Trust transfers remain incomplete gifts and committee powers avoid estate inclusion

Plain-English summary

A grantor created an irrevocable trust with distribution powers shared among the grantor, a beneficiary committee, and a corporate trustee. The IRS concluded that the grantor's retained consent, nonfiduciary distribution, and testamentary appointment powers made contributions to the trust wholly incomplete gifts. Distributions back to the grantor would not be gifts by committee members, while distributions to other beneficiaries would be gifts by the grantor and not by the committee. The committee members did not hold general powers of appointment, so their powers would not cause trust property to enter their estates, while the trust property would enter the grantor's estate at death. The IRS also found no grantor ownership under sections 673, 674, 676, or 677 and no committee-member ownership under section 678, but deferred the section 675 administrative-control question to examination.

Ruling snapshot

• Question: How would the trust's retained and committee distribution powers affect grantor-trust status, gift completion, and estate inclusion?
• Outcome: Mixed, the requested gift and power-of-appointment rulings were favorable, but IRC § 675 treatment remained for examination.
• Key authorities: IRC §§ 671 through 678, 2041, 2501, 2511, and 2514; Treas. Reg. §§ 20.2041-3, 25.2511-2, and 25.2514-3

Full text (IRS public release)

Internal Revenue Service                                Department of the Treasury
                                                        Washington, DC 20224

Number: 201613007                                       Third Party Communication:
Release Date: 3/25/2016                                 Date of Communication: None
Index Number: 671.00-00, 2501.00-00,
              2514.00-00, 2041.00-00                    Person To Contact:
                                                        ---------------------------, ID No. ---------------
-----------------------------                           -----------------
---------------------------------------------------     Telephone Number:
---------------------------                             ----------------------
                                                        Refer Reply To:
                                                        CC:PSI:B03
                                                        PLR-122253-15
                                                        Date:
                                                        December 04, 2015

Date                      = ----------------------------
Grantor                   = ---------------------------------------------------------
Permissible Beneficiaries = ---------------------------------------------------------
                            -------------------------------------------------
                            ---------------------------------------------
                            ----------------------------------------------
                            ----------------------------------------------------
                            -------------------------------------------
Distribution Committee    = ----------------------------------------------------
                            ----------------
Trust                     = ----------------
State                     = --------------
Trustee                   = --------------------------------------------------------
Son                       = ------------------------------------------------
Daughter                  = ------------------------------------------------


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


      This responds to a letter dated June 25, 2015, and subsequent correspondence,
requesting rulings under §§ 671, 2501, 2514, and 2041 of the Internal Revenue Code.

Facts

        On Date, Grantor created Trust, an irrevocable trust, for the benefit of Grantor
and the other Permissible Beneficiaries. Trustee, a corporate trustee, is the sole trustee
of Trust. During Grantor’s lifetime, Trustee must distribute such amounts of net income
and principal to any of the Permissible Beneficiaries as directed by Distribution
Committee and/or Grantor, as follows: (1) At any time, Trustee, pursuant to the
direction of a majority of Distribution Committee, with the written consent of Grantor,

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shall distribute to any of the Permissible Beneficiaries such amounts of the net income
or principal of Trust (Grantor’s Consent Power); (2) At any time, Trustee, pursuant to
the direction of all Distribution Committee members, shall distribute to Permissible
Beneficiaries such amounts of the net income (Unanimous Member Power); and (3) At
any time, Trustee, shall distribute to any of the Permissible Beneficiaries, other than
Grantor, all or any portion of the principal of Trust directly for the health, education,
maintenance, or support of the Permissible Beneficiaries as directed by Grantor
(Grantor’s Sole Power). Grantor’s exercise of Grantor’s Sole Power shall be
exercisable in a nonfiduciary capacity. Distribution Committee may direct that
distributions be made equally or unequally and to or for the benefit of any one or more
of the Permissible Beneficiaries of Trust to the exclusion of others. Any net income not
distributed by Trustee will be accumulated and added to principal.

         Trust provides that at all times there must be at least two members of the
Distribution Committee. If at any time there are fewer than two individuals serving on
the Distribution Committee, then the Distribution Committee shall be deemed not to
exist. The Grantor shall not serve as a member of the Distribution Committee. The
Distribution Committee shall consist of two adults other than Grantor who are also
Permissible Beneficiaries. The Distribution Committee members act in a nonfiduciary
capacity. A vacancy on the Distribution Committee must be filled in the following order:
Grantor’s Father, Grantor’s Son, and Grantor’s Daughter. Distribution Committee is
initially composed of three of the Permissible Beneficiaries and will cease to exist upon
Grantor’s death.

       Upon Grantor’s death, Trust shall terminate and the remaining balance of Trust
shall be distributed to or for the benefit of any person, other than Grantor’s estate,
Grantor’s creditors, or the creditors of Grantor’s estate, as Grantor may appoint by will.
In default of the exercise of this limited power to appoint (Grantor’s Testamentary
Power) the balance of Trust property will be divided into equal shares and distributed
either outright or in trust to or for Grantor’s named individuals.

       You have requested the following rulings:

      1. For so long as the Distribution Committee is serving, no portion of the income,
deductions, and credits against tax of Trust shall be included in computing the taxable
income, deductions, and credits of Grantor or any member of the Distribution
Committee under § 671.

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

       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.

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        4. 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.

       5. The members of the Distribution Committee do not possess a general power
of appointment within the meaning of § 2041, and accordingly, Trust will not be
includible in any Distribution Committee member’s gross estate under § 2041.


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.

      Section 672(a) provides that, 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 nonexercise 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 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 power in § 674(b)(5)
regardless of by whom held. Section 674(b)(5)(A) describes a power to distribute corpus
to or for a beneficiary provided that the power is limited by a reasonably definite
standard which is set forth in the trust instrument.

       Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable

PLR-122253-15                                  4

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.

       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 to 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 re-vest 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
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 §§ 671-677, inclusive, subject a grantor of a trust to treatment as the owner thereof.

       Based solely on the facts submitted and representations made, we conclude an
examination of Trust reveals none of the circumstances that would cause Grantor to be
treated as the owner of any portion of Trust under §§ 673, 674, 676, or 677. Because
none of the other Distribution Committee members has a power exercisable solely by
himself to vest Trust income or corpus in himself, none shall be treated as the owner of
any portion of the Trust under § 678(a).

       We further conclude that an examination of Trust reveals none of the
circumstances that would cause administrative controls to be considered exercisable
primarily for the benefit of Grantor under § 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 § 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

PLR-122253-15                                  5

examined by the office with responsibility for such examination.

Rulings 2 and 3

       Section 2501(a)(1) of the Internal Revenue Code 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, or part thereof or interest therein, 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, 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.

       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(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

PLR-122253-15                                6

power over it except fiduciary powers, the exercise or nonexercise 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 and the entire value of the transferred
property is subject to the gift tax.

        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
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. Grantor’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).

       In this case, Grantor retained the Grantor's Consent Power over the income and
principal of Trust. Under § 25.2511-2(e), a donor is considered as himself having a
power if it is exercisable by him in conjunction with any person not having a substantial
adverse interest in the disposition of the transferred property or the income therefrom.
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 the Grantor's Consent Power. The retention of this power causes
the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.

      Grantor also retained the 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

PLR-122253-15                                7

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, the Grantor's Sole Power gives Grantor
the power to change the interests of the beneficiaries. Even though Grantor’s power is
limited by an ascertainable standard, i.e., health, education, maintenance and support,
Grantor ‘s power is not a fiduciary power. Accordingly, the retention of the 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 to any persons, other than Grantor's estate, Grantor's creditors, or the creditors
of Grantor's estate. Under § 25.2511-2(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 the Unanimous Member
Power over income. This power is not a condition precedent to Grantor's powers.
Grantor's power over the income is presently exercisable and not subject to a condition
precedent. Grantor retains dominion and control over the income of Trust until the
Distribution Committee members exercise their Unanimous Member Power.
Accordingly, this power does not cause the transfer of property to be complete with
respect to the income interest for federal gift tax purposes. See Goldstein v.
Commissioner, 37 T.C. 897 (1962); Estate of Goelet v. Commissioner, 51 T.C. 352
(1968),

       Accordingly, 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. Therefore, we conclude that 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. 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),

PLR-122253-15                                  8

the possessor's estate, the possessor's creditors, or the creditors of the possessor's
estate.


       Section 25.2514-1(c)(1) provides, in part, 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 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
§ 2514(c)(3)(B), 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 of
appointment 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 creditor, 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 or property owned by
the decedent, such property would be includible in the decedent's gross estate under
§§ 2035 to 2038, inclusive.

PLR-122253-15                                  9


       Under § 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, which is exercisable by the decedent only
in conjunction with another person, 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
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 the Grantor's
Consent Power are powers that are exercisable only in conjunction with the creator,
Grantor. Accordingly, under §§ 2514(b) and 2041(a)(2), the Distribution Committee
members do not possess general powers of appointment by virtue of possessing this
power. Further, the powers held by the Distribution Committee members under the
Unanimous Member Powers 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 distribution made from
Trust to a beneficiary, other than Grantor, pursuant to the exercise of these powers, the
Grantor's Consent Power and the Unanimous Member Powers, are not gifts by the
Distribution Committee members. Instead, such distributions are gifts by Grantor.

        Based upon the facts submitted and representations made, we conclude that any
distribution of property by the Distribution Committee from Trust to any beneficiary of

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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
members are not general powers of appointment for purposes of § 2041(a)(2) and,
accordingly, the possession of these powers by the Distribution Committee members
will not cause Trust property to be includible in any the Distribution Committee
member's gross estate under § 2041(a)(2).

       Except as specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code. Specifically, we express no opinion on the trust provisions
permitting Trustee to distribute income or principal to trustees of other trusts.

      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.

       Pursuant to a power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.


                                               Sincerely,




                                               Bradford R. Poston
                                               Senior Counsel, Branch 3
                                               Associate Chief Counsel
                                               (Passthroughs and Special Industries)


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