Splitting a GST-grandfathered trust into four equal trusts is tax-free across income, gift, estate, and GST tax

Plain-English summary

A trust created long ago (irrevocable before September 25, 1985, so it is "grandfathered" and exempt from the generation-skipping transfer, or GST, tax) held everything in a single share for one child of the settlor and that child's descendants. The child's four children had different investment goals and distribution priorities, so the trustee proposed to split the trust into four equal, separate trusts, one tied to each of those grandchildren, with terms identical to the original and a pro rata split of the assets. The taxpayer asked the IRS to confirm the split would not trigger tax, and the IRS issued five favorable rulings. The division keeps the trust's grandfathered GST status because it does not shift any benefit to a lower generation and does not delay when any interest vests. It is not a sale or other disposition, so no income, gain, or loss is recognized under sections 61, 661, 662, or 1001 (a pro rata division of trust assets is not a sale or exchange). It is not a gift under section 2501 because each beneficiary's interest is worth the same before and after. Each resulting trust keeps the original trust's carryover basis under section 1015 and its holding period under section 1223. And because no beneficiary made a transfer or retained a controlling interest, none of the assets are pulled into any beneficiary's estate under sections 2035 through 2038. The takeaway: a pro rata, terms-preserving split of a grandfathered trust is a tax-neutral event.

Ruling snapshot

• Question: Will dividing one grandfathered irrevocable trust pro rata into four equal, identically-termed trusts trigger income, gift, estate, or GST tax?
• Outcome: Approved (five favorable rulings)
• Key authorities: IRC §§ 61, 661, 662, 1001, 1015, 1223, 2501, 2035-2038, 2601; Treas. Reg. §§ 26.2601-1(b)(4)(i)(D) and (E) (Example 5), 1.661(a)-2(f), 1.1001-1(a), 1.1015-2(a)(1); Rev. Rul. 56-437; Rev. Rul. 69-486

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202322005                                              Third Party Communication: None
 Release Date: 6/2/2023                                         Date of Communication: Not Applicable
 Index Number: 61.00-00, 661.00-00, 662.00-
               00, 1001.00-00, 1015.02-00, Person To Contact:
               1223.00-00, 2001.01-00,      -------------------------------
               2033.00-00, 2035.01-00,      ID No. -----------------
               2036.01-00, 2037.01-00,      Telephone Number:
               2038.00-00, 2601.00-00       --------------------
                                                                Refer Reply To:
 ------------------------------------------------------------   CC:PSI:B04
 -------------------------------                                PLR-116802-22
 ------------------------------------------------------------   Date:
 -------------------------------                                March 02, 2023
 ----------------------------------
 ----------------------------------------
 --------------------------------------
 -------------------------

          Re: -------------------------------------

Legend

Trust                     =        --------------------------------------------------------------
                                   ----------------------------------------------------------
Trustee                   =        ----------------------------------------
Settlor                   =        -----------------------
Child                     =        ----------------- -------------------------
Date                      =        --------------------------
Grandchild 1              =        --------------------------------------------------------
Grandchild 2              =        --------------------- -------------------------
Grandchild 3              =        --------------------------------------------------------------
Grandchild 4              =        --------------------------------------------------------
State                     =        ------
Statute                   =        ----------------------------------------------- ----------------

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

This letter responds to your authorized representative's letter dated August 31, 2022,
and subsequent correspondence, requesting income, estate, gift, and generation-
skipping transfer (GST) tax rulings with respect to the proposed division of Trust.
PLR-116802-22                                 2

The facts and representations submitted are summarized as follows:

On Date, Trust was established by Settlor for the primary benefit of Settlor’s child, Child,
under an Agreement and Declaration of Trust (Trust Agreement). Settlor had three
children in addition to Child. Child and Child’s four children, Grandchild 1, Grandchild 2,
Grandchild 3, and Grandchild 4 are living.

Trustee is currently serving as trustee of Trust, which is administered under the laws of
State. Trust was irrevocable before September 25, 1985, and no actual or constructive
additions to Trust were made after that date.

Under the terms of Trust Agreement, Trustee must distribute all income to Child and
may distribute principal to Child to provide for Child’s maintenance, support, and
education. Trustee may distribute principal to Settlor’s issue (including issue who are
not the issue of Child) to provide for their maintenance, support, and education. After
Child’s death, Trustee must distribute all income to Child’s issue, per stirpes. Trustee
may continue to distribute principal to any of Settlor’s issue to provide for maintenance,
support, and education. Trust terminates 21 years after the death of Settlor’s last
surviving child, and the remainder is distributed to Child’s issue, per stirpes.

Under the terms of the Trust Agreement, Trust holds all property in one share. Because
Child’s children have different investment goals and distribution priorities, Trustee
proposes to divide Trust into four equal, separate trust shares for the benefit of Child
and each of Child’s children and their respective issue (Resulting Trusts). Each
Resulting Trust will be funded with one quarter of the assets of Trust. The terms of
each Resulting Trust will be identical and unchanged from the terms of Trust
Agreement, except that each Resulting Trust will be held for the benefit of Child and the
respective child for whom the Resulting Trust was created and such child’s issue. Each
Resulting Trust also provides Settlor’s issue who are not the issue of Child with the
same beneficial interest they each had under Trust. The division of Trust into Resulting
Trusts will be created by a pro rata distribution from Trust.

State Statute provides, in relevant part, that after notice to qualified beneficiaries, a
trustee may divide a trust into two or more separate trusts if the result does not
substantially impair the rights of any beneficiary or have a materially adverse effect on
the achievement of the purposes of the trust.

You have requested the following rulings regarding the proposed division and equal
allocation of Trust assets to four separate trusts:

    1. The proposed division will not cause Trust or the Resulting Trusts to lose their
      grandfathered status for purposes of GST tax or otherwise become subject to
      GST tax.

    2. The proposed division will not result in the recognition of income, gain, or loss
      from a sale or other disposition of Trust property under § 61, § 661, § 662, or
      § 1001 of the Internal Revenue Code (Code).
PLR-116802-22                                 3

    3. The proposed division will not constitute a transfer subject to gift tax under
      § 2501.

    4. The adjusted basis and holding periods of the Resulting Trusts will be the same
      as the adjusted basis and the holding periods of Trust.

    5. The proposed division will not cause Trust assets to be includible in the gross
      estate of any Trust beneficiaries under §§ 2035, 2036, 2037, and 2038.

LAW AND ANALYSIS

Ruling 1

Section 2601 imposes a tax on every generation-skipping transfer. The term
“generation-skipping transfer” is defined in § 2611 as a taxable distribution, a taxable
termination, and a direct skip.

Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the
Generation-Skipping Transfer Tax Regulations, 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), the GST tax does not apply to a
transfer under a trust that was irrevocable on September 25, 1985, but only to the
extent that such transfer is not made out of corpus added to the trust after September
25, 1985 (or out of income attributable to corpus so added).

Section 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial
construction, settlement agreement, or trustee action with respect to a trust that is
exempt from the GST tax will not cause the trust to lose its exempt status. In general,
unless specifically provided otherwise, the rules contained in this paragraph are
applicable only for purposes of determining whether an exempt trust retains its exempt
status for GST tax purposes. Thus (unless specifically noted), 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 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, by judicial reformation or nonjudicial reformation that is valid under
applicable state law, will not cause an exempt trust to be subject to the GST tax if the
modification does not shift a beneficial interest in the trust to any beneficiary who
occupies a lower generation (as defined in § 2651) than the person or persons who held
the beneficial interest prior to the modification, and the modification does not extend the
time for vesting of any beneficial interest in the trust beyond the period provided for in
the original trust. A modification of an exempt trust will result in a shift in beneficial
interest to a lower generation beneficiary if the modification can result in either an
increase in the amount of a GST transfer or the creation of a new GST transfer. A
PLR-116802-22                                   4

modification that is administrative in nature that only indirectly increases the amount
transferred will not be considered to shift a beneficial interest in the trust.

Section 26.2601-1(b)(4)(i)(E), Example 5, provides as follows: In 1980, Trustor
established an irrevocable trust for the benefit of his two children, A and B, and their
issue. Under the terms of the trust, the trustee has the discretion to distribute income
and principal to A, B, and their issue in such amounts as the trustee deems appropriate.
On the death of the last to die of A and B, the trust principal is to be distributed to the
living issue of A and B, per stirpes. In 2002, the appropriate local court approved the
division of the trust into two equal trusts, one for the benefit of A and A’s issue and one
for the benefit of B and B’s issue. The trust for A and A’s issue provides that the trustee
has the discretion to distribute trust income and principal to A and A’s issue in such
amounts as the trustee deems appropriate. On A’s death, the trust principal is to be
distributed equally to A’s issue, per stirpes. If A dies with no living descendants, the
principal will be added to the trust for B and B’s issue. The trust for B and B’s issue is
identical (except for the beneficiaries), and terminates at B’s death at which time the
trust principal is to be distributed equally to B’s issue, per stirpes. If B dies with no living
descendants, principal will be added to the trust for A and A’s issue. The division of the
trust into 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 division. In addition, the division does not extend the
time for vesting of any beneficial interest in the trust beyond the period provided for in
the original trust. Therefore, the two partitioned trusts resulting from the division will not
be subject to the provisions of chapter 13.

In this case, Trust will be divided into four separate trusts each benefitting Child, one
Grandchild, and his or her descendants (Resulting Trusts). Each Resulting Trust also
provides Settlor’s issue who are not the issue of Child with the same beneficial interest
they each had under Trust. The proposed division will not result in a shift of any
beneficial interest in Trust to any beneficiary who occupies a generation lower than the
persons holding the beneficial interests. Further, the proposed division will not extend
the time for vesting of any beneficial interest in the Resulting Trusts beyond the period
provided for in Trust. Accordingly, based on the facts submitted and the
representations made, if the division of Trust satisfies all of the State law requirements
and is valid under State law, we conclude that the division of Trust will not cause Trust
or any of the Resulting Trusts to lose their exempt status from GST tax or otherwise
become subject to GST tax.
PLR-116802-22                                    5

Ruling 2

Section 61(a)(3) provides that gross income includes gains derived from dealings in
property.

Section 661(a) provides that in any taxable year a deduction is allowed in computing the
taxable income of a trust (other than a trust to which subpart B applies), for the sum of
(1) the amount of income for such taxable year required to be distributed currently; and
(2) any other amounts properly paid or credited or required to be distributed for such
taxable year.

Section 1.661(a)-2(f) of the Income Tax Regulations provides that gain or loss is
realized by the trust or estate (or the other beneficiaries) by reason of a distribution of
property in kind if the distribution is in satisfaction of a right to receive a distribution of a
specific dollar amount, of specific property other than that distributed, or of income as
defined under § 643(b) and the applicable regulations, if income is required to be
distributed currently.

Section 662 provides that there shall be included in the gross income of a beneficiary to
whom an amount specified in § 661(a) is paid, credited, or required to be distributed (by
an estate or trust described in § 661), the sum of the following amounts: (1) the amount
of income for the taxable year required to be distributed currently to such beneficiary,
whether distributed or not; and (2) all other amounts properly paid, credited, or required
to be distributed to such beneficiary for the taxable year.

Rev. Rul. 56-437, 1956-2 C.B. 507, holds that the conversion of a joint tenancy in stock
to a tenancy in common in order to eliminate the survivorship feature and the partition of
a joint tenancy in stock are not sales or exchanges. Similarly, divisions of trusts are also
not sales or exchanges of trust interests where each asset is divided pro rata among the
new trusts. See Rev. Rul. 69-486, 1969-2 C.B. 159 (pro rata distribution of trust assets
not a sale or exchange).

Section 1001(a) provides that the gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the adjusted basis provided in
§ 1011 for determining gain, and the loss shall be the excess of the adjusted basis
provided in § 1011 for determining loss over the amount realized.

Section 1001(b) states that the amount realized from the sale or other disposition of
property shall be the sum of any money received plus the fair market value of the
property (other than money) received. Under § 1001(c), except as otherwise provided
in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or
exchange of property shall be recognized.
Section 1.1001-1(a) provides that the gain or loss realized from the conversion of
property into cash, or from the exchange of property for other property differing
materially either in kind or in extent, is treated as income or loss sustained.
PLR-116802-22                                 6

In this case, the Trust Agreement provides the terms governing distribution of Trust for
Child and Child’s descendants. It is represented that the proposed division of Trust into
four equal, separate trusts (Resulting Trusts) will be funded pro rata with assets of equal
value. In addition, Trustee is authorized by State Statute to divide Trust into two or
more separate trusts. The Resulting Trusts will be funded with Trust property of equal
value; Trust will receive nothing in exchange for the allocation of Trust assets among
the Resulting Trusts; and the proposed division does not shift beneficial interests in
Trust because the beneficiaries will have substantially equal interests before and after
the proposed division. Accordingly, based on the facts submitted and the
representations made, we conclude that the proposed division of Trust will not cause
Trust, the Resulting Trusts, or any beneficiary of any of the foregoing trusts, to
recognize any gain or loss from a sale or other disposition of Trust assets under § 61
and § 1001. We further conclude that the proposed division is not a distribution under
§ 661 or § 1.661(a)-2(f) and will not cause Trust, the Resulting Trusts, or any
beneficiary of the foregoing trusts to recognize any income, gain, or loss under § 662.

Ruling 3

Section 2501(a)(1) imposes a tax for each calendar year on the transfer of property by
gift by any individual.

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 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.

Section 2512(b) provides that where property is transferred for less than adequate and
full consideration in money or money's worth, then the amount by which the value of the
property exceeded the value of the consideration is deemed to be a gift, and is included
in computing the amount of gifts made during the calendar year.

In this case, the value of the beneficial interests of the beneficiaries are the same, both
before and after the proposed division. Thus, we conclude that no transfer of property
will be deemed to occur as a result of the division of Trust. Accordingly, based on the
facts submitted and the representations made, we conclude that the proposed division
will not cause any beneficiary of Trust, or the Resulting Trusts to have made a gift
subject to federal gift tax.

Ruling 4

Section 1015(b) provides that if property is acquired after December 31, 1920, by a
transfer in trust (other than a transfer in trust by a gift, bequest, or devise), the basis
shall be the same as it would be in the hands of the grantor increased in the amount of
gain or decreased in the amount of loss recognized to the grantor on such transfer.
PLR-116802-22                                  7

Section 1.1015-2(a)(1) provides that in the case of property acquired after December
31, 1920, by transfer in trust (other than by transfer in trust by gift, bequest, or devise),
the basis of property so acquired is the same as it would be in the hands of the grantor
increased in the amount of gain or decreased in the amount of loss recognized to the
grantor on the transfer under the law applicable to the year in which the transfer was
made. If the taxpayer acquired the property by transfer in trust, this basis applies
whether the property is in the hands of the trustee or the beneficiary, and whether
acquired prior to termination of the trust and distribution of the property, or thereafter.

In this case, as stated above, § 1001 does not apply to the proposed transaction. Thus,
after the division of Trust and transfer of the assets into the Resulting Trusts, the basis
in each asset will be the same in the Resulting Trusts as it was in Trust under § 1015.
Further, we conclude that the holding period of the assets received by the Resulting
Trusts will be the same as the holding period of the assets in Trust. See § 1223(2).

Ruling 5

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 2033 provides that the value of the gross estate includes the value of all
property to the extent of the interest therein of the decedent at the time of death.

Section 2035(a) provides that if (1) the decedent transferred an interest in property or
relinquished a power with respect to any property, during the 3-year period ending on
the date of the decedent's death, and (2) the value of the property (or interest therein)
would have been included in the gross estate under § 2036, 2037, 2038, or 2042 if the
interest or power had been retained by the decedent on the date of death, then the
value of the gross estate shall include the value of any property (or interest therein) that
would have been so included. Under § 2035(b), the gross estate shall be increased by
the amount of any gift tax paid by the decedent or his estate on any gift made by the
decedent or his spouse during the 3-year period ending on the date of the decedent's
death.

Section 2036(a) provides that the value of the gross estate shall include the value of all
property to the extent of any interest therein of which the decedent has at any time
made a transfer (except in case of a bona fide sale for an adequate and full
consideration in money or money's worth), by trust or otherwise, under which he has
retained for his life or for any period not ascertainable without reference to his death or
for any period which does not in fact end before his death (1) the possession or
enjoyment of, or the right to the income from, the property, or (2) the right, either alone
or in conjunction with any person, to designate the persons who shall possess or enjoy
the property or the income therefrom.

Section 2037(a) provides that the value of the gross estate shall include the value of all
property to the extent of any interest therein of which the decedent has at any time
made a transfer (except in case of a bona fide sale for an adequate and full
PLR-116802-22                                  8

consideration in money or money's worth), by trust or otherwise, if (1) possession or
enjoyment of the property can, through ownership of such interest, be obtained only by
surviving the decedent, and (2) the decedent has retained a reversionary interest in the
property, and the value of such reversionary interest immediately before the death of
the decedent exceeds 5 percent of the value of such property.

Section 2038(a)(1) provides that the value of the gross estate shall include the value of
all property to the extent of any interest therein of which the decedent has at any time
made a transfer (except in case of a bona fide sale for an adequate and full
consideration in money or money's worth), by trust or otherwise, where the enjoyment
thereof was subject at the date of his death to any change through the exercise of a
power, either by the decedent alone or in conjunction with any person, to alter, amend,
revoke, or terminate, or where the decedent relinquished any such power during the
3-year period ending on the date of the decedent's death.

In order for §§ 2036 through 2038 to apply, the decedent must have made a transfer of
property or any interest therein (except in the case of a bona fide sale for an adequate
and full consideration in money or money's worth) under which the decedent retained an
interest in, or power over, the income or corpus of the transferred property. In the
present case, the proposed division of Trust does not constitute a transfer within the
meaning of §§ 2036 through 2038. The beneficiaries of the four Resulting Trusts will
have the same interests after the division that they had as beneficiaries under Trust.
Accordingly, based on the facts submitted and the representations made, we conclude
that the proposed division of Trust will not cause the assets of Trust, or the Resulting
Trusts to be includible in the gross estate of any beneficiary of such trusts for federal
estate tax purposes under § 2035, 2036, 2037, or 2038.

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

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.
PLR-116802-22                                9

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) of the Code
provides that it may not be used or cited as precedent.

                                      Sincerely,

                                      Leslie H. Finlow
                                      _______________________________
                                      Leslie H. Finlow
                                      Senior Technician Reviewer, Branch 4
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosure (1)
      Copy for § 6110 purposes

cc: