Pro-rata division into separate family trusts preserves income-tax attributes and GST exemption

Plain-English summary

Two grantors created a trust for their children and allocated enough generation-skipping transfer tax exemption to give it an inclusion ratio of zero. As the family grew and beneficiaries' financial needs diverged, the trustees proposed a pro-rata division into a separate trust for each child's family line, together with administrative changes involving trustees and investment authority. The IRS ruled that the asset transfers would not be distributions or exchanges producing income, gain, or loss. The resulting trusts would be treated as separate trusts, would retain the original basis and holding periods of their assets, and would succeed proportionately to the original trust's tax attributes. The division and administrative modifications also would preserve the trusts' GST-exempt status because they did not shift interests to lower generations or extend vesting.

Ruling snapshot

• Question: What income-tax and GST consequences follow from the pro-rata division and administrative modification of the trust?
• Outcome: Approved on all seven requested rulings.
• Key authorities: IRC §§ 61, 643(f), 661, 662, 1001, 1015, 1223, 2601; Treas. Reg. §§ 1.1001-1(h), 26.2601-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202134003 Third Party Communication: None
Release Date: 8/27/2021 Date of Communication: Not Applicable
Index Number: 61.00-00, 661.00-00, 643.00-
00, 1001.00-00, 1223.00-00, Person To Contact:
2601.00-00 ---------------------, ID No. -----------------
Telephone Number:
--------------------------------- --------------------
------------------------------------------ Refer Reply To:
---------------------------------- CC:PSI:B4
PLR-119284-20
In Re: ---------------------------------- Date:
March 03, 2021

Legend

Trust 1 = ----------------------------------------------------------
Trust 2 = ---------------------------------------------------------
Grantor 1 = ----------------------
Grantor 2 = ------------------------
Date 1 = --------------------------
Date 2 = --------------------------
Date 3 = -----------------
Date 4 = -----------------
Date 5 = --------------------
Date 6 = -----------------------
Date 7 = ------------------------
State = --------
x = ----
Year = -------
State Law 1 = --------------------------------------------
State Law 2 = --------------------------------------------
Court 1 = ---------------------------------------------------------
Court 2 = ---------------------------------------------------------
Partial Judgment = ---------------------------------------------------------------------------------
-------------------

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

This responds to your authorized representative’s letter dated August 26, 2020, and
subsequent correspondence, in which you request rulings concerning the income tax

PLR-119284-20 2

and generation-skipping transfer (GST) tax consequences of a division and modification
of Trust 2.

FACTS

The facts and representations submitted are as follows.

On Date 1, Grantor 1 and Grantor 2 established Trust 2, an irrevocable trust for the
benefit of Grantors’ children. In Year 1, Grantor 2 transferred property to Trust 2.
Grantors treated the Year 1 transfers as made one-half by Grantor 1 and one-half by
Grantor 2. Grantor 1 and Grantor 2 each allocated GST exemption to all of his or her
respective portion of the transfers to Trust 2 on timely filed Forms 709, United States
Gift (and Generation-Skipping Transfer) Tax Returns. Trust 2 holds member interests
and limited partner interests in entities that own passive investments and non-operated
oil and gas working interests and related royalty interests. Trust 2 is administered under
the laws of State.

Article III, section 3.1 of Trust 2 provides that the trustees may distribute to any one or
more of Grantors’ children so much or all of the trust estate, both principal and income,
as in the trustee’s discretion is necessary or beneficial for the health, education,
maintenance, and support of such child of Grantors. In addition, an Independent
Trustee, as defined in Article X of the trust instrument (by reference to § 672(c) of the
Internal Revenue Code (Code)), may distribute to any one or more of Grantors’ children
so much of the trust estate, both principal and income, as the trustee shall determine.
However, no such distribution shall be made which would defeat any unlapsed and
unsatisfied withdrawal right then existing under section 3.3. Section 3.3 provides each
descendant of Grantors a limited right to withdraw.

Section 3.4 provides that Trust 2 shall be divided upon the first to occur of (A) the death
of a child, (B) four years after the death of the last to die of Grantors, (C) the date of the
trustee’s decision to divide the trust estate, or (D) the date the original trustee is no
longer serving as trustee (collectively, the Division Events). Upon the first to occur of
the Division Events, the trust estate shall be divided and distributed pursuant to
Article IV of Trust 2.

Article IV, section 4.1 of the trust instrument provides that the trustee shall divide Trust 2
into x separate trusts of equal value, one share for each child of Grantors who is then
living and one share for each child of Grantors who is not then living (each a Child’s
Trust). Each share for a deceased child shall be distributed as set forth in section 4.4.
If a child receives distributions pursuant to Article III of Trust 2, the value of the property
distributed to the child shall be included in the value of that child’s share for purposes of
determining the value of that Child’s Trust under section 4.1.

Section 4.2 provides that following the division, the trustees may distribute to the child
for whom a Child’s Trust was created so much or all of the trust estate of that Child’s

PLR-119284-20 3

Trust, both principal and income, as in the trustee’s discretion is necessary or beneficial
for the health, education, maintenance, and support of such child of Grantors. In
addition, an Independent Trustee may distribute to the child for whom the Child’s Trust
was created so much or all of the trust estate of that Child’s Trust, both principal and
income, as the trustee shall determine.

Section 4.3 grants to each child for whom a Child’s Trust is created a lifetime special
power of appointment, which the child may exercise in favor of one or more of the
Grantors’ descendants for health, education, maintenance, and support. The child may
exercise the lifetime power to appoint the principal and income of his Child’s Trust but
may not appoint an interest in any closely-held entity received by gift or purchase from
either Grantor. A child may not exercise his power of appointment in favor of himself,
his estate, his creditors or the creditors of his estate.

Sections 4.4 and 4.5 provide that a Child’s Trust shall terminate upon the death of the
child for whom it was created. Each child for whom a trust is created or a share of
Trust 2 is set aside (due to the child’s death prior to the division), is granted a
testamentary power of appointment, which he may exercise in favor of (A) one or more
of Grantors’ descendants, (B) the child’s spouse, and (C) any charitable organizations
described in §§ 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Code. A child may not
exercise his power of appointment in favor of himself, his estate, his creditors or the
creditors of his estate. If, or to the extent that, the child for whom the trust was created
or a share set aside does not effectively exercise his power of appointment, the trust
estate shall be distributed in further trust to: (A) If any of the descendants of such child
are then living, then to the trustee of the Descendants’ Trusts (as set forth in section
5.1) for the benefit of the descendants of such deceased child of Grantors; (B) If none
of that child's descendants are then living, but any of Grantors' descendants are then
living, then in equal shares to the Grantors' children, one share for each of Grantors'
children who is then living and one share for each of Grantors' children who is not
then living but has any descendants who are then living; (C) If none of Grantors’
children or the descendants of the deceased child are then living, then to the trustee of
the Descendants’ Trusts for the benefit of the Grantors’ descendants; (D) If none of
Grantors’ descendants are then living, then to Grantors’ heirs.

Article V, section 5.1 provides the terms of each trust created pursuant to sections 4.4
and 4.5 (Descendant’s Trust). Section 5.1(A) provides that the trustee may distribute to
the descendant for whom the Descendants Trust was created so much or all of the trust
estate of that descendant’s trust, both principal and income, as in the trustee’s
discretion is necessary or beneficial for the health, education, maintenance, and support
of the beneficiary to or for whom the distributions is to be made. In addition, an
Independent Trustee may distribute to the descendant for whom such trust was created
so much or all of the trust estate of that Descendant’s Trust, both principal and income,
as the trustee shall determine. Section 5.1(B) grants the descendant, when he reaches
the age of 35, a lifetime special power of appointment, which the descendant may
exercise in favor of any one or more of the Grantors’ descendants for such

PLR-119284-20 4

descendants’ health, education, maintenance, and support. The descendant may
exercise his lifetime special power to appoint principal and income of his Descendant’s
Trust but may not appoint an interest in any closely-held entity received by gift or
purchase from either Grantor. A descendant may not exercise his power of
appointment in favor of himself, his estate, his creditors or the creditors of his estate.

Sections 5.1(C) and (D) provide that a Descendant’s Trust shall terminate upon the
death of the descendant for whom it is created. The decedent is granted a
testamentary power of appointment, which he may exercise in favor of (A) one or more
of Grantors’ descendants, (B) the descendant’s spouse, and (C) any charitable
organizations described in §§ 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Code.
The descendant may not exercise his power of appointment in favor of himself, his
estate, his creditors or the creditors of his estate. If, or to the extent that, the
descendant does not effectively exercise his power of appointment, the Descendant’s
Trust shall be distributed in further trust to: (A) That person’s descendants; (B) If none
of that person’s descendants are then living, and if that person was a descendant of
Grantors’ child for whom the trust was created, then to the descendants of that person’s
nearest ancestor who was one of the descendants of Grantors’ child who was the
ancestor of the person for whom the trust was created and who had descendants then
living; (C) If none of these persons are then living, then to the descendants of Grantors'
child for whom the trust was created; (D) If none of descendants of Grantors' child for
whom the trust was created are then living, but any of Grantors' descendants are then
living, then in equal shares among the Grantors' descendants, one share for each child
of Grantors who is then living and one share for each child of Grantors who is not then
living but has any descendants who are then living; (E) If none of Grantors' descendants
are then living, then to Grantors' heirs in further trust.

Article VII, section 7.1 establishes the original trustees of Trust 2 and provides the order
and method of appointment of successor trustees.

State Law 1 provides that a trustee may, unless expressly prohibited by the terms of the
instrument establishing the trust, divide a trust into two or more separate trusts.

State Law 2 provides in subsection (a) that on petition of a trustee or a beneficiary, a
court may order that the trustee be changed, that the terms of the trust be modified, that
the trustee be directed or permitted to do acts that are not authorized or that are
forbidden by the terms of the trust, that the trustee be prohibited from performing acts
required by the terms of the trust, or that the trust be terminated in whole or in part, if:
(1) the purposes of the trust have been fulfilled or have become illegal or impossible to
fulfill; (2) because of circumstances not known to or anticipated by the settlor, the order
will further the purposes of the trust; (3) modification of administrative, non-dispositive
terms of the trust is necessary or appropriate to prevent waste or impairment of the
trust's administration; (4) the order is necessary or appropriate to achieve the settlor’s
tax objectives or to qualify a distributee for governmental benefits and is not contrary to
the settlor’s intentions; or (5) subject to subsection (d): (A) continuance of the trust is
not necessary to achieve any material purpose of the trust; or (B) the order is not

PLR-119284-20 5

inconsistent with a material purpose of the trust. Subsection (d) provides that the court
may not take the action permitted by subsection (a)(5) unless all beneficiaries of the
trust have consented to the order or are deemed to have consented to the order.

On Date 2, Grantor 1 died. Grantor 1 is survived by Grantor 2, x children,
grandchildren, and a great-grandchild. As Grantors’ family has grown in number and
has become more diverse, the financial needs and objectives of the Trust 2
beneficiaries have diverged. In accordance with section 3.4 of Trust 2, the trustees
have decided to divide Trust 2 into x separate and independent trusts, one for the
benefit of each child of Grantors and that child’s descendants (Early Division).

On Date 3, the trustees petitioned Court 2 to approve the Early Division as well as
modification of section 7.1 (related to the appointment of co-trustees and successor
trustees) and addition of new section 7.1A (related to the appointment of an Investment
Trustee). On Date 4, the trustees and current beneficiaries of Trust 2, together with
other interested parties, entered into an agreement (Settlement Agreement) in which
each agreed to take all actions necessary to accomplish the Early Division. On Date 5,
the trustees’ petition in Court 2 was consolidated with a similar petition filed in Court 1
related to Trust 1. On Date 6, the trustees amended their petition to include a request
that Court 2 declare Settlement Agreement valid and enforceable.

On Date 7, Court 2 issued Partial Judgment. Partial Judgment approves the Early
Division, the modification of section 7.1, and the addition of new section 7.1A. Partial
Judgment will become effective upon entry of a final judgment, and the trustees of Trust
2 represent that Trust 2 will not be divided until Court 2 enters a final judgment. In
addition, the trustees represent that Trust 2 currently has an inclusion ratio of zero for
GST tax purposes, that no distributions from Trust 2 have been made, and that the
assets of Trust 2 are to be allocated to the newly-created trusts on a pro-rata basis.
Moreover, the trustees represent that the interests of the beneficiaries in Trust 2 will not
be materially altered by the division of Trust 2 into the newly-created trusts, that each
newly-created trust will have different primary beneficiaries, and that each newly-
created trust will be separately managed and administered.

RULINGS REQUESTED

1. The pro-rata transfer of assets from Trust 2 into the newly-created trusts will not
   result in treating any property of Trust 2 as paid, credited, or distributed for
   purposes of § 661 or § 1.661-2(f), and thus will not result in the realization of any
   income, gain, or loss under § 661 or § 662 by Trust 2, the newly-created trusts,
   or a beneficiary of any of the trusts.
2. The pro-rata transfer of assets from Trust 2 into the newly-created trusts will not
   result in the realization of any income, gain, or loss to Trust 2, the newly-created
   trusts, or a beneficiary of any of the trusts under § 61 or § 1001.
3. The newly created trusts will be treated as separate trusts for federal income tax
   purposes pursuant to § 643(f).

PLR-119284-20 6

4. The tax basis that the newly-created trusts will have in the assets of Trust 2
   immediately after the transfer of such assets from Trust 2 will be the same as the
   tax basis of Trust 2 in such assets immediately before the transfer.
5. Each historic asset of Trust 2 will have the same holding period immediately after
   the transfer to the newly-created trusts that it had immediately before the
   transfer.
6. On the division of Trust 2 into the newly-created trusts, each of the newly-created
   trusts will succeed to and take into account an equal portion of any net operating
   loss carryforward, net capital loss, and other tax attributes including passive
   activity losses and credit carryforwards and statutory depletion deductions, of
   Trust 2. Each asset transferred by Trust 2 to the newly-created trusts will have
   the same tax attributes immediately after the division that it had immediately
   before the division.
7. The GST tax exempt status of Trust 2 under chapter 13 of the Code will not be
   affected by either (a) the Early Division of Trust 2 or (b) the modification of
   Trust 2.

RULINGS 1 & 2

Section 61(a) defines gross income as all income from whatever source derived.

Section 61(a)(3) provides that gross income includes gains derived from dealings in
property and, under § 61(a)(15), from an interest in a trust.

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.

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 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.

PLR-119284-20 7

Section 1001(a) provides that the gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the adjusted basis provided in
§ 1011 for determining gain, and the loss shall be the excess of the adjusted basis
provided in § 1011 for determining loss over the amount realized.

Section 1001(b) provides that the amount realized from the sale or other disposition of
property shall be the sum of any money received plus the fair market value of the
property (other than money) received. Under § 1001(c), except as otherwise provided
in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or
exchange of property shall be recognized.

Section 1.1001-1(a) provides that the gain or loss realized from the conversion of
property into cash, or from the exchange of property for other property differing
materially either in kind or in extent, is treated as income or loss sustained.

Section 1.1001-1(h)(1) provides that the severance of a trust (including without limitation
a severance that meets the requirements of § 26.2642-6 or of § 26.2654-1(b) of this
chapter) is not an exchange of property for other property differing materially either in
kind or in extent if - (i) An applicable state statute or the governing instrument authorizes
or directs the trustee to sever the trust, and (ii) Any non-pro rata funding of the separate
trusts resulting from the severance ... whether mandatory or in the discretion of the
trustee, is authorized by an applicable state statute or governing instrument.

A partition of jointly owned property is not a sale or other disposition of property where
the co-owners of the joint property sever their joint interests but do not acquire a new or
additional interest as a result of the transaction. Thus, neither gain nor loss is realized
on a partition. See Rev. Rul. 56-437, 1956-2 C.B. 507.

Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991), addresses the issue of
when a sale or exchange has taken place that results in the realization of gain or loss
under § 1001. In Cottage Savings, a financial institution exchanged its interests in one
group of residential mortgage loans for another lender's interests in a different group of
residential mortgage loans. The two groups of mortgages were considered
“substantially identical” by the agency that regulated the financial institution.

Consequently, based on the facts submitted and the representations made, the pro-rata
transfer of assets from Trust 2 to the newly created trusts will not result in a sale or
exchange, or other disposition, of any property for purposes of § 1001(a), and thus no
gain or loss will be recognized by the beneficiaries or the trusts on the division for
purposes of § 61(a)(3) or § 1001(c). We further conclude that the pro-rata transfer of
assets from Trust 2 to the newly-created trusts is not a distribution under § 661 or
§ 1.661(a)-2(f) and therefore not included in the gross income of any newly-created trust
beneficiary under § 662. It is consistent with the Supreme Court’s opinion in Cottage
Savings to find that the interests of the beneficiaries, after a pro-rata distribution, of the
newly-created trusts do not materially differ from the interests in Trust 2.

PLR-119284-20 8

RULING 3

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.

Trust 2 represents that the newly-created trusts will each have different beneficiaries.
We conclude that as long as the newly-created trusts created by the pro-rata transfer of
assets from Trust 2 are separately managed and administered, they will be treated as
separate trusts for federal income tax purposes.

RULINGS 4, 5 & 6

Section 1015(a) provides that if the property was acquired by gift, the basis shall be the
same as it would be in the hands of the donor or the last preceding owner by whom it
was not acquired by gift, except that if the basis (adjusted for the period before the date
of the gift as provided in § 1016) is greater than the fair market value of the property at
the time of the gift then for the purpose of determining loss the basis shall be the fair
market value.

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.

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.

Section 1223(2) provides that, in determining the period for which the taxpayer has held
property however acquired, there shall be included the period for which such property
was held by any other person, if under chapter 1 of subtitle A such property has, for the

PLR-119284-20 9

purpose of determining gain or loss from a sale or exchange, the same basis in whole
or in part in his hands as it would have in the hands of such other person. See also
§ 1.1223-1(b).

Based on the facts submitted and the representations made, we conclude that because
§ 1001 does not apply to the pro rata transfer of assets from Trust 2 into the newly-
created trusts, under § 1015 the basis of the newly-created trust assets will be the same
after pro-rata transfer of assets from Trust 2 as the basis of those assets before the
transfer. We further conclude that each asset transferred by Trust 2 to the newly-
created trusts will have the same holding period in the hands of the newly-created trusts
as it had in Trust 2. Finally, we conclude that on the division of property from Trust 2 to
the newly-created trusts, the newly-created trusts will succeed to and take into account,
pro-rata, any net operating loss carry forward, net capital loss, and other tax attributes,
including passive activity losses, credit carryforwards, and statutory depletion
deductions, of Trust 2.

RULING 7

Section 2601 provides that a tax is imposed on every generation-skipping transfer
(GST) made by a “transferor” to a skip person.

Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the
Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to
GSTs made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and
§ 26.2601-1(b)(1)(i), the tax does not apply to a transfer from a trust if the trust was
irrevocable on September 25, 1985, and no addition (actual or constructive) was made
to the trust after that date.

Section 2631(a) provides that for purposes of determining the inclusion ratio, every
individual shall be allowed a GST exemption amount which may be allocated by such
individual (or his executor) to any property with respect to which such individual is the
transferor.

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 GST tax will not cause the trust to lose its exempt status. The
regulation provides that the rules contained in the paragraph are generally applicable
only for purposes of determining whether an exempt trust retains its exempt status for
GST tax purposes. Unless the regulations specifically provide otherwise, 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) provides that a modification of the governing instrument of
an exempt trust by judicial reformation, or nonjudicial reformation that is valid under

PLR-119284-20 10

applicable state law, will not cause an exempt trust to be subject to the 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. 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 or the creation of a new GST. A modification that is
administrative in nature that only indirectly increases the amount transferred will not be
considered to shift a beneficial interest in the trust.

Section 26.2601-1(b)(4)(i)(E), Example 5, describes a situation where, 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 example
concludes that 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 § 26.2601-1(b)(4)(i)(E), Example 10, considers the following situation: In 1980,
grantor established an irrevocable trust for the benefit of grantor's issue, naming a bank
and five other individuals as trustees. In 2002, the appropriate local court approves a
modification of the trust that decreases the number of trustees which results in lower
administrative costs. The modification pertains to the administration of the trust and
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. In addition, 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. Therefore, the trust will not be subject to the provisions of chapter 13.

PLR-119284-20 11

No guidance has been issued concerning judicial modifications that may affect the
status of trusts that are exempt from GST tax because sufficient GST exemption was
allocated to the trust to result in an inclusion ratio of zero. At a minimum, a modification
that would not affect the GST status of a grandfathered trust should similarly not affect
the exempt status of such a trust.

This case involves facts similar to those in Example 5 of § 26.2601-1(b)(4)(i)(E). The
Early Division of Trust 2 will result in x trusts, one for the family line of each child of
Grantor 1 and Grantor 2. After the division and modification (i) the dispositive terms of
each resulting trust will be the same as the original dispositive terms of Trust 2,
although limited to a particular family line, (ii) each resulting trust will terminate no later
than Trust 2 terminates under its original terms, and (iii) the distributees of property on
termination of each newly-created trust (and trusts created under the terms of each
newly-created trust) will be the same as the distributees of property under the original
terms of Trust 2. Thus, the Early Division of Trust 2 and pro-rata allocation of Trust 2
assets among the x newly-created trusts will not shift a beneficial interest in Trust 2 to
any beneficiary who occupies a lower generation than the person or persons who held
the beneficial interest prior to the Early Division. In addition, the Early Division will not
extend the time for the vesting of any beneficial interest in the newly-created trusts
beyond the period provided for the vesting of that beneficial interest under the original
terms of Trust 2.

The modification to section 7.1 and the addition of section 7.1A resemble those in
Example 10 of § 26.2601-1(b)(4)(i)(E). The modification and addition pertain to the
administration of Trust 2 and do not shift a beneficial interest in Trust 2 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. Furthermore, the
modification and addition do not extend the time for vesting of any beneficial interest in
Trust 2 beyond the period provided for under the original terms of Trust 2.

Accordingly, based on the facts submitted and the representations made, the division of
Trust 2 in accordance with Partial Judgment into the x newly-created trusts and the pro-
rata allocation of Trust 2 assets will not affect the status of Trust 2 or the newly-created
trusts as exempt from the GST tax. Likewise, neither the division nor the pro-rata
allocation of assets will cause a distribution from, or termination of any interest in Trust
2 or any of the newly-created trusts to be subject to the GST tax.

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.

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.

PLR-119284-20 12

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, we have sent a copy of
this letter to your authorized representatives.

                                  Sincerely,

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

Enclosures (2)

  Copy of this letter
  Copy for § 6110 purposes

cc: