Pro rata trust divisions preserve existing tax treatment

Plain-English summary

Two irrevocable trusts created before September 25, 1985 proposed dividing into separate, pro rata subtrusts for each of three children and their descendants. The IRS ruled that the divisions would preserve the trusts' exemption from generation-skipping transfer tax and that separately managed subtrusts would be treated as separate trusts for federal income-tax purposes. The divisions would produce no recognized gain, loss, or trust distribution, and each subtrust would retain the transferred assets' basis and holding period. They also would not cause trust property to enter a beneficiary's gross estate or create a taxable gift. The GST ruling depended on the state-court order being effective under the governing state law and implementing the described division.

Ruling snapshot

• Question: What income, estate, gift, and generation-skipping transfer tax consequences follow from dividing two grandfathered trusts into pro rata beneficiary-specific subtrusts?
• Outcome: approved; the divisions preserve GST-exempt status and do not trigger recognition, estate inclusion, or gift tax
• Key authorities: IRC §§ 61, 643(f), 661, 662, 1001, 1015, 2035-2038, 2501-2512, 2601; Treas. Reg. § 26.2601-1(b)(4)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201702006 Third Party Communication: None
Release Date: 1/13/2017 Date of Communication: Not Applicable
Index Number: 61.00-00, 643.00-00,
1001.00-00, 1015.00-00, Person To Contact:
2035.01-00, 2036.00-00, ------------------------------, ID No. ------------
2037.00-00, 2038.00-00, ----------------
2501.00-00, 2601.00-00 Telephone Number:
--------------------
----------------------------------------- Refer Reply To:
--------------------------------------------------- CC:PSI:B04
-------------------------------- PLR-110417-16
------------------------- Date:
September 23, 2016
In Re: Request for Rulings

Legend:

Settlor = ----------------------
A = ------------------
B = -------------------------------
C = ----------------------
D = -------------------------------
BB 1 =
BB 2
DD 1 = ---------------
DD 2 = --------------------------
DD 3 = -------------------------------------------------------
Trust 1 = ---------------------------------------------------------------------------------------
------------------------------------------------------------
Subtrust 1-B = ----------------------------------------------------------
Subtrust 1-C = ------------------------------------------------
Subtrust 1-D = ----------------------------------------------------------
Trust 2 = ---------------------------------------------------------------------------------------
------------------
Subtrust 2-B = ----------------------------------------------------------
Subtrust 2-C = ------------------------------------------------
Subtrust 2-D = ----------------------------------------------------------
Trustee = ---------------------------------------
Date 1 = --------------------------
Date 2 = ---------------------
State A = ------
State B = --------
State A Court = ------------------------------------------------------
PLR-110417-16 2

State B Court = ----------------------------------------
State A Statute 1 = ---------------------------------------------
State A Statute 2 = ---------------------------------------------
State B Statute 1 = --------------------------------------
State B Statute 2 = --------------------------------------
State B Statute 3 = --------------------------------------
X = -------
Year 1 = ------
Year 2 = ------

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

  This responds to your authorized representative’s letter of March 23, 2016,

requesting rulings on the federal income, gift, estate and generation-skipping transfer
(GST) tax consequences of the proposed division of Trust 1 and Trust 2.

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

before September 25, 1985, Settlor created Trust 1, an irrevocable trust for the benefit
of the descendants of Settlor's child, A. Under Article III, Section 3.02 of Trust 1,
income is distributable to A's children and the descendants of any deceased child of A.
A has three adult children (B, C, and D) and five minor grandchild (BB 1, BB 2, DD 1,
DD 2, and DD 3).

    Under Section 3.02(1), the trustee may withhold distribution of income. The

withheld income may be accumulated and added to principal, set aside for future
distribution, or distributed to or for the benefit of the beneficiaries then entitled to the
income. Under Section 3.02(2), the trustee, in exercising the power to withhold or
distribute income, is to take into account the needs and other income and resources of
the beneficiaries, including those for health, medical care, support, and education.
Under Section 3.08, if, in the trustee's opinion, the share of income to which a child of A
is entitled is insufficient for the child's proper care, education and support, and in
particular cases of severe or protracted illness, the deficiency may be made up by
payments of principal. The trustee may require that the advances be restored from
future income.

    Section 3.03 provides that trust principal and accumulated income is to be

distributed to A's children, per stirpes, one year after A's death. Under Section 3.04, if,
at final distribution of the trust, a child of A has died without surviving descendants, that
child's share is to be reallocated to his or her siblings per stirpes. Section 3.05 provides
that if a beneficiary is under age 21 at the time of distribution, his or her share is to be
held, and the income is to be applied to his or her education, support and maintenance.
The trustee may accumulate the income as deemed necessary. The beneficiary's share
is to be distributed outright on his or her reaching age 21.
PLR-110417-16 3

    Section 5 of Exhibit “A” of Trust 1 provides that the trustee is expressly

authorized to make any division, distribution or partition of property in cash or otherwise,
and to allot any property, including an undivided interest therein, to any trust or share.
Section 3.10 provides that where any portion of Trust 1 is designated as a separate
trust for the benefit of a grandchild of Settlor, the share is to constitute a separate fund.
Article IV, Section 4.01 provides that the trust is to be interpreted under the laws of
State A.

    On Date 2, a date before September 25, 1985, Settlor created Trust 2, another

irrevocable trust for the benefit of A's descendants. The provisions of Trust 2 are
identical to those of Trust 1, except in the following respects: Trust 2 does not provide
for distributions to the descendants of any deceased child of A during the trust term,
and, under Article III, Section 3.02(3) of Trust 2, A's children have a non-cumulative
right, exercisable within 60 days after receiving notice, to withdraw a pro rata portion of
property transferred to Trust 2 during a calendar year.

   Trustee proposes to divide Trust 1 into Subtrust 1-B (for B and B's descendants),

Subtrust 1-C (for C and C's descendants), and Subtrust 1-D (for D and D's
descendants). Each Subtrust will be funded with a pro rata share of each asset of
Trust 1.

    The provisions of Trust 1 will govern Subtrust 1-B, Subtrust 1-C, and Subtrust

1-D, except that each respective Subtrust will be held exclusively for the benefit of the
child (and the child's descendants) for whom that Subtrust was created. Income will be
payable to the respective child or accumulated, in the trustee's discretion. If the child
dies before termination of the Subtrust with any descendant living, income will be
payable to the child's descendants, or accumulated, in the trustee's discretion. Prior to
the termination of the Subtrust, principal may be distributed to the child in accordance
with Section 3.08 of Trust 1.

   If A has or adopts another child (After-Born Child) prior to termination of a

Subtrust, all of the Subtrusts held for A’s children shall be reallocated to create a new
Subtrust for this After-Born Child, such that the After-Born Child’s Subtrust will receive a
fraction of the aggregate value of the Subtrusts then existing and held for A’s
descendants. The numerator of the fraction shall be one and the denominator of the
fraction shall be one plus the number of Subtrusts held for A’s children immediately
before the birth or adoption of the After-Born Child. Each existing Subtrust for a child of
A shall contribute to the Subtrust for the After-Born Child in the proportion that its value
bears to the aggregate value of all such Subtrusts for A’s children.

    If a child of A and all descendants of that child die before the termination of that

child’s Subtrust, the deceased child’s Subtrust will be reallocated so as to be added to
or used to fund the Subtrusts held for that child’s siblings or their descendants or, if
there are no other descendants of A then living, will remain in existence until the
PLR-110417-16 4

termination of the Subtrusts created for children of A, with income being payable to any
After-Born Child of A, or to the descendants of any deceased After-Born Child of A, or
accumulated if there is no After-Born Child of A or descendant of a deceased After-Born
Child of A.

    Each Subtrust then in existence will terminate one year after the death of A.

Distribution or termination will be to the child of A if then living, otherwise per stirpes to
the deceased child of A’s then-living descendants, or if none, per stirpes to the then
living descendants of A for whom the Subtrust was created. On termination, if there is
no living descendant of A, the trust property will be distributed among the trusts
established in Year 1 for the children of Settlor other than A or to subtrusts which have
been created for the children of Settlor other than A, or directly to the ultimate
beneficiaries thereof if any trust established in Year 1 or subtrust has been terminated
prior to termination of the Subtrust then terminating.

   Likewise, Trustee proposes to divide Trust 2 into Subtrust 2-B (for B and B's

descendants), Subtrust 2-C (for C and C's descendants), and Subtrust 2-D (for D and
D's descendants). Each Subtrust will be funded with a pro rata share of each asset of
Trust 2.

    The provisions of Trust 2 will govern Subtrusts 2-B, 2-C, and 2D, except that

each respective Subtrust will be held exclusively for the benefit of the child (and the
child's descendants) for whom that Subtrust was created. Income will be payable to the
respective child or accumulated, in the trustee's discretion. If the child dies before
termination of the Subtrust with any descendant living, income will be accumulated.
Additions to the Subtrust will be subject to the child's withdrawal right under Section
3.02(3) of the Trust 2 agreement. Prior to termination of the Subtrust, principal may be
distributed, in accordance with Section 3.08 of Trust 2, but only to a child beneficiary.

   If A has or adopts another child (After-Born Child) prior to termination, all of the

Subtrusts held for A’s children shall be reallocated to create a new Subtrust for this
After-Born Child, such that the After-Born Child’s Subtrust will receive a fraction of the
aggregate value of the Subtrusts then existing and held for A’s descendants. The
numerator of the fraction shall be one and the denominator of the fraction shall be one
plus the number of Subtrusts held for A’s children immediately before the birth or
adoption of the After-Born Child. Each existing Subtrust for a child of A shall contribute
to the Subtrust for the After-Born Child in the proportion that its value bears to the
aggregate value of all such Subtrusts for A’s children.

    If a child of A and all descendants of that child die before the termination of that

child’s Subtrust, the deceased child’s Subtrust will be reallocated so as to be added to
or used to fund the Subtrusts held for that child’s siblings or their descendants or, if
there are no other descendants of A then living, will remain in existence until the
PLR-110417-16 5

termination of the Subtrusts created for children of A, with income being payable to any
After-Born Child of A, or accumulated if there is no After-Born Child of A.

    Each Subtrust will terminate one year after A's death. Distribution on termination

will be to the child if then living, otherwise per stirpes to the deceased child's then-living
descendants, or if none, per stirpes to the then living descendants of A who is the
parent of the child for whom that Subtrust is created. On termination, if there is no living
descendant of A who is the parent of the child for whom a Subtrust is created, the trust
property will be distributed among the Year 2 trusts for the children of Settlor other than
A, or to subtrusts which have been created for the children of Settlor other than A, or
directly to the ultimate beneficiaries thereof if any such Year 2 Trust or subtrust has
been terminated prior to the termination of the Subtrust then terminating.

   Pursuant to an order of State A Court, the administration and situs of Trust 1 and

Trust 2 were moved to State B. Trustee is now administering the trusts in State B.
Therefore, the division of Trust 1 and Trust 2 will be effected pursuant to a proceeding
in and by order of State B Court, which will apply State A law to construe the trusts.

   State A Statute 1 provides that an irrevocable trust may be terminated or its

dispositive provisions modified by the court with the consent of all of the beneficiaries if
continuance of the trust on the same or different terms is not necessary to carry out a
material purpose. State A Statute 2 provides that:

   1. Without approval of a court, a trustee may divide a trust into two or
   more separate trusts with substantially similar terms if the division will not
   defeat or substantially impair the accomplishment of the trust purposes or
   the rights of the beneficiaries unless the trust is a court reporting trust.

   2. On petition by a trustee or beneficiary, the court may divide a trust into
   two or more separate trusts, whether or not their terms are similar, if the
   court determines that dividing the trust is in the best interest of the
   beneficiaries and will not defeat or substantially impair the
   accomplishment of the trust purposes or the rights of the beneficiaries. To
   facilitate the division, the trustee may divide the trust assets in kind, by pro
   rata or non-pro rata division, or by any combination of the methods.

   3. By way of illustration and without limitation, a trust may be divided
   pursuant to this section to allow a trust to qualify as a marital deduction
   trust for tax purposes, as a qualified subchapter S trust for federal income
   tax purposes, as a separate trust for federal generation skipping tax
   purposes, or for any other federal or state income, estate, excise, or
   inheritance tax benefit, or to facilitate the administration of a trust.

PLR-110417-16 6

    State B Statute 1 provides that to the extent there is no conflict of interest

between the representative and the represented beneficiary with respect to the
particular question or dispute, a beneficiary who is a minor or a beneficiary with a
disability or an unborn beneficiary, or a beneficiary whose identity or location is
unknown and not reasonably ascertainable (hereinafter referred to as an
"unascertainable beneficiary"), may for all purposes be represented by and bound by
another beneficiary having a substantially similar interest with respect to the particular
question or dispute; provided, however, that the represented beneficiary is not
otherwise represented by a guardian or agent in accordance with subdivision [X] or by a
parent in accordance with [State B Statute 3].

   State B Statute 2 provides that if all primary beneficiaries of a trust either have

legal capacity or have representatives in accordance with this subsection who have
legal capacity, the actions of such primary beneficiaries, in each case either by the
beneficiary or by the beneficiary's representative, shall represent and bind all other
beneficiaries who have a successor, contingent, future, or other interest in the trust.

   State B Statute 3 provides, in part, that if a trust beneficiary is a minor or a

person with a disability or an unborn person and is not represented by a guardian or
agent in accordance with subdivision [X], then a parent of the beneficiary may represent
and bind the beneficiary, provided that there is no conflict of interest between the
represented person and either of the person's parents with respect to the particular
question or dispute.

   It is represented that no additional contributions have been made to Trust 1 or

Trust 2 after September 25, 1985.

   You have requested the following rulings.

   (1) The division of Trust 1 and Trust 2 into Subtrusts will not cause Trust 1,

Trust 2, or a post-division Subtrust to lose its “grandfathered” status for purposes of the
GST tax or otherwise become subject to the GST tax.

  (2) The Subtrusts resulting from the division of Trust 1 and Trust 2 will be treated

as separate trusts for federal income tax purposes.

   (3) The division of Trust 1 and Trust 2 into Subtrusts will not cause Trust 1,

Trust 2, a post-division Subtrust, or any beneficiary to recognize gain or loss from a sale
or other disposition of property under § 61, § 662, or § 1001.

   (4) The tax basis of the Subtrust assets received from Trust 1 and Trust 2 will be

the same as the tax basis in those assets of Trust 1 and Trust 2, and the Subtrusts'
holding periods in those assets will include the holding periods in those assets of
Trust 1 and Trust 2.
PLR-110417-16 7

   (5) The division of Trust 1 and Trust 2 and the pro rata allocation of Trust 1 and

Trust 2 assets to the Subtrusts will not cause those assets to be includible in a
beneficiary's gross estate.

   (6) The division of Trust 1 and Trust 2 and the pro rata allocation of Trust 1 and

Trust 2 assets to the Subtrusts will not constitute a transfer subject to federal gift tax
under § 2501.

Ruling 1:

    Section 2601 imposes a tax on every generation-skipping transfer, which is

defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip.
Under § 1433 of the Tax Reform Act of 1986 (Act), GST tax is generally applicable to
generation-skipping transfers made after October 22, 1986. However, under
§ 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer
Tax Regulations, the tax does not apply to a transfer under a trust that was irrevocable
on September 25, 1985, except to the extent the transfer is made out of corpus added
to the trust by an actual or constructive addition after September 25, 1985.

    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 generation-skipping transfer tax under § 26.2601-1(b) will not cause
the trust to lose its exempt status. These rules are applicable only for purposes of
determining whether an exempt trust retains its exempt status for generation-skipping
transfer tax purposes. The rules do not apply in determining, for example, whether the
transaction results in a gift subject to gift tax, or may cause the trust to be included in
the gross estate of a beneficiary, or may result in the realization of capital gain for
purposes of § 1001.

    Section 26.2601-1(b)(4)(i)(D)(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) of this section) 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.

   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 transfer or the creation of a new GST transfer. To determine whether a
PLR-110417-16 8

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 5, considers a situation in which, in 1980,

Grantor 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 the present case, Trust 1 and Trust 2 were irrevocable on

September 25, 1985. It is represented that no trust additions have been made after
September 25, 1985.

   The proposed division of Trust 1 into Subtrust 1-B, Subtrust 1-C, and Subtrust

1-D, and Trust 2 into Subtrust 2-B, Subtrust 2-C, and Subtrust 2-D are substantially
similar to the situation described in Example 5 of § 26.2601-1(b)(4)(i)(E). Under the
proposed division, the Trust 1 Subtrusts will, except as described above, be
administered under the original terms of Trust 1. Likewise, the Trust 2 Subtrusts will,
except as described above, be administered under the original terms of Trust 2.
PLR-110417-16 9

   Based on the facts submitted and the representations made, and provided the

State A Court order is effective under State A law and includes the division as described
above, we conclude that the proposed division of Trust 1 and Trust 2 will not shift a
beneficial interest in the respective Trusts to any beneficiary who occupies a lower
generation than the persons holding the beneficial interests prior to the division. In
addition, the proposed division will not extend the time for vesting of any beneficial
interest in the Subtrusts beyond the period provided in the original terms of Trust 1 and
Trust 2, respectively. Accordingly, the proposed division will not cause Trust 1, Trust 2,
or the Subtrusts to lose their exempt status and will not cause any distribution from or
termination of any interests in Trust 1, Trust 2, or the Subtrusts to be subject to GST tax
under § 2601.

Ruling 2:

   Section 643(f) provides that, for purposes of subchapter J of chapter 1 of subtitle

A, under regulations prescribed by the Secretary, two or more trusts shall be treated as
one trust if (1) such trusts have substantially the same grantor or grantors and
substantially the same primary beneficiary or beneficiaries, and (2) a principal purpose
of such trusts is the avoidance of the tax imposed by chapter 1.

    Section 1806(b) of the Tax Reform Act of 1986 provides that § 643(f) shall apply

to taxable years beginning after March 1, 1984; except that, in the case of a trust that
was irrevocable on March 1, 1984, it shall apply only to that portion of the trust that is
attributable to contributions of corpus after March 1, 1984.

   It is represented that each Subtrust will have different beneficiaries. It is further

represented that no portion of the principal of Trust 1 and Trust 2 was contributed after
March 1, 1984. Based on the facts submitted and the representations made, we
conclude that as long as Subtrusts are separately managed and administered, they will
be treated as separate trusts for federal income tax purposes.

Ruling 3:

   Section 61(a)(3) provides that gross income includes gain 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. However, such deduction shall not exceed the
distributable net income (DNI) of the estate or trust.
PLR-110417-16 10

    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(a) 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.

   Section 1001(a) provides that the gain from the sale or other disposition of

property is the excess of the amount realized over the adjusted basis provided in § 1011
for determining gain, and the loss is the excess of the adjusted basis provided in § 1011
for determining loss over the amount realized. Under § 1001(c), the entire amount of
gain or loss must be recognized, except as otherwise provided.

    Section 1.1001-1(a) provides that, except as otherwise provided in subtitle A, the

gain or loss realized from the exchange of property for cash or for other property
differing materially either in kind or in extent is treated as income or loss sustained.

    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).

    In the present case, the assets of Trust 1 and Trust 2 will be distributed in kind on

a pro rata basis among the Subtrusts. Accordingly, based on the facts submitted and
the representations made, we conclude that the proposed division of Trust 1 and Trust 2
will not result in the realization of gain or loss under § 61 and § 1001 and that the
proposed division is not a distribution under § 661, § 662, or § 1.661(a)-2(f).

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-110417-16 11

   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.

    Based on the facts submitted and representations made, we conclude that

because § 1001 does not apply to the division of Trust 1 and Trust 2, under § 1015 the
basis of the assets received by the Subtrusts from Trust 1 and Trust 2 will be the same
after the division as the basis of those assets in the hands of Trust 1 and Trust 2 before
the division. Likewise, the holding period of each asset in the hands of a new Subtrust
will be the same as the holding period of that asset in the hands of Trust 1 or Trust 2
immediately before the distribution in further trust.

Ruling 5:

    Section 2035(a) provides that if (1) the decedent made a transfer (by trust or

otherwise) of an interest in any property, or relinquished a power with respect to any
property, during the three-year period ending on the date of the decedent's death, and
(2) the value of such property (or an interest therein) would have been included in the
decedent's gross estate under § 2036, § 2037, § 2038, or § 2042 if such transferred
interest or relinquished power had been retained by the decedent on the date of the
decedent's death, the value of the gross estate shall include the value of any property
(or interest therein) that would have been so included.

   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 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 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
after September 7, 1916, 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, if
(1) possession or enjoyment of the property can, through ownership of such interest, be
PLR-110417-16 12

obtained only by surviving the decedent, and (2) the decedent has retained a
reversionary interest in the property (but in the case of a transfer made before
October 8, 1949, only if such reversionary interest arose by the express terms of the
instrument of transfer), and the value of such reversionary interest immediately before
the death of the decedent exceeds five percent of the value of such property.

   Section 2038(a)(1) provides that the value of the decedent's 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
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 (in whatever capacity exercisable) by the decedent alone or by
the decedent in conjunction with any other person (without regard to when or from what
source the decedent acquired such power), to alter, amend, revoke, or terminate, or
where any such power is relinquished during the three-year period on the date of the
decedent's death.

    In the present case, the distribution, management, and termination provisions of

the Subtrusts will be substantially similar to the current distribution, management, and
distribution provisions of the respective Trust. Accordingly, based on the facts
submitted and the representations made, the division of Trust 1 and Trust 2 will not
cause any property of Trust 1, Trust 2, or the Subtrusts to be includible in the gross
estate of any beneficiary of any such trust under §§ 2035 through 2038.

Ruling 6:

    Section 2501 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 provides that, subject to certain limitations, the gift tax applies

whether the transfer is in trust or otherwise, direct or indirect, and whether the property
transferred 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 is deemed a gift that
is included in computing the amount of gifts made during the calendar year.

   In this case, the beneficiaries of the Subtrusts will have substantially the same

interests after the proposed division that they had as beneficiaries under Trust 1 and
Trust 2. Because the beneficial interests, rights, and expectancies of the beneficiaries
PLR-110417-16 13

are substantially the same, both before and after the proposed division, no transfer of
property will be deemed to occur as a result of the division. Accordingly, based on the
facts submitted and the representations made, we conclude that the division of Trust 1
and Trust 2, as described above, will not result in a transfer by any beneficiary of
Trust 1, Trust 2, or the Subtrusts that will be subject to federal gift tax under § 2501.

   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.

  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.

  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.

     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,

                                   Leslie H. Finlow

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

Enclosure:
Copy of this letter for § 6110 purposes