Incomplete-gift trust receives requested tax treatment

Plain-English summary

A grantor created an irrevocable trust with distribution powers held by the grantor and a distribution committee. While the committee remained in existence, the IRS found no stated circumstances that would make the grantor or committee members owners under the identified grantor-trust provisions, although section 675 treatment would depend on actual administration and was left for examination. The grantor's retained consent, distribution, and testamentary powers made the initial contribution an incomplete gift, and trust property would be included in the grantor's estate at death. Distributions back to the grantor would be returns of the grantor's property. Distributions to other beneficiaries would be gifts by the grantor, not by committee members, and the committee members' powers were not general powers of appointment.

Ruling snapshot

• Question: What are the income, gift, and estate tax consequences of the grantor's and distribution committee's powers over the trust?
• Outcome: approved
• Key authorities: IRC §§ 671-678, 2041, 2501, 2511, 2514; Treas. Reg. §§ 20.2041-3, 25.2511-2, 25.2514-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201650005
Release Date: 12/9/2016
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:B04 – PLR-106969-16
Date:
August 26, 2016

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

Date 1 = -------------------
Grantor = -------------------------------------------------
Spouse = --------------------
Mother = -----------------------
Distribution Committee = -----------------------------------------------------------------------------
------------------------------------------------------------------------------------------

Trust = --------------------------------------
-----------------------------------------------------
State = -----------
Trustee = ---------------------------------
Child 1 = --------------------------
Child 2 = --------------------------
A = --------------------
B = -----------------------

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

    This letter responds to your authorized representative’s letter of May 18, 2016,

and subsequent correspondence requesting rulings under §§ 671, 2501, 2514 and 2041
of the Internal Revenue Code.

  The facts submitted and representations made are as follows. On Date 1,

Grantor created an irrevocable trust (Trust) for the benefit of himself, his spouse, his
mother, and his issue. Currently, Grantor has 2 children, Child 1 and Child 2, who are
minors. Trustee is the sole trustee.
PLR-106969-16 2

   Article One, Section 3 of Trust states that Grantor’s intentions in creating Trust

are, generally, that Trust is a non-grantor trust for federal tax purposes, that no gifts to
Trust are completed gifts for federal tax purposes, and that the assets of Trust will be
includible in Grantor’s gross estate. Trust further states that all provisions to this
agreement shall be interpreted in such a manner so as to give effect to these intentions.
Any power that is contrary to these intentions shall be void.

    During Grantor’s lifetime, Trustee must distribute such amounts of net income

and principal to one or more beneficiaries as directed by the Distribution Committee
and/or Grantor, as follows: (1) At any time, Trustee, pursuant to the direction of a
majority of the Distribution Committee, with the written consent of Grantor, shall
distribute to any beneficiary such amounts of the income or principal as directed by the
Distribution Committee (Grantor’s Consent Power); (2) At any time, Trustee, pursuant to
the direction of all of the Distribution Committee members, other than Grantor, shall
distribute to any beneficiary such amounts of the net income or principal as directed by
the Distribution Committee (Unanimous Member Power); and (3) At any time, Grantor,
in a nonfiduciary capacity, may direct the Trustee to distribute to any one or more
beneficiary other than Grantor, such amounts of the principal (including the whole
thereof) as Grantor deems advisable to provide for the health, maintenance, support
and education of the beneficiaries (Grantor’s Sole Power). The Distribution Committee
may appoint income or principal equally or unequally and to or for the benefit of any one
or more of the beneficiaries of Trust to the exclusion of others.

    Any net income not distributed by Trustee will be accumulated and added to

principal. The Distribution Committee is initially composed of Grantor, Mother, and A
and B. A and B are guardians of Child 1 and Child 2, respectively. “Eligible
Individuals” must be members of the Distribution Committee. An “Eligible Individual”
means Grantor’s Mother, a member of the class consisting of the adult issue of Grantor,
the parent of a minor issue of Grantor, excluding Grantor or Spouse, and any individual
who has authority to act on behalf of Grantor’s issue under State law. A vacancy on the
Distribution Committee must be filled by the eldest of Grantor’s adult issue other than
any issue already serving as a member of the Distribution Committee, or if none of
Grantor’s issue not already serving as a member of the Distribution Committee is an
adult, then the individual who has legal authority to act on behalf of my eldest issue
under State law shall serve, or if such minor issue does not have such an agent, then
the parent of such minor issue, other than Grantor or Spouse. If at any time fewer than
two Eligible Individuals are members of the committee, the Distribution Committee shall
be deemed not to exist. The Distribution Committee shall cease to exist upon Grantor’s
death.

   Trustee, pursuant to the direction of the Distribution Committee, shall, at any time

or times prior to or upon the distribution date, distribute to the trustee or trustees of any
PLR-106969-16 3

one or more qualified trusts such amounts of the net income and/or principal of Trust
(including the whole thereof) as the Distribution Committee determines. Any such
distribution shall be added to the principal of such qualified trust and disposed of in
accordance with the terms of such qualified trust. No distribution or transfer may be
made to a qualified trust unless made pursuant to the direction of the Distribution
Committee.

    Upon Grantor’s death, Trust will terminate and the remaining balance of Trust

shall be distributed to such persons, corporations, or entities, other than Grantor’s
estate, Grantor’s creditors, or the creditors of Grantor’s estate, as Grantor may appoint
by living trust or will (Grantor’s Testamentary Power). In default of the exercise of this
limited power to appoint, the balance of Trust will be distributed free of trust, per stirpes,
to Grantor’s then living descendants. If none of Grantor’s descendants are then living,
such balance shall be distributed to one or more charities. The Distribution Committee
ceases to exist upon the earlier of the Grantor’s death, or the date the Distribution
Committee is reduced to one eligible member other than Grantor.

   You have requested the following rulings:

   1. During the period the Distribution Committee is serving, no portion of the items

of income, deductions, and credits against tax of the Trust shall be included in
computing the taxable income, deductions, and credits of Grantor under § 671.

   2. The contribution of property to Trust by Grantor is not a completed gift subject

to federal gift tax.

   3. Any distribution of property by the Distribution Committee from the Trust to

Grantor will not be a completed gift, subject to federal gift tax, by any member of the
Distribution Committee.

   4. Any distribution of property by the Distribution Committee from the Trust to

any beneficiary of the Trust, other than Grantor, will not be a completed gift subject to
federal gift tax, by any member of the Distribution Committee, other than Grantor.

RULING 1

    Section 671 provides that where it is specified in subpart E of part I of subchapter

J that the grantor or another person shall be treated as the owner of any portion of a
trust, there shall then be included in computing the taxable income and credits of the
grantor or the other person those items of income, deductions, and credits against tax of
the trust which are attributable to that portion of the trust to the extent that such items
would be taken into account under chapter 1 in computing taxable income or credits
against the tax of an individual.
PLR-106969-16 4

  Section 672(a) provides, for purposes of subpart E, that 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)(3) provides that § 674(a) shall not apply to a power exercisable

only by will, other than a power in the grantor to appoint by will the income of the trust
where the income is accumulated for such disposition by the grantor or may be so
accumulated in the discretion of the grantor or a nonadverse party, or both, without the
approval or consent of any adverse party.

  Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute

corpus to or for a beneficiary, provided that the power is limited by a reasonably definite
standard.

   Under § 675 and applicable regulations, the grantor is treated as the owner of

any portion of a trust if, under the terms of the trust agreement or circumstances
attendant 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 revest in the grantor
title to such portion is exercisable by the grantor or a nonadverse party, or both.
PLR-106969-16 5

    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 and representations submitted, 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 as long as
the Distribution Committee remains in existence and Trust remains a United States
person. Because none of the members of the Distribution Committee has a power
exercisable by 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
examined by the office with responsibility for such examination.

RULINGS 2 AND 3

   Section 2501(a)(1) provides that a tax is imposed 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 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, a part thereof or interest therein, of which the donor has so parted
with dominion and control as to leave the donor no power to change its disposition,
whether for the donor's own benefit or for the benefit of another. But if upon a transfer
PLR-106969-16 6

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 to

another 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 himself having 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 or the income therefrom.
A trustee, as such, is not a person having an adverse interest in the disposition of the
trust property or its income.

   Section 25.2511-2(f) provides that the relinquishment or termination of a power to

change the beneficiaries of transferred property, occurring otherwise than by death of
the donor, is regarded as the event which completes the gift and causes the gift tax to
apply.

  Section 25.2511-2(g) provides that if a donor transfers property to himself as

trustee (or to himself and some other person, not possessing a substantial adverse
interest, as trustees), and retains no beneficial interest in the trust property and no
power over it except fiduciary powers, the exercise or 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)
PLR-106969-16 7

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. A’s retention of a power to change the beneficial interests in a trust causes
the transfer to the trust to be incomplete for gift tax purposes, even though the power
may be defeated by the actions of third parties. Goldstein v. Commisisoner, 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.
The Distribution Committee members are not takers in default for purposes of
§ 25.2514-3(b)(2). They are merely co-holders of the power. Under § 25.2514-3(b)(2),
a co-holder of a power is only considered as having an adverse interest where he may
possess the power after the possessor's death and may exercise it at that time in favor
of himself, his estate, his creditors, or the creditors of his estate. In this case, the
Distribution Committee ceases to exist upon Grantor's death. Accordingly, the
Distribution Committee members do not have interests adverse to Grantor under
§ 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). Therefore, Grantor is considered
as possessing the power to distribute income and principal to any beneficiary himself
because he retained the Grantor's Consent Power.

   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
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
Consent Power and the Grantor's Sole Power causes the transfer of property to Trust to
be wholly incomplete for federal gift tax purposes.
PLR-106969-16 8

   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 § 25.2514-3(b)(2), the retention of a testamentary power to
appoint the remainder of a trust is considered a retention of dominion and control over
the remainder. Accordingly, the retention of this power causes the transfer of property
to Trust to be incomplete with respect to the remainder in Trust for federal tax purposes.

   Finally, the Distribution Committee members possess the Unanimous Member

Power over income and principal. This power is not a condition precedent to Grantor's
powers. Grantor's power over the income and principal is presently exercisable and not
subject to a condition precedent. Grantor retains dominion and control over the income
and principal of Trust until the Distribution Committee members exercise their
Unanimous 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),
the possessor's estate, the possessor's creditors, or the creditors of the possessor's
estate.

  Section 25.2514-1(c)(1) provides that a power of appointment is not a general

power if by its terms it is exercisable only in favor of one or more designated persons or
classes other than the possessor or his creditors, or the possessor's estate or the
creditors of the estate or expressly not exercisable in favor of the possessor or his
creditors, or possessor’s estate or the creditors of his estate.
PLR-106969-16 9

  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 coholder of a power has no

adverse interest merely because of his joint possession of the power nor merely
because he is a permissible appointee under a power. However, a co-holder of a power
is considered as having an adverse interest where he may possess the power after the
possessor's death and may exercise it at that time in favor of himself, his estate, his
creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power
jointly to appoint among a group of persons which includes themselves and if on the
death of X the power will pass to Y and Z jointly, then Y and Z are considered to have
interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the
power will pass to Z, Z is considered to have an interest adverse to the exercise of the
power in favor of Y.

   Section 2041(a)(2) provides that the value of the gross estate shall include the

value of all property to the extent of any property with respect to which the decedent has
at the time of death a general power of appointment created after October 21, 1942, or
with respect to which the decedent has at any time exercised or released such a power
by a disposition which is of such nature that if it were a transfer of property owned by
the decedent, such property would be includible in the decedent's gross estate under
§§ 2035 to 2038, inclusive.

   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)(i) provides that in the case of a power of appointment

created after October 21, 1942, which is exercisable by the decedent only in conjunction
PLR-106969-16 10

with another person, if the power is not exercisable by the decedent except in
conjunction with the creator of the power, such power shall not be deemed a general
power of appointment.

   Section 2041(b)(1)(C)(ii) provides, however, that in the case of a power of

appointment created after October 21, 1942, if the power is not exercisable by the
decedent except in conjunction with a person having a substantial interest in the
property, subject to the power, which is adverse to the exercise of the power in favor of
the decedent -- such power shall not be deemed a general power of appointment. For
purposes of § 2041(b)(1)(C)(ii), a person who, after the death of the decedent, may be
possessed of a power of appointment (with respect to the property subject to the
decedent's power) which he may exercise in his own favor shall be deemed as having
an interest in the property and such interest shall be deemed adverse to such exercise
of the decedent's power.

   Section 20.2041-3(c)(2) of the Estate Tax Regulations provides, in part, that a

co-holder of a power of appointment has no adverse interest merely because of his joint
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 Power are not general powers of appointment for purposes of
§§ 2514(b) and 2041(a)(2). As in the examples in §§ 25.2514-3(b)(2) and 20.2041-
3(c)(2), the Distribution Committee members have substantial adverse interests in the
property subject to this power. Accordingly, any 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 on the facts and representations made, we conclude that any distribution

of property by the Distribution Committee from Trust to any beneficiary of Trust, other
than Grantor, will not be a completed gift subject to federal gift tax, by any member of
PLR-106969-16 11

the Distribution Committee. Further, we conclude that any distribution of property from
Trust to a beneficiary other than Grantor will be a completed gift by Grantor. Finally, we
conclude that the powers held by the Distribution Committee are not general powers of
appointment for purposes of § 2041(a)(2) and, accordingly, no member of the
Distribution Committee upon his or her death will include in his or her estate any
property held in Trust because such member is deemed to have a general power of
appointment within the meaning of § 2041 over property held in Trust.

  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 qualified trusts
(decanting).

  This ruling is directed only to the taxpayer who requested 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 Associate Chief Counsel
                                       (Passthroughs and Special Industries)

Enclosure
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