Modifying a pre-1985 grandfathered trust without losing GST exemption or triggering gift, estate, or income tax

Plain-English summary

A family trust was created under the will of someone who died before September 25, 1985. That timing makes the trust "grandfathered" and exempt from the generation-skipping transfer (GST) tax, so long as no new property is added and its terms are not changed in ways that shift benefits to younger generations. The trustee and beneficiaries agreed to modify the trust: they dropped a requirement that any successor trustee be a bank doing business in a specific state, added administrative provisions on trustee fees, indemnification, and resignation, and gave an Advisory Committee power to direct the trust's investments while acting as fiduciaries. A state court approved the changes. The taxpayers asked the IRS to confirm the modification carries no tax cost, and the IRS agreed on all four points. The changes are administrative, do not shift any beneficial interest to a lower generation, and do not delay vesting, so the trust stays GST-exempt. The committee's fiduciary investment powers are not a general power of appointment under section 2041, so committee members are not treated as owning the trust for estate tax. Because no beneficiary's interest changes, there is no gift under section 2501 and no sale or exchange, so no one realizes gain or loss under section 1001.

Ruling snapshot

• Question: Will administrative modifications to a pre-1985 grandfathered trust (relaxed successor-trustee rules plus a fiduciary investment-direction committee) keep it GST-exempt and avoid gift, estate, and income tax?
• Outcome: approved (all four rulings favorable)
• Key authorities: IRC §§ 2601, 2041, 2501, 1001; Treas. Reg. § 26.2601-1(b)(4); Tax Reform Act of 1986 § 1433(b)(2)(A)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202622002
Third Party Communication: None
Release Date: 5/29/2026
Date of Communication: Not Applicable
Index Number: 2601.00-00, 2601.04-00,
2601.04-01, 2041.00-00,
Person To Contact:
2041.03-00, 2501.01-00,
---------------------, ID No. -----------------
1001.00-00
Telephone Number:
--------------------
----------------------------------------
Refer Reply To:
---------------------------
CC:PT&E:B04
------------------------------------------------------------ PLR-113827-25
--------------------------------------------------- Date:
-----------------------------------
March 02, 2026
------------------
------------------------------
------------------------------

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

Legend

Trust = ---------------------------------------------------------------------------------
---------------------------------------
-----------------------
Decedent = -----------------------------
Spouse = ---------------------------
Child 1 = ----------------------------
Child 2 = ----------------------------
Grandchild 1 = ---------------------------
Grandchild 2 = -------------------------
Grandchild 3 = -------------------------------------
State 1 = ------------
State 1 Statute 1 = ---------------------------------------------- State 1 Statute 2 = -------------------------------------------------
State 2 = -------------
Trustee = -------------------------------------------
Court = ---------------------------------------------------------------------------------
------------
Date 1 = -------------------------
Date 2 = ------------------
Date 3 = -------------------------
Date 4 = -------------------
Date 5 = -------------------
PLR-113827-25
2

Date 6 = -----------------------
Date 7 = ---------------------------
Date 8 = ------------------------
Date 9 = -----------------

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

This letter responds to a letter dated July 16, 2025, and subsequent correspondence, submitted by your authorized representative requesting income, gift, estate, and generation-skipping transfer (GST) tax rulings with respect to a proposed modification of Trust.

The information submitted and representations made are summarized as follows:

Decedent died testate on Date 1, a date prior to September 25, 1985, survived by Spouse, Child 1, Child 2, Grandchild 1, Grandchild 2, and Grandchild 3. Decedent’s will provides for a number of specific bequests, and further provides that the remainder of the estate is to pass to a residuary trust (Trust) to be held in trust until twenty-one (21) years after the death of the last survivor among Decedent’s children and grandchildren who are in being at the time of Decedent’s death. Upon termination, the principal of Trust shall be divided among its income beneficiaries, per stirpes. Pursuant to the terms of Decedent’s will, Trust was divided into two equal shares, Fund A and Fund B, one for the benefit of each of Decedent’s two children and their children.

Trustee represents that there have been no additions, actual or constructive, to Trust after September 25, 1985.

Fund A is for the benefit of Child 1 and Child 1’s children. The terms that govern Fund A provide that during Child 1's life, Child 1 receives two-thirds of the net income and Child 1’s children receive one-third of the net income. At Child 1’s death, all of the income is payable to Child 1’s surviving issue per stirpes. If Child 1 and all of Child 1’s issue die before the Trust terminates, the entire assets of Fund A are to be added to the assets of Fund B.

The terms that govern Fund B are identical to Fund A, except that Fund B is to be held for the benefit of Child 2 and Child 2’s children. Child 2 died on Date 2 (a date prior to September 25, 1985), without issue. According to the terms of Decedent’s will, Fund A and Fund B were combined as of Child 2’s death (hereinafter, Trust).

Pursuant to the terms of Trust, the trustee acts at the direction of an Advisory Committee consisting of Spouse, Child 1, and Child 2. A majority of adult beneficiaries may remove and replace the trustee with a bank doing trust business in State 1 and having capital stock of a minimum specified amount.
PLR-113827-25
3

On Date 3, Trust was modified by court order to extend the life of the Advisory Committee beyond the life of Child 1 by providing that Child 1’s living children would serve on the Advisory Committee at Child 1’s death, and to provide successor provisions following the death of Child 1’s children.

On Date 4, Trust was modified by court order to expand the Advisory Committee to include Grandchild 1, Grandchild 2, and Grandchild 3 (collectively, Grandchildren) as members of the Advisory Committee with Child 1 during Child 1’s lifetime, and to add successor provisions following the death of Grandchild 1.

On Date 5, Trust was modified by court order to convert each beneficiary’s income interest from a share of net income to a share of an established unitrust amount.

On Date 6, Child 1 died (predeceased by Spouse) and was survived by Grandchildren. Following Child 1’s death, Grandchildren serve as the sole members of the Advisory Committee.

On Date 7, Trustee and the beneficiaries of Trust executed a nonjudicial settlement agreement (Settlement Agreement) to modify the terms of Trust effective upon the issuance of a favorable private letter ruling. On Date 8, Trustee petitioned Court to approve the Settlement Agreement and on Date 9, Court entered an order approving the Settlement Agreement (Court Order).

The modification pursuant to Court Order removes the requirement that a successor trustee be a bank doing trust business in State 1 and provides instead that a successor trustee must be a bank or trust company (but without any specific geographical requirement), and adds provisions regarding successor trustee indemnification, payment of fees, and resignation.

The modification pursuant to Court Order also adds a new paragraph to Trust that provides the Advisory Committee with the power to direct the trustee as to the investments of Trust, including the power to direct the trustee to purchase, sell, and retain all Trust assets; to exercise voting, management, and similar rights with respect to ownership interest in entities held by Trust; to direct the trustee to borrow and lend money and to guarantee the loans of entities owned by Trust; and to create new business entities. The new paragraph also provides for the method of issuing such direction, trustee liability and indemnification, and other similar provisions related to the Advisory Committee’s investment direction power. The new paragraph applies only if the trustee resides in State 2 and provides that, in exercising these powers, the Advisory Committee is acting in a fiduciary capacity.

Trustee represents that the Advisory Committee has no power or authority to alter how, or to whom, the income or principal of the trust is distributed.
PLR-113827-25
4

You have requested the following rulings:

1. The proposed modification will not violate the transition rules under
   § 1433(b)(2)(A) of the Tax Reform Act of 1986 and, thus, the Trust will continue to be exempt from GST tax.

2. The powers granted to the members of the Advisory Committee pursuant to the
   proposed modification will not cause the members of the Advisory Committee to possess, individually or collectively, a general power of appointment within the meaning of § 2041(a).

3. The proposed modification will not cause the Trust or any of the beneficiaries to
   be subject to federal gift tax with respect thereto.

4. The proposed modification will not be considered a sale, exchange, or other
   disposition of property and will not cause the Trust or any of the beneficiaries to realize a gain or loss for purposes of § 1001.

LAW AND ANALYSIS

Ruling 1:

Section 2601 imposes a tax on every GST. Section 2611(a) defines a GST as a taxable distribution, a taxable termination, and a direct skip.

Under § 1433(b)(2)(A) of the Tax Reform Act of 1986 and § 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations, the GST tax provisions do not apply to any GST under a trust that was irrevocable on September 25, 1985. However, this exemption does not apply if additions (actual or constructive) are made to the trust after September 25, 1985.

Section 26.2601-1(b)(1)(ii)(A) provides that any trust in existence on September 25, 1985, will be considered an irrevocable trust except as provided in § 26.2601-1(b)(ii)(B) or (C), which relate to property includible in a grantor’s gross estate under § 2038 and
§ 2042.

Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement or trustee action with respect to a trust that is exempt from the GST tax under § 26.2601-1(b)(1), (2), or (3) (hereinafter referred to as an exempt trust) will not cause the trust to lose its exempt status. In general, unless specifically provided otherwise, the rules contained in § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. 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
PLR-113827-25
5

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)(1) provides that a modification of the governing instrument of an exempt trust (including a trustee distribution, settlement, or construction that does not satisfy § 26.2601-1(b)(4)(i)(A), (B), or (C)) by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in
§ 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust.

Section 26.2601-1(b)(4)(i)(D)(2) provides that for purposes of this section, 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 or the creation of a new GST. To determine whether a modification of an irrevocable trust will shift a beneficial interest in a trust to a beneficiary who occupies a lower generation, the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification. If the effect of the modification cannot be immediately determined, it is deemed to shift a 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 modification. A modification that is administrative in nature that only indirectly increases the amount transferred (for example, by lowering administrative costs or income taxes) will not be considered to shift a beneficial interest in the trust.

Section 26.2601-1(b)(4)(i)(E), Example 10, considers a situation where in 1980, Grantor executed an irrevocable trust for the benefit of Grantor’s issue, naming a bank and five other individuals as trustees. In 2002, the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs. The modification pertains to the administration of the trust and 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. In addition, 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. Therefore, the trust will not be subject to the provisions of chapter 13 of the Internal Revenue Code.

State 1 Statute 1 provides, in part, that interested persons (persons whose consent would be required to achieve a binding settlement were the settlement to be approved by the court) may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust.
PLR-113827-25
6

State 1 Statute 2 provides, in part, that a noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.

Trustee represents that Trust was irrevocable on September 25, 1985, and that there have been no additions, constructive or otherwise, to Trust after September 25, 1985. Consequently, Trust is currently exempt from GST tax.

The proposed modification of Trust approved by Court Order to remove the geographical requirement that a successor trustee be a bank doing trust business in State 1 and to add provisions regarding successor trustee indemnification, payment of fees, and resignation, is viewed as pertaining to the administration of the trust, comparable to the administrative modification in Example 10 of § 26.2601-1(b)(4)(i)(E).

In addition, the provision of the Advisory Committee with the power to direct the trustee as to the investments of Trust (and accompanying provisions) are viewed as administrative in nature and, under § 26.2601-1(b)(4)(i)(D)(2), will not be considered to shift a beneficial interest to a lower generation in the trust or extend the time for vesting of any beneficial interest in the trust beyond the period provided for in Trust.

Accordingly, based upon the facts submitted and the representations made, we conclude that after the proposed modification of Trust approved by Court Order, Trust will continue to be exempt from GST tax.

Ruling 2:

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 his 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 of appointment 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 §§ 2035 to 2038, inclusive.

Section 2041(b)(1) provides that a general power of appointment is a power which is exercisable in favor of the decedent, the decedent’s estate, the decedent’s creditors, or the creditors of the decedent’s estate.

Section 20.2041-1(b)(1) of the Estate Tax Regulations provides, in part, that the term “power of appointment” includes all powers which are in substance and effect powers of appointment regardless of the nomenclature used in creating the power and regardless of local property law connotations. For example, if a trust instrument provides that the beneficiary may appropriate or consume the principal of the trust, the power to consume or appropriate is a power of appointment. A power in a donee to remove or discharge a trustee and appoint himself may be a power of appointment. For example, if under the
PLR-113827-25
7

terms of a trust instrument, the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself, and the decedent has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself, the decedent is considered as having a power of appointment. However, the mere power of management, investment, custody of assets, or the power to allocate receipts and disbursements as between income and principal, exercisable in a fiduciary capacity, whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of such fiduciary duties is not a power of appointment.

In the present case, the proposed modification provides the Advisory Committee with the power to direct the trustee regarding the investments of Trust. The powers of the Advisory Committee are exercisable in a fiduciary capacity. Further, under the terms of Trust, the trustee has no discretionary power with respect to distributions of trust income and principal and the Advisory Committee does not have the power to remove and replace the trustee. Accordingly, based on the facts submitted and the representations made, we conclude that the powers granted to the Advisory Committee under the proposed modification will not cause the members of the Advisory Committee to possess, individually or collectively, a general power of appointment withing the meaning of § 2041(a).

Ruling 3:

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

Section 2511(a) provides 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 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 an 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 shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.

In this case, because the proposed modification of Trust does not change the interests of the beneficiaries, no transfer of property is deemed to occur. See § 26.2601- 1(b)(4)(i)(E), Example 10. Accordingly, we conclude that the proposed modification of Trust will not cause a transfer, direct or indirect, of property that will be subject to the gift tax imposed by § 2501.
PLR-113827-25
8

Ruling 4:

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 loss over the amount realized.

Section 1001(b) provides 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) of the Income Tax Regulations 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.

Because the proposed modification of Trust does not change the interests of the beneficiaries, no transfer of property is deemed to occur. Accordingly, the proposed modification of Trust will not cause Trust or any of the beneficiaries to realize any gain or loss under § 1001.

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.

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,

Associate Chief Counsel
Passthroughs, Trusts, and Estates

_______
By: Leslie H. Finlow
Senior Technician Reviewer, Branch 4
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)
PLR-113827-25
9

Enclosure:
Copy for § 6110 purposes

cc: ---------------------
------------------------------------------------
-----------------------
--------------
---------------------------
----------------------------

cc: ------------------------------------------------------------
-----------------------------------------