Married couple's community-property trust is a non-grantor trust and their contributions are incomplete gifts

Plain-English summary

A married couple in a community property state set up an irrevocable trust for themselves, their children, two other individuals, and charities. Distributions are controlled by a "Power of Appointment Committee" made up of the couple and the beneficiaries, plus certain powers the couple keeps for themselves. This is the structure commonly used to build an "incomplete-gift non-grantor trust," which lets a couple move assets into a trust that pays its own income tax (rather than being taxed to them) while still not treating the transfer as a finished, taxable gift. The IRS ruled the couple's way on all six questions: as long as the committee is serving, the trust is not a grantor trust as to the couple or the committee members (whether the trust's own administration ever shifts ownership back to the couple under § 675 is left as a factual question for audit); the couple's contributions are incomplete gifts because they each keep powers to redirect the property; committee members do not make gifts and do not hold a general power of appointment that would pull the trust into their own estates; and the community property gets a full basis step-up at the first spouse's death under § 1014. The practical payoff is a trust taxed as a separate person for income tax while the couple retains enough control to keep gift tax from applying until death.

Ruling snapshot

• Question: Is this committee-directed community-property trust a non-grantor trust whose funding is an incomplete gift, without creating gift or estate exposure for the committee members?
• Outcome: Approved (favorable on all six rulings; § 675 grantor-trust question reserved for examination)
• Key authorities: IRC §§ 671-679, 2501, 2511, 2514, 2041, 2036, 2038, 1014; Treas. Reg. §§ 25.2511-2, 25.2514-3, 20.2041-3; Estate of Sanford v. Commissioner, 308 U.S. 39 (1939); Goldstein v. Commissioner, 37 T.C. 897 (1962)

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 201852009                                           Third Party Communication: None
Release Date: 12/28/2018                                    Date of Communication: Not Applicable
Index Number: 671.00-00, 1014.00-00,
              2041.00-00, 2501.00-00,                       Person To Contact:
              2514.00-00                                    ----------------, ID No. ------------------
                                                            Telephone Number:
-------------------------------                             ----------------------
-------------------                                         Refer Reply To:
---------------------------                                 CC:PSI:04
                                                            PLR-110169-18
                                                            Date:
                                                            September 20, 2018

RE: --------------------------------

Legend

Husband                           = ------------------------------------- ------------------
Wife                              = ----------------------------------------------------------
Trust                             = ------------------------------------------------
Child 1                           = -------------------------
Child 2                           = ---------------------------
Individual 1                      = ------------------------
Individual 2                      = ------------------
Trustee                           = --------------------------
State 1                           = -----------
State 2                           = --------------
Guardian 1                        = ----------------------
Guardian 2                        = -------------
Power of Appointment
Committee                         = ------------------------------------------------------------------------------
                                    ------------------------------------------------------------------------------
                                    ------------------------------------------------------------------------------
                                    ------------------------------------------------------------------------------
                                    --------------------------, ------------------------------------------

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

This responds to a letter dated March 22, 2018, requesting rulings under the Internal
Revenue Code.

Facts

The facts submitted and representations made are as follows. Grantors (Husband and
Wife) intend to establish an irrevocable trust (Trust) for the benefit of Grantors, Child 1,
Child 2, Individual 1, Individual 2, and charities. Child 1, Child 2, Individual 1 and
Individual 2 are referred to collectively as Lifetime Beneficiaries. Trust is a domestic
trust governed by the laws of State 1. A corporate trustee (Trustee) is the sole trustee
of Trust. Grantors are married and reside in State 2, a community property state.

The terms of Trust provide that while either Grantor is living, the Trustee shall not make
any distributions except as appointed by Grantors or the Power of Appointment
Committee (Committee).

While either Grantor is living, either or both Grantor may (but are not required to)
appoint trust principal (including the whole thereof) outright or in trust to or for the
benefit of any one or more of the Lifetime Beneficiaries as Grantors deem advisable at
any time and from time to time for the beneficiary's health, education, maintenance, or
support (Grantor's Sole Power). The exercise of the power will be in a nonfiduciary
capacity.

While either Grantor is living, a majority of the Committee members, with Grantors'
written consent, may (but are not required to) appoint trust income or principal (including
the whole thereof) outright or in trust to or for the benefit of any one or more of the
Grantors or the Lifetime Beneficiaries for any purpose at any time and from time to time
(Grantor's Consent Power). Further, while either Grantor is living, the members of the
Committee other than Grantors, by unanimous vote, may (but are not required to)
appoint trust income or principal (including the whole thereof) to or for the benefit of any
one or more of the Grantors or the Lifetime Beneficiaries for any purpose at any time
and from time to time (Unanimous Member Power).

Trust provides that the members of the Committee shall initially consist of the Grantors,
their children, Child 1 and Child 2 when they reach 18 years of age, Individual 1, and
Individual 2. Until each of Child 1 and Child 2 reaches age 18, Guardian 1 and
Guardian 2, shall serve for each of them respectively. At all times there must be two
members of Committee in addition to Grantors. If at any time there are fewer than two
members other than Grantors, the Committee automatically ceases to exist. The
Committee shall also cease to exist upon the death of the survivor of Grantors
(Surviving Grantor).

While either Grantor is living, if at any time the Committee ceases to exist, Trustee may
(but is not required to) distribute income or principal of the trust to the Lifetime
Beneficiaries or, with the consent of an adverse party other than one of the Grantors
within the meaning of § 672(a), to either one or both of Grantors. Any net income not
distributed must be accumulated and added to the principal of the trust. Under no
circumstances may Trustee make any distribution to any beneficiary in a manner that
would discharge any or both of Grantors' legal obligations.

Each Grantor may appoint one-half of the Trust to any one or more persons or charities
qualified under § 2055 in equal or unequal proportions and on any terms or conditions
as each Grantor may designate. Each Grantor may exercise this limited power by valid
will or valid living revocable trust, and the appointment will be effective immediately
upon the death of the person exercising the power (Grantor's Testamentary Power).
Neither Grantor may exercise this power for the purpose of discharging their legal
obligations or otherwise for their pecuniary benefit.

Upon the death of each Grantor, any property remaining of the Grantor's entire one-half
interest that has not been effectively appointed by Grantor's Testamentary Power, shall
be distributed as follows: 10 percent of the remaining trust property in equal shares in
trust to each member of Committee other than Grantors, to be administered for each
beneficiary in a separate trust for the benefit of the beneficiary as provided by Trust; 10
percent of the remaining trust property to one or more charities supported by Grantors
during their lifetimes; and the balance among Grantors' descendants and charities as
the Trustee, in its sole discretion, may determine.

Trust provides that all transferred property to Trust is community property and Grantors
may hereafter, either singly or jointly, transfer to the Trustee other property which either
is community property or is being transmuted into community property. Any and all
property transferred to the Trustee prior to the death of the first Grantor to die
(Predeceased Grantor) is and shall retain its character as community property.

Any appointment of property pursuant to the terms of Trust to either Grantor prior to the
death of the Predeceased Grantor is and shall be a distribution of community property.
All distributions of the net income or principal to one or more of the Lifetime
Beneficiaries prior to the death of the Predeceased Grantor, whether made by the
Committee, Trustee, or a Grantor's exercise of the powers retained by such Grantor, is
and shall be a distribution out of community property.

Prior to the death of the Predeceased Grantor, any exercise of either Grantor's Sole
Power shall be funded equally from each Grantor's share of community property held in
Trust. Each Grantor consents to all such appointments made by the other Grantor.

With respect to a Grantor's Testamentary Power retained by the Predeceased Grantor,
any such appointment by the decedent Grantor shall be funded solely from the
decedent Grantor's one-half interest in property in Trust.

Each Grantor affirmatively agrees and confirms that any joint appointment (by each
Grantor or the Committee) or Trustee distribution from Trust to one of the Lifetime
Beneficiaries shall be funded equally from each Grantor's share of community property
in Trust.

It is represented that Trustee, Grantors, and members of the Committee are all United
States persons within the meaning of § 7701(a)(30)(A).

You request the following rulings:

1. As long as the 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 Grantors or any member of the Committee under § 671.

2. The contribution of property to Trust by Grantors will not be a completed gift subject
to federal gift tax.

3. Any distribution of property by the Committee from Trust to either Grantor will not be
a completed gift, subject to federal gift tax, by any member of the Committee.

4. Any distribution of property by the Committee from Trust to any beneficiary of Trust,
other than the Grantors, will not be a completed gift, subject to federal gift tax, by any
member of the Committee, other than the Grantors.

5. No member of the 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.

6. The basis of all community property in Trust on the date of death of the Predeceased
Grantor will receive an adjustment in basis to the fair market value of such property at
the date of death of the Predeceased 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.

Section 672(a) provides, for purposes of subpart E, the term "adverse party" means any
person having a substantial beneficial interest in the trust which would be adversely
affected by the exercise or nonexercise of the power which he possesses respecting the
trust.

Sections 673 through 677 specify the circumstances under which the grantor is treated
as the owner of a portion of a trust.

Section 673(a) provides that the grantor shall be treated as the owner of any portion of
a trust in which the grantor has a reversionary interest in either the corpus or the income
therefrom, if, as of the inception of that portion of the trust, the value of such interest
exceeds five (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 powers described in
§ 674(b) 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
on 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.

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.

Section 679(a) provides that a United States person who directly or indirectly transfers
property to a foreign trust shall be treated as the owner for his taxable year of the
portion of such trust attributable to such property if for such year there is a United States
beneficiary of any portion of the trust.

Based solely on the facts submitted and representations made, we conclude that an
examination of Trust reveals none of the circumstances that would cause Grantors to be
treated as the owner of any portion of Trust under § 673, 674, 676, 677 or 679 as long
as Trust is a domestic trust and Committee remains in existence and serving. Because
none of the members of Committee have a power exercisable by himself to vest trust
income or corpus in himself, none shall be treated as the owner of 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 Grantors under § 675. Thus, the circumstances attendant on the operation of
Trust will determine whether Grantors 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 for the imposition of a gift tax for each calendar year on the
transfer of property by gift during such calendar year by any individual. Section 2511(a)
provides that the gift tax applies whether the transfer is in trust or otherwise, whether
the gift is direct or indirect, and whether the property is real or personal, tangible or
intangible.

Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete as to
any property, or part thereof or interest therein, with respect to which the donor has so
parted with dominion and control as to leave the donor with no power to change the
disposition of the property, whether for the donor's own benefit, or for the benefit of
another. But if upon a transfer of property (whether in trust or otherwise) the donor
reserves any power over its disposition, the gift may be wholly incomplete, or may be
partially complete and partially incomplete, depending upon all the facts in the particular
case. Accordingly, in every case of a transfer of property subject to a reserved power,
the terms of the power must be examined and its scope determined.

Section 25.2511-2(b) provides an example, where the donor transfers property in trust
to pay the income to the donor, or accumulate it in the discretion of the trustee, and the
donor retains a testamentary power to appoint the remainder among the donor's
descendants. The regulation concludes that no portion of the transfer is a completed
gift. However, if the donor had not retained a testamentary power of appointment, but
had instead provided that the remainder should go to X or his heirs, the entire transfer
would be a completed gift.

Section 25.2511-2(c) provides that a gift is incomplete in every instance in which a
donor reserves the power to revest the beneficial title to the property in himself or
herself. A gift is also incomplete if and to the extent that a reserved power gives the
donor the power to name new beneficiaries or to change the interests of the
beneficiaries as between themselves unless the power is a fiduciary power limited by a
fixed or ascertainable standard.

Under § 25.2511-2(e), a donor is considered as possessing a power if it is exercisable
by the donor in conjunction with any person not having a substantial adverse interest in
the disposition of the transferred property 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.

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 coholder 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 grantor's retention of a power to change the beneficial interests in a trust
causes the transfer to the trust to be incomplete for gift tax purposes, even though the
power may be defeated by the actions of third parties. Goldstein v. Commissioner, 37
T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

In this case, Grantors each 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.
Pursuant to Trust, upon the Predeceased Grantor's death, the Predeceased Grantor's
remaining interest in Trust (i.e., one-half) that the Predeceased Grantor did not
effectively appoint pursuant to his or her limited testamentary power of appointment
shall be distributed out of, and shall no longer be subject to, the terms of Trust.
Consequently, upon the death of the Predeceased Grantor, the Committee will no
longer possess any powers over the property transferred to Trust by the Predeceased
Grantor. Under § 25.2514-3(b)(2), a coholder 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. Accordingly, upon the Predeceased Grantor's death, the Committee
members would not be takers in default and do not have interests adverse to the
Predeceased Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e).
They are merely coholders of the power at the time of the Predeceased Grantor's death.
Therefore, the Predeceased Grantor is considered as himself or herself possessing the
power to distribute income and principal to any beneficiary because he or she retained
the Grantor's Consent Power. The retention of the power with respect to the
Predeceased Grantor causes the transfer of property to Trust to be wholly incomplete
for federal gift tax purposes.

Likewise, after the Predeceased Grantor's death, the Surviving Grantor continues to
retain the Grantor's Consent Power over the balance of Trust. The Committee
members are not takers in default for purposes of § 25.2514-3(b)(2). They are merely
coholders of the power. The Committee ceases to exist upon the death of the Surviving
Grantor. Accordingly, upon the Surviving Grantor's death, the Committee members do
not have interests adverse to the Predeceased Grantor under § 25.2514-3(b)(2) and for
purposes of § 25.2511-2(e). Therefore, the Surviving Grantor is considered as himself
or herself possessing the power to distribute income and principal to any beneficiary
because he or she retained the Grantor's Consent Power. The retention of the power
with respect to the Surviving Grantor causes the transfer of property to Trust to be
wholly incomplete for federal gift tax purposes.

If the Committee ceases to exist, the Trustee has the power to distribute income and
principal to the beneficiaries. However, the Trustee's power is not a condition
precedent to each Grantor's Consent Power. Each Grantor's Consent Power over
income is presently exercisable and not subject to a condition precedent. Thus, the
Trustee's power to distribute income and principal does not cause the transfer of
property to be complete with respect to the income and principal interests in Trust for
federal gift tax purposes. Therefore, each Grantor is considered as possessing the
power to distribute income to any beneficiary himself or herself because he or she
retained the Grantor's Consent Power.

Each 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 each
Grantor the power to change the interests of the beneficiaries. Even though each
Grantor's power is limited by an ascertainable standard, i.e., health, education,
maintenance and support, each Grantor's power is not a fiduciary power. If the
Committee ceases to exist, the Trustee, in its fiduciary capacity, also has the power to
distribute principal to one or more beneficiaries. Trustee is a corporate trustee and,
under the terms of the trust instrument, cannot be related or subordinate within the
meaning of § 672(c) to the Grantors. The powers of the Trustee are not conditions
precedent to the Grantors' powers. Each Grantor's Sole Power over principal is
presently exercisable and not subject to a condition precedent. Accordingly, each
Grantor retains dominion and control over the principal of Trust until the Trustee
exercises his or her power to appoint principal. See Goldstein v. Commissioner, 37
T.C. 897 (1962). Thus, the Trustee's powers to distribute principal do not cause the
transfer of property to be complete with respect to the remainder in Trust for federal gift
tax purposes. Accordingly, the retention of the Grantor's Consent Power and the
Grantor's Sole Power causes the transfer of property to Trust to be incomplete for
federal gift tax purposes.

Further, each Grantor retained either a Predeceased Grantor's Testamentary Power or
a Surviving Grantor's Testamentary Power (depending upon the order of death) to
appoint the property in Trust to any persons, other than to the Grantor's estates,
Grantor's creditors, or the creditors of Grantor's estates. 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 for federal tax purposes.

Finally, the Committee members possess the Unanimous Member Power over income
and principal. This power is not a condition precedent to Grantors' powers. Each
Grantor's powers over the income and principal are presently exercisable and not
subject to a condition precedent. Each Grantor retains dominion and control over the
income and principal of Trust until the Committee members exercise their Unanimous
Member Powers. Accordingly, the Unanimous Member 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 Grantors is not a completed gift subject to
federal gift tax. Any distribution from Trust to either grantor prior to the death of the
Predeceased Grantor is a distribution of community property. Any distribution from
Trust to either Grantor is merely a return of each Grantor's property. Therefore, we
conclude that any distribution of property from Trust by the Committee to either Grantor
will not be a completed gift subject to federal gift tax, by any member of the Committee.
Further, upon the Predeceased Grantor's death, the fair market value of the
Predeceased Grantor's interest in Trust is includible in the Predeceased Grantor's gross
estate for federal estate tax purposes. Moreover, upon the Surviving Grantor's death,
the fair market value of the balance in Trust is includible in the Surviving 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, in part, that a power of appointment is not a general
power if by its terms it is exercisable only in favor of one or more designated persons or
classes other than the possessor or his creditors, or the possessor's estate or the
creditors of the estate.

Section 2514(c)(3)(A) provides that, in the case of a power of appointment created after
October 21, 1942, if the power is exercisable by the possessor only in conjunction with
the creator of the power, such power is not deemed a general power of appointment.

Section 2514(c)(3)(B) provides that, in the case of a power of appointment created after
October 21, 1942, if the power is not exercisable by the possessor except in conjunction
with a person having a substantial interest in the property subject to the power, which is
adverse to the exercise of the power in favor of the possessor, such power shall not be
deemed a general power of appointment. For purposes of § 2514(c)(3)(B), a person
who, after the death of the possessor, may be possessed of a power of appointment
(with respect to the property subject to the possessor's power) which he may exercise in
his own favor shall be deemed as having an interest in the property and such interest
shall be deemed adverse to such exercise of the possessor's power.

Section 25.2514-3(b)(2) provides, in part, that a coholder 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 coholder 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)(ii) provides, however, that in the case of a power of appointment
created after October 21, 1942, which is exercisable by the decedent only in conjunction
with another person, if the power is not exercisable by the decedent except in
conjunction with a person having a substantial interest in the property, subject to the
power, which is adverse to the exercise of the power in favor of the decedent - such
power shall not be deemed a general power of appointment. For purposes of
§ 2041(b)(1)(C)(ii), a person who, after the death of the decedent, may be possessed of
a power of appointment (with respect to the property subject to the decedent's power)
which he may exercise in his own favor shall be deemed as having an interest in the
property and such interest shall be deemed adverse to such exercise of the decedent's
power.

Section 20.2041-3(c)(2) of the Estate Tax Regulations provides, in part, that a coholder
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 coholder 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 Committee members under the Grantor's Consent Power are a
power that is exercisable only in conjunction with the creators, either Grantor (or the
survivor thereof). Accordingly, under §§ 2514(b) and 2041(a)(2), the Committee
members do not possess general powers of appointment by virtue of possessing this
power. Further, the powers held by the Committee members under the Unanimous
Member Power is not a general power 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
Committee members have substantial adverse interests in the property subject to this
power. Accordingly, any distribution made from Trust to a beneficiary, other than to
either Grantor, pursuant to the exercise of these powers, the Grantor's Consent Power
and the Unanimous Member Power, are not gifts by the Committee members. Instead,
such distributions are gifts by the Grantors.

Based upon the facts submitted and representations made, we conclude that any
distribution of property by the Committee from Trust to any beneficiary of Trust, other
than the Grantors, will not be a completed gift subject to federal gift tax, by any member
of the Committee. Further, we conclude that any distribution of property from Trust to a
beneficiary other than Grantors will be a completed gift by the Grantors. Trust provides
that all distributions of the net income or principal prior to the death of the Predeceased
Grantor, whether made by the Committee, the Trustee or a Grantor's exercise of the
powers retained by such Grantor, to a beneficiary is and shall be a distribution out of
community property. Accordingly, distributions to beneficiaries, other than Grantors, will
be gifts made one-half by each Grantor. Finally, we conclude that the powers held by
the Committee members are not general powers of appointment for purposes of
§ 2041(a)(2) and, accordingly, the possession of these powers by the Committee
members will not cause Trust property to be includible in any Committee member's
gross estate under § 2041(a)(2).

Ruling 6

Section 1014(a) provides, in part, that, except as otherwise provided in this section, the
basis of property in the hands of a person acquiring the property from a decedent or to
whom the property passed from a decedent will, if not sold, exchanged, or otherwise
disposed of before the decedent's death by such person, be the fair market value of the
property at the date of the decedent's death.
Section 1014(b)(6) provides that, in the case of decedents dying after December 31,
1947, property which represents the surviving spouse's one-half share of community
property held by the decedent and the surviving spouse under the community property
laws of any State, is considered, for purposes of § 1014(a), to have been acquired from
or to have passed from the decedent if at least one-half of the whole of the community
interest in such property was includible in determining the value of the decedent's gross
estate.

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 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.

Grantors reside in State 2, a community property state. Trust provides that all
transferred property to Trust is community property or is being transmuted into
community property. Moreover, any and all property transferred to Trust prior to the
death of the Predeceased Grantor is and shall retain its character as community
property. As concluded above, upon the death of each Grantor, his or her respective
interest in Trust as either the Predeceased Grantor or the Surviving Grantor will be
includible in his or her respective gross estate for federal estate tax purposes.

Accordingly, based upon the facts submitted and representations made, we conclude
that the basis of all community property in Trust on the date of death of the
Predeceased Grantor will receive an adjustment in basis to the fair market value of such
property at the date of death of the Predeceased Grantor.

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)
or any other trust provisions not referenced in this private letter ruling.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. In accordance with the Power of
Attorney on file with this office, a copy of this letter is being sent to your authorized
representative.

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.

                                       Sincerely,

                                       Karlene M. Lesho
                                       Karlene M. Lesho
                                       Senior Technician Reviewer, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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