
 Trust A                                       -------------------------------------------------------------------
                                               -------------------------------------------------------------------
                                               ------------------------------------------
 Trust B                                       -------------------------------------------------------------------
                                               -------------------------------------------------------------------
                                               --------------------------------------------
 Trust WB                                      -------------------------------------------------------------------
                                               ------------------------------------------
 Trustee                                       --------------------
 a                                             -----------
 b                                             ---------
 c                                             ---------
 d                                             ---
 e                                             ---
 State                                         --------------

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

      This letter responds to your authorized representative’s letter, dated
November 2, 2021 and other correspondence, requesting a generation-skipping transfer
(GST) tax ruling regarding the proposed merger of certain trusts.
PLR-121628-21                                  2

       The facts and representations made are as follows:

        On Date 1, Husband and Wife (collectively, “Grantors”) established Trust A. The
Grantors each made gifts of $a of property to Trust A. In Year 1, each Grantor timely
filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for
the transfer to Trust A and allocated $a in GST tax exemption to Trust A. As a result of
the allocations, Trust A has an inclusion ratio of zero at the date of the transfer.

      Paragraph 1.01 of Trust A provides that the trustee, within its sole discretion,
may pay as much of the net income and/or trust principal as trustee from time to time
considers advisable for the general health, education and higher education of any one
or more of Grantors’ issue living from time to time, in all degrees. All distributions shall
be made according to the needs of the various beneficiaries rather than equally among
them.

        Paragraph 1.03 provides that when the Grantors’ then youngest living great-
grandchild (living at the time of the death of the last Grantor) attains age d, the initial
Trust estate is to be divided into equal trust shares. One trust share for each of
Grantors’ then living great-grandchildren and one trust share for each of Grantors’ then
living great-great-grandchildren. Each such great-grandchild or great-great-grandchild
is to be a trust share beneficiary of his or her trust share as created hereunder.

         Paragraph 1.05 provides, in relevant part, that where there is a division of the
initial trust into trust shares under paragraph 1.03, each such trust share shall be further
held, administered, and distributed to and for the benefit of the trust share beneficiary as
follows: The trustee shall have discretion to distribute to the trust share beneficiary the
entire net income from the appropriate trust share, or so much thereof from time to time,
for the beneficiary’s health, support, maintenance, education and/or higher education,
and the same may be paid over and distributed to the trust share beneficiary at least
quarterly. If a trust share beneficiary has attained age e, the trust share net income
shall be paid over and distributed to the beneficiary quarter-annually. During the
administration of a trust share, to or for the benefit of a trust share beneficiary, the
trustee may, within the sole discretion of the trustee, distribute trust principal to a trust
share beneficiary according to the standards and/or directions set forth under paragraph
1.01.

       After reaching age d, the trust share beneficiary may withdraw any part or all of
the trust share. If a trust share beneficiary dies before receiving the final distribution of
his/her trust share and leaves lineal issue surviving, the trust share of the deceased
trust share beneficiary will be further divided into equal trust shares for each of the then
surviving children of the deceased trust share beneficiary. If the trust share beneficiary
dies before receiving the final distribution of his/her share and leaves no children
surviving, but leaves siblings surviving, the share of the deceased trust share
beneficiary will be divided into equal shares for the number of siblings then surviving. If
the trust share beneficiary dies before receiving the final distribution of his/her share
PLR-121628-21                                   3

and leaves no children and siblings surviving, the share of the deceased trust share
beneficiary will be divided into equal shares for the then surviving great-grandchildren
and great-great-grandchildren and, if the trust share beneficiary is age d or older, the
trust share shall be distributed outright.

        Paragraph 1.07 provides that no trust property shall be construed to remain held
in trust beyond the period permitted by applicable law.

       Paragraph 5.06 provides that the trustee may transfer property of a trust to, or
receive property from, the trustees of any trust with substantially similar provisions for
the same beneficiaries, for purposes of merging the trusts.

        On Date 1, the Grantors established Trust B. The Grantors each made gifts of
$b of property to Trust B. In Year 1, each Grantor timely filed a Form 709 for the
transfer to Trust B and allocated $b in GST tax exemption to Trust B. As a result of the
allocations, Trust B has an inclusion ratio of zero at the date of the transfer. The
distribution, dispositive, termination, and trustee power provisions of Trust B are
substantially identical to those of Trust A.

        On Date 2, Grantors executed Trust WB. The Grantors each made gifts of $c of
property to Trust WB. In Year 2, each Grantor timely filed a Form 709 for the transfer
to Trust WB and allocated $c in GST tax exemption to Trust WB. As a result of the
allocations, Trust WB has an inclusion ratio of zero at the date of the transfer. The
distribution, dispositive provisions, and trustee power provisions are substantially
identical to those of Trust A. The termination provision under paragraph 8 provides that
the trust shall last in perpetuity for the benefit of Grantors’ descendants.

         Trustee is serving as the current trustee of all of the Trusts. All of the trusts are
irrevocable. All of the trusts are administered in State. The beneficiaries are identical
for all trusts.

      Trustee proposes to merge Trust WB and Trust B into Trust A. After the merger,
Trust WB and Trust B will terminate and the provisions of Trust A will apply to all
property held in Trust A. It is represented that the reason for the merger is to save
administrative costs and enhance the management of the trusts’ investments.

       You have requested the following ruling:

      The proposed merger of Trust WB and Trust B into Trust A will not affect the
present GST tax exempt status of such trusts and will not cause any distributions (upon
termination or otherwise) from Trust A to beneficiaries to become subject to the GST
tax.

LAW AND ANALYSIS
PLR-121628-21                                 4

Ruling

      Section 2601 imposes a tax on every generation-skipping transfer, which is
defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip.

       Under § 2602, the amount of GST tax is the taxable amount multiplied by the
applicable rate. Under § 2641, the applicable rate means the product of the maximum
federal estate tax rate, and the inclusion ratio (defined under § 2642) with respect to the
transfer. Under § 2631(a), for purposes of determining the inclusion ratio, in Year 1,
every individual shall be allowed a GST exemption of $1 million (adjusted for inflation)
which may be allocated by such individual (or his executor) to any property with respect
to which such individual is the transferor. In Year 2, the GST amount was determined
under §2631(c). Any allocation under §2631(a), once made, is irrevocable.

        In this case, Grantors allocated sufficient GST exemption in Years 1 and 2 to the
transfers to the trusts to cause the inclusion ratio for each trust to equal zero. No
guidance has been issued under chapter 13 concerning changes, such as a merger,
that may affect the status of trust that is exempt from GST tax because sufficient GST
exemption was allocated to the trust to result in an inclusion ratio of zero. At a
minimum, a change that would not affect the GST status of a grandfathered trust should
similarly not affect the exempt status of such a trust. Accordingly, the merger must
meet the requirements of § 26.2601-1(b)(4)(i)(A), (B), (C), or (D) in order for Trust A to
retain its GST exempt status with respect to all properties held in Trust A subsequent to
the merger.

       Under § 1433 of the Tax Reform Act of 1986 (Act), the GST tax is generally
applicable to generation-skipping transfers made after October 22, 1986. However,
under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i) of the Generation-Skipping
Transfer Tax Regulations, the tax does not apply to a transfer under a trust that was
irrevocable on September 25, 1985, provided no additions (actual or constructive) were
made to the trust after that date.

        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) will not cause the trust to lose its
exempt status. The regulation provides that the rules contained in the paragraph 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) provides that a modification of the governing
instrument of an exempt trust (including a trustee distribution, settlement, or
construction that does not satisfy paragraph (b)(4)(i)(A), (B), or (C) of this section) by
PLR-121628-21                                 5

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.

       Example 6 of § 26.2601-1(b)(4)(ii)(E), considers a situation where the grantor, in
1980, establishes an irrevocable trust for grantor’s child and the child’s issue. In 1983,
grantor’s spouse also established a separate irrevocable trust for the benefit of the
same child and issue. The terms of the spouse’s trust and grantor’s trust are identical.
In 2002, the appropriate local court approved the merger of the two trusts into one trust
to save administrative costs and enhance the management of the investments. The
merger of the two trusts does not shift any beneficial interest in the trust to a beneficiary
who occupies a lower generation (as defined in § 2651) than the person or persons who
held the beneficial interest prior to the merger. In addition, the merger does not extend
the time for vesting of any beneficial interest in the trust beyond the period provided in
the original trust. Therefore, the example concludes that the trust that resulted from the
merger will not be subject to the provisions of chapter 13.

        In this case, the beneficiaries of each trust are identical and the distribution,
dispositive, and trustee power provisions of each trust are substantially similar. The
termination provisions of Trust A and Trust B are identical. Under Paragraph 1.07, no
trust property shall be construed to remain held in trust beyond the period permitted by
applicable State law. The termination provisions of Trust WB would allow the trust to
remain in existence in perpetuity. Pursuant to the merger of Trust WB and Trust B into
Trust A, Trusts WB and B will terminate and the termination provisions of Trust A will
apply to all property transferred from Trust WB and Trust B. Accordingly, the merger
will 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.

        Accordingly, based on the information submitted and the representations made,
we conclude that the proposed merger of Trust WB and Trust B into Trust A will not
affect the present GST tax exempt status of such trusts and will not cause any
distributions (upon termination or otherwise) from Trust A to beneficiaries to become
subject to the GST tax.

      In accordance with the Power of Attorney on file with this office, we have sent a
copy of this letter to your authorized representatives.
PLR-121628-21                                6

       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 including the gift tax consequences.

      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.

      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)



      Enclosure:
            Copy for § 6110 purposes



      cc: