Retained trust powers make gift incomplete without taxing distribution committee

Plain-English summary

A grantor created an irrevocable trust whose nonfiduciary distribution committee could direct distributions with the grantor's consent or by unanimous action, while the grantor retained separate distribution and testamentary appointment powers. The IRS ruled that the grantor's retained powers made the initial transfer wholly incomplete for gift-tax purposes, so trust property would be included in the grantor's estate at death. Distributions to beneficiaries other than the grantor would be completed gifts by the grantor, not by committee members. The committee members' joint powers were not general powers of appointment and would not pull trust property into their estates. The IRS found no grantor-owner status under IRC §§ 673, 674, 676, or 677 and no committee-member ownership under § 678, but left possible grantor treatment under § 675 to examination of how the trust was actually administered.

Ruling snapshot

• Question: How did the retained and joint distribution powers affect grantor-trust status, completed gifts, and powers of appointment?
• Outcome: mixed, the requested transfer-tax rulings were favorable but the IRC § 675 issue was deferred
• Key authorities: IRC §§ 671-678, 2041, 2501, 2511, and 2514; Treas. Reg. §§ 25.2511-2 and 25.2514-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201729009 Third Party Communication: None
Release Date: 7/21/2017 Date of Communication: Not Applicable
Index Number: 671.03-00, 2501.00-00,
2514.02-00, 2041.03-00 Person To Contact:
------------------------------, ID No. ------------
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---------------------------------- Telephone Number:
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Refer Reply To:
RE: ------------------------ CC:PSI:B04
PLR-132166-16
Date:
March 27, 2017

Legend

Date = ------------------------

Grantor = -------------------------------------------------

Trust = ------------------------------------------------------------------------------

Brother = ----------------------------

Sister = ------------------------------

Individual 1 = -----------------------------

Individual 2 = ---------------------

Permissible Beneficiaries = ------------------------------------------------------------------------------
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Trustees = ---------------------------------------------------------------

Distribution Committee = ------------------------------------------------------------------------------
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PLR-132166-16 2

Daughter = --------------------------------

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

This letter responds to your authorized representative’s letter of October 5, 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, Grantor created Trust, an irrevocable trust, for the benefit of Grantor,
Grantor’s wife, Grantor’s descendants, Brother, Sister, Individual 1 and Individual 2, and
qualified charitable organizations (collectively the “Permissible Beneficiaries”).

A corporate trustee and an individual are Trustees of Trust. During Grantor's lifetime,
Trustees must distribute amounts of net income and principal as directed by the
Distribution Committee and/or Grantor, as follows:

(1) Trustees shall distribute such amounts of principal and income to the Permissible
Beneficiaries, at any time, as directed by a majority of the Distribution Committee
members, with the written consent of Grantor (referred to as “Grantor’s Consent
Power”);
(2) Trustees shall distribute such amounts of principal and income to the Permissible
Beneficiaries, at any time, as directed by all of the Distribution Committee members
(referred to as the “Unanimous Member Power”); and
(3) Trustees shall distribute such amounts of principal to one or more of Daughter,
Brother, Sister, Individual 1, and Individual 2, at any time, as directed by Grantor,
acting in a non-fiduciary capacity, as Grantor determines for their health, education,
maintenance, and support (referred to as “Grantor’s Sole Power”).

The 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. Trustees, pursuant to the direction of the Distribution
Committee, shall pay over to the trustees of any trust any or all principal and income for
the primary benefit of any one or more Permissible Beneficiaries, as the Distribution
Committee determines. Any net income not distributed by Trustees will be accumulated
and added to principal.

The Distribution Committee members act in a nonfiduciary capacity. Trust provides that
at all times there must be at least two adults who are also Permissible Beneficiaries
serving as members of the Distribution Committee, except that Grantor may not serve
as a member of the Distribution Committee. The Distribution Committee is initially
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composed of Daughter, Brother, Sister, Individual 1 and Individual 2. If at any time
there are fewer than two individuals serving on the Distribution Committee, then the
Distribution Committee will cease to exist. In any event, the Distribution Committee will
cease to exist upon the Grantor’s death.

Upon Grantor’s death, Trust terminates and the remaining balance of Trust shall be
distributed to or for the benefit of any person or persons or entity or entities, 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 will be distributed, per stirpes, to Grantor’s
descendants as survive the Grantor.

You have requested the following rulings:

1. As long as the Distribution Committee is serving, no portion of the items of income,
   deductions and credits against tax of Trust shall be included in computing the
   taxable income, deductions, and credits of Grantor or any other member of the
   Distribution Committee 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 made at the direction of the Distribution Committee from
   Trust to any permissible beneficiary, other than Grantor, will not be a completed gift
   subject to federal gift tax by any member of the Distribution Committee.

4. Any distribution of property made at the direction of the Distribution Committee from
   Trust to any beneficiary of Trust, other than Grantor, will be a completed gift subject
   to federal gift tax by Grantor.

5. No member of the Distribution Committee, upon his or her death, will be considered
   to have a general power of appointment within the meaning of § 2041 over any
   property held in trust.

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-132166-16 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.

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.

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.
PLR-132166-16 5

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 on the facts submitted and the representations made, we conclude that 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 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 examined by the
office with responsibility for such examination.

RULING 2

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 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
PLR-132166-16 6

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) 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
PLR-132166-16 7

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. 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.
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.

Further, Grantor retained Grantor’s Testamentary Power to appoint the property 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 of 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
PLR-132166-16 8

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. 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 3, 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.

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) that 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 has no adverse
interest merely because of his joint possession of the power nor merely because he is a
PLR-132166-16 9

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 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)
that 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
PLR-132166-16 10

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 distributions made from Trust to a beneficiary,
other than Grantor, pursuant to the exercise of these powers (Grantor’s Consent Power
and the Unanimous Member Power), are not gifts by the Distribution Committee
members. Instead, such distributions are gifts by Grantor.

Based on the facts submitted and the 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 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
property held in trust will be includible in the gross estate of any member of the
Distribution Committee upon his or her death under § 2041.

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
(decanting).
PLR-132166-16 11

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,

                                  Karlene M. Lesho

                                  Karlene M. Lesho
                                  Senior Technician Reviewer, Branch 4
                                  (Passthroughs & Special Industries)

Enclosure
Copy for section 6110 purposes

cc: