Division of grandfathered trust preserves GST exemption and avoids transfer-tax and income-tax consequences

Plain-English summary

A trust created under a settlor's will before September 25, 1985 proposed dividing one child's share into two equal trusts, one associated with each of that child's children. The new trusts would have equal value but could receive different assets to reflect the beneficiaries' investment objectives, and several administrative and trustee provisions would be updated. The IRS ruled that an earlier court modification and the proposed changes would not destroy the trust's grandfathered exemption from generation-skipping transfer tax because they did not shift beneficial interests to a lower generation or extend vesting. It also ruled that the division would not create taxable gifts or cause trust assets to enter any beneficiary's gross estate. The equal-value, authorized non-pro-rata funding would not trigger gain or loss or count as a distribution under Sections 661 or 662. Each new trust would retain the original trust's basis and holding periods in the assets it received.

Ruling snapshot

• Question: What GST, gift, estate, income, basis, and holding-period consequences would follow from dividing the grandfathered trust into two equal successor trusts?
• Outcome: Approved on all seven requested rulings.
• Key authorities: IRC §§ 61, 661, 662, 1001, 1015, 1223, 2035-2038, 2501, 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: 202134004 Third Party Communication: None
Release Date: 8/27/2021 Date of Communication: Not Applicable
Index Number: 2601.00-00, 2501.00-00,
2033.00-00, 661.00-00, Person To Contact:
662.00-00, 1001.00-00, -------------------------- ID No. ----------------
61.00-00, 1015.00-00, Telephone Number:
1223.00-00 --------------------
Refer Reply To:
-------------------------------------- CC:PSI:B04
----------------------------------------------- PLR-120623-20
-------------------- Date:
------------------------- March 22, 2021

Legend

Settlor -----------------------
Trust ---------------------------------------------------------------------------------
-------------------------------------------------------
Trustee 1 --------------------------
Trustee 2 ------------------------------------------------
Trustee 3 -----------------------------
Child -----------------------------
Grandchild 1 -----------------------------
Grandchild 2 -------------------------------------
Grandchild 1 Trust ---------------------------------------------------------------------------------
----------------------------------------------------------------------------
Grandchild 2 Trust ---------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Individual -----------------------
Date 1 ----------------------
Date 2 ------------------
Date 3 ---------------------
Date 4 ---------------------------
Date 5 --------------------------
State --------
x -------------
Court 1 --------------------------------------------------
Court 2 ----------------------------------------------------
State Statute 1 ------------------------------------------------------------
State Statute 2 -----------------------------------------------------

PLR-120623-20 2

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

   This letter responds to your authorized representative’s letter dated

September 18, 2020, and subsequent correspondence, requesting income, estate, gift,
and generation-skipping transfer (GST) tax rulings with respect to the proposed division
of Trust.

    The facts and representations submitted are summarized as follows:

   Trust was created under the will of Settlor, dated Date 1. Settlor died on Date 2

(a date prior to September 25, 1985). Settlor was a resident of State. Settlor was
survived by her spouse and children. Child is one of Settlor’s children. Trustee 1 is
currently serving as trustee of Trust.

   Article V of Settlor’s will provides, in relevant part, that the residue of Settlor’s

estate is to be held in trust.

   Article V.A provides, in relevant part, that the trustee is to divide the trust estate

into separate shares of equal value for each child of Settlor then living, and for each
lawful descendant then living of each child then deceased leaving one or more lawful
descendants. Each separate share is to be held, managed, and distributed as a
separate trust.

   Article V.B provides, in relevant part, that during the life of Settlor’s spouse, the

trustee is to pay to any member of the class composed of spouse, child, and child’s
descendants as much of the income of the separate share then held in trust as trustee
deems necessary for support, education, and health of the class members. All of the
net income for each fiscal year of such trust not distributed prior to the last day of such
year is then to be added to the principal of such separate share.

    Article V.C provides, in relevant part, that upon the death of Settlor’s spouse, the

trustee is to pay the net income of each separate share then held in trust to any
member of the class composed of child, and child’s descendants in the same manner
and upon the same terms and conditions as provided in Article V.B. so long as child is
alive or until the distribution of child’s separate share to such child, whichever event
shall first occur.

   Article V.E provides, in relevant part, that if a separate share is provided for

Child, Child is not to have, at any time, any right to request the withdrawal of any part of
the principal of her separate share, it being Settlor’s express intention that Child’s rights
and interests in such share shall be limited to the rights and interests provided in
Articles V.B, V.C, and VI.A.

PLR-120623-20 3

   Article V.G provides, in relevant part, that upon the death of Child, the trustee is

to pay and distribute all of the principal and the accrued, accumulated and unpaid net
income of Child’s separate share to her then living descendants per stirpes. Provided,
however, that the share or portion thereof payable and distributable to each lawful
descendant of Settlor for whose primary benefit the trustee is then holding a separate
share or portion thereof in trust is to be added to and become part of the principal and
income of such separate share or portion.

   Article V.L provides, in relevant part, that anything provided to the contrary

notwithstanding with respect to payments of income to any beneficiary, the trustee, in
exercising its discretion, is to consider all income and other resources known to the
trustee to be available to such beneficiary and limit any amount so paid to the amount
that may be reasonably necessary to permit such beneficiary to maintain his or her
accustomed standard of living and station in life.

    Article VI.A provides, in relevant part, that if, in the sole judgment of the trustee,

the aggregate of income payable hereunder and accruing from all other sources known
to the trustee to any beneficiary is to be insufficient to provide for his or her suitable
care, maintenance, education, and medical attention, the trustee, in the trustee’s sole
discretion, may pay to or apply for the benefit of such beneficiary a portion of the
principal then held in trust.

    Article VII.H provides, in relevant part, that in the retention, investment,

management and distribution of each separate trust, the trustee is given the full power
and authority to make any division or distribution in kind or partly in kind and partly in
money and to determine the value of any such property so allotted, divided, or
distributed.

   Articles IX.A and IX.B provide, in relevant part, that Settlor’s husband is to be the

trustee of Trust. In the event of the death, resignation, refusal or other inability of
Settlor’s husband to act as trustee, Settlor nominates Trustee 1 to act as successor
trustee.

   Article IX.C provides, in relevant part, that in the event of the death, resignation,

refusal or other inability of Trustee 1 to act as successor trustee, Settlor nominates
Trustee 2 to act as successor trustee.

   Article IX.E provides, in relevant part, that upon the resignation of either or both

Settlor’s husband and Trustee 1, the appointment of his successor is to be determined
as hereinafter provided. Upon the resignation of Trustee 2, or any successor in trust
thereafter, the person or persons to whom such resignation is delivered is to
immediately appoint any bank or trust company wherever situated having a combined
capital and surplus of not less than $x as successor trustee.

PLR-120623-20 4

   On Date 3, in response to a petition by Trustee 1, Court 1 ordered that the

provisions of Settlor’s will that govern Trust to be modified. Article IX.C was modified to
provide that in the event of the death, resignation, refusal, removal, or other inability of
Trustee 1 to act as successor trustee, Trustee 3 is to act as successor trustee.

    Article IX.E was modified by the Date 3 court order to provide, in relevant part,

that upon the death, resignation, refusal, removal or other inability of all and each of
Settlor’s husband, Trustee 1, Trustee 3, and any successor to act as trustee or
successor trustee, the adult beneficiaries of such trust who are then eligible to receive
income distributions from such trust and who have capacity, one of whom must be
Child, if she is then living, is to have the power, acting by a majority of such
beneficiaries, to appoint a successor trustee or co-trustees, by an acknowledged written
instrument delivered to the trustee or trustees so appointed. No such successor trustee
may be a beneficiary of such trust. Any successor trustee must be a resident of State.

   New Article IX.I was added by the Date 3 court order to provide, in relevant part,

that Individual is to have the power to remove any trustee. Upon any such removal, a
successor trustee is to be appointed as specified in Article IX.E. The removal power is
to be exercised by the delivery of an acknowledged written removal notice to the trustee
being removed as well as to the successor trustee, if one had been appointed, and is to
become effective immediately upon the acceptance of the trusteeship of the newly-
appointed successor trustee. Individual is also to have the power to appoint a
successor person with authority to remove the trustee in the event that Individual is
deceased, incapacitated, or no longer able to act. Any successor appointed under this
section must reside in State at the time of appointment and continue to remain a State
resident thereafter.

   New Article XI.C was added by the Date 3 court order to provide, in relevant part,

that any trustee named hereunder is to be exempt from any duty or obligation to
diversify the assets of any trust created hereunder. The assets held by one or more of
the trusts created hereunder may include interests in partnerships, limited liability
companies, or other entities owned in whole or in part by members of Settlor’s family.
The trustee of each trust created hereunder is authorized to retain any interest in any
family-owned entity for as long as the trustee deems such retention to be advisable,
without regard to any statute or rule of law to the contrary regarding trust investments,
diversification of trust assets, or any other matter involving the administration of trusts.

   On Date 4, Trustee 1 filed a petition in Court 2, proposing to divide Trust into two

separate trusts of equal value and update Trust’s administrative provisions. The petition
stated that the likely remainder beneficiaries had significantly different family situations
and financial interests since the inception of Trust. Thus, given the beneficiaries’
different investment objectives and risk tolerances, the trustee plans to fund the new
trusts non-pro rata, but both trusts will be funded with assets of total equal value.

PLR-120623-20 5

    On Date 5, Court 2 ordered that the provisions of Settlor’s will that govern Trust

to be modified, pending a favorable ruling from the Internal Revenue Service. Article
V.A will be modified to provide, in relevant part, that the trustee is to divide the trust
estate into separate shares of equal value for each child of Settlor. The trustee is to
further divide the separate share set aside for Child into two separate shares of equal
value, creating Grandchild 1 Trust for Child and Grandchild 1 and Grandchild 2 Trust for
Child and Grandchild 2. Each of Grandchild 1 Trust, Grandchild 2 Trust, and the
separate shares created for Settlor’s other children are to be held, managed, and
distributed as separate trusts.

    Article V.C will be modified by the Date 5 court order to provide, in relevant part,

that upon the death of Settlor’s spouse, the trustee is to pay the net income of each
separate share then held in trust to any member of the class composed of Child, the
grandchild who is a primary beneficiary of that trust, and that grandchild’s descendants
in the same manner and upon the same terms and conditions as provided in Article V.B
so long as Child is alive. Provided, however, that the common trustee is to determine
the aggregate amount of any distribution of net income to Child and each separate
aggregate distribution is to be made in equal shares from Grandchild 1 Trust or
Grandchild 2 Trust.

    Article V.G will be modified by the Date 5 court order to provide, in relevant part,

that upon the death of Child, the trustee is to pay and distribute all of the principal and
accrued, accumulated and unpaid net income of a trust named for a child of Child to the
child of Child for whom the trust is named, if then living, or if not, then to that child’s then
living descendants per stirpes, or if none, then to Child’s then living descendants, per
stirpes. Provided, however, that the share or portion thereof payable and distributable
to each lawful descendant of Settlor for whose primary benefit the trustee is then
holding a separate share or portion thereof in trust is to be added to and become part of
the principal and income of such separate share or portion.

   Article VI.A will be modified by the Date 5 court order to add a provision that the

common trustee is to determine the aggregate amount of any distribution of principal to
Child and each such aggregate distribution is to be made in equal shares from
Grandchild 1 Trust and Grandchild 2 Trust.

    Article VII.O will be added by the Date 5 court order to provide, in relevant part,

that State law will always govern the construction, interpretation, and validity of the
provisions of Settlor’s will. The trustee may administer any trust created under Settlor’s
will at any time or times from any jurisdiction (including a jurisdiction outside of the
United States) as the trustee may determine is necessary and appropriate.

   Article IX.E will be modified by the Date 5 court order to provide, in relevant part,

that upon the death, resignation, refusal, removal or other inability of all and each of
Settlor’s husband, Trustee 1, Trustee 3, and any successor to act as trustee or
successor trustee, the adult beneficiaries of such trust who are then eligible to receive

PLR-120623-20 6

income distributions from such trust and who have capacity are to have the power,
acting by a majority of such beneficiaries (one of whom must be Child, if she is then
living), to appoint a successor trustee or co-trustees, by an acknowledged written
instrument delivered to the trustee or trustees so appointed. No trustee of a separate
trust hereunder may be a beneficiary of such trust. Until the death of Child, at least one
trustee must be acting concurrently as a trustee of both Grandchild 1 Trust and
Grandchild 2 Trust and is referred to as the common trustee.

   Article IX.I will be modified by the Date 5 court order to remove the requirement

that any individual with authority to remove a trustee must reside in State.

    The trustee represents that Trust has been irrevocable since its creation under

Article V.A of Settlor’s will and that no contributions have been made to Trust since its
funding following the administration of Settlor’s estate. No other trusts are now held
under the terms of Settlor’s will.

   State Statute 1 provides, in relevant part, that on the 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 because of circumstances not known to or anticipated by the settlor,
the order will further the purposes of the trust.

   State Statute 2 provides that when distributing trust property or dividing or

terminating a trust, a trustee may (1) make distributions in divided or undivided
interests; (2) allocate particular assets in proportionate or disproportionate shares; (3)
value the trust property for the purposes of acting under section (1) or (2); and (4) adjust
the distribution, division, or termination for resulting differences in valuation.

   You have requested the following rulings:

1. Modifications of Trust pursuant to the Date 3 court order did not cause Trust to
  lose its exempt status from the GST tax or otherwise become subject to the GST
  tax.

2. The proposed modifications under the Date 5 court order will not cause Trust or
  Grandchild 1 Trust or Grandchild 2 Trust to lose its exempt status from the GST
  tax or otherwise become subject to the GST tax.

3. The proposed division of Trust under the Date 5 court order will not cause any
  beneficiary of Trust, Grandchild 1 Trust, or Grandchild 2 Trust to make a gift
  subject to federal gift tax.

PLR-120623-20 7

4. The proposed division of Trust under the Date 5 court order will not cause the
   assets of Trust, Grandchild 1 Trust, or Grandchild 2 Trust to be includible in the
   gross estate of any beneficiary of such trusts for federal estate tax purposes
   under § 2035, 2036, 2037, or 2038.

5. The proposed division of Trust under the Date 5 court order to divide Trust and
   allocate assets of equal value non-pro rata to Grandchild 1 Trust and
   Grandchild 2 Trust will not cause Trust, Grandchild 1 Trust, Grandchild 2 Trust,
   or any beneficiary of such trusts to recognize gain or loss from a sale or other
   disposition of property.1

6. The proposed division of Trust under the Date 5 court order will not be treated as
   a distribution from Trust to either Grandchild 1 Trust or Grandchild 2 Trust for
   federal income tax purposes under § 661 or 662.

7. The adjusted basis and holding periods of the assets of each new trust will be the
   same as the adjusted basis and holding periods of those assets while held in
   Trust.

LAW AND ANALYSIS

Rulings 1 and 2

  Section 2601 imposes a tax on every generation-skipping transfer. The term

“generation-skipping transfer” is defined in § 2611 as a taxable distribution, a taxable
termination, and a direct skip.

   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
generation-skipping transfers made after October 22, 1986. However, under
§ 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the GST tax does not apply to a
transfer under a trust that was irrevocable on September 25, 1985, but only to the
extent that such transfer is not made out of corpus added to the trust after September
25, 1985 (or out of income attributable to corpus so added).

    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 under § 26.2601-1(b) will not cause the trust to lose its
exempt status.

1
The taxpayer has requested a ruling that the trust division will not cause the recognition of any income in
addition to gain or loss. Our office is unable to issue a “blanket” ruling concerning the recognition of
ordinary income or loss, including such items as dividends and interest. Such a ruling would be
overbroad and would have to take into account the timing of such items of income including under
assignment of income principles.

PLR-120623-20 8

    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 applicable state law, will not cause an exempt trust to be subject to the
GST tax if the modification does not shift a beneficial interest in the trust to any
beneficiary who occupies a lower generation (as defined in § 2651) than the person or
persons who held the beneficial interest prior to the modification, and the modification
does not extend the time for vesting of any beneficial interest in the trust beyond the
period provided for in the original trust. A modification of an exempt trust will result in a
shift in beneficial interest to a lower generation beneficiary if the modification can result
in either an increase in the amount of a GST transfer or the creation of a new GST
transfer. 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 4, considers the following situation. In

1980, Grantor, who was domiciled in State X, executed an irrevocable trust for the
benefit of Grantor's issue, naming a State X bank as trustee. Under the terms of the
trust, the trust is to terminate, in all events, no later than 21 years after the death of the
last to die of certain designated individuals living at the time the trust was executed.
The provisions of the trust do not specify that any particular state law is to govern the
administration and construction of the trust. In State X, the common law rule against
perpetuities applies to trusts. In 2002, a State Y bank is named as sole trustee. The
effect of changing trustees is that the situs of the trust changes to State Y, and the laws
of State Y govern the administration and construction of the trust. State Y law contains
no rule against perpetuities. In this case, however, in view of the terms of the trust
instrument, the trust will terminate at the same time before and after the change in situs.
Accordingly, the change in situs 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 transfer. Furthermore, the change
in situs does not extend the time for vesting of any beneficial interest in the trust beyond
that provided for in the original trust. Therefore, the trust will not be subject to the
provisions of chapter 13.

   Section 26.2601-1(b)(4)(i)(E), Example 5, illustrates a situation where a trust that

is otherwise exempt from the GST tax is divided into two trusts. Under the facts
presented, the division of a 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, and 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. Accordingly, the two partitioned
trusts will not be subject to the GST tax.

  Section 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

PLR-120623-20 9

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.

    In this case, Trust will be divided into two new equal trusts, Grandchild 1 Trust

and Grandchild 2 Trust. Child, Grandchild 1, and Grandchild 1’s descendants will be
the beneficiaries of Grandchild 1 Trust. Child, Grandchild 2, and Grandchild 2’s
descendants will be the beneficiaries of Grandchild 2 Trust. Additionally, several
administrative provisions of Trust, including trustee succession provisions, will also be
modified. There is also a new provision that maintains that Trust will be governed by
State law, but will allow the trustee to administer the new trusts from any jurisdiction that
the trustee may determine is necessary and appropriate. The proposed modifications
will not result in a shift of any beneficial interest in the trusts to any beneficiary who
occupies a generation lower than the persons holding the beneficial interests. Further,
the proposed modifications will not extend the time for vesting of any beneficial interest
in the new trusts beyond the period provided for in Trust. Accordingly, based on the
facts submitted and the representations made, we conclude that the modifications of
Trust pursuant to the Date 3 court order as well as the proposed modifications to Trust
pursuant to the Date 5 court order will not cause Trust, Grandchild 1 Trust, or
Grandchild 2 Trust to lose its exempt status from the GST tax or otherwise become
subject to the GST tax.

Ruling 3

  Section 2501(a)(1) imposes a tax for each calendar year on the transfer of

property by gift 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 2512(a) provides that if the gift is made in property, the value thereof at

the date of the gift is considered the amount of the gift.

   Section 2512(b) provides that where property is transferred for less than

adequate and full consideration in money or money's worth, then the amount by which
the value of the property exceeded the value of the consideration is deemed to be a gift,
and is included in computing the amount of gifts made during the calendar year.

   In this case, the beneficiaries of Grandchild 1 Trust and the beneficiaries of

PLR-120623-20 10

Grandchild 2 Trust will have the same interests after the division that they had as
beneficiaries under Trust. Because the beneficial interests of the beneficiaries are
substantially the same, both before and after the proposed division, no transfer of
property will be deemed to occur as a result of the division of Trust. Accordingly, based
on the facts submitted and the representations made, we conclude that the proposed
division will not cause any beneficiary of Trust, Grandchild 1 Trust, or Grandchild 2
Trust to have made a gift subject to federal gift tax.

Ruling 4

 Section 2001(a) imposes a tax on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States.

  Section 2033 provides that the value of the gross estate includes the value of all

property to the extent of the interest therein of the decedent at the time of death.

   Section 2035(a) provides that if (1) the decedent transferred an interest in

property or relinquished a power with respect to any property, during the 3-year period
ending on the date of the decedent's death, and (2) the value of the property (or interest
therein) would have been included in the gross estate under § 2036, 2037, 2038,
or 2042 if the interest or power had been retained by the decedent on the date of death,
then the value of the gross estate shall include the value of any property (or interest
therein) that would have been so included. Under § 2035(b), the gross estate shall be
increased by the amount of any gift tax paid by the decedent or his estate on any gift
made by the decedent or his spouse during the 3-year period ending on the date of the
decedent’s death.

   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 an adequate and full
consideration in money or money's worth), by trust or otherwise, under which he has
retained for his life or for any period not ascertainable without reference to his death or
for any period which does not in fact end before his death (1) the possession or
enjoyment of, or the right to the income from, the property, or (2) the right, either alone
or in conjunction with any person, to designate the persons who shall possess or enjoy
the property or the income therefrom.

   Section 2037(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 an adequate and full
consideration in money or money's worth), by trust or otherwise, if (1) possession or
enjoyment of the property can, through ownership of such interest, be obtained only by
surviving the decedent, and (2) the decedent has retained a reversionary interest in the
property, and the value of such reversionary interest immediately before the death of
the decedent exceeds 5 percent of the value of such property.

PLR-120623-20 11

   Section 2038(a)(1) 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 an 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, either by the decedent alone or in conjunction with any person, to alter, amend,
revoke, or terminate, or where the decedent relinquished any such power during the
3-year period ending on the date of the decedent's death.

   In order for §§ 2036 through 2038 to apply, the decedent must have made a

transfer of property or any interest therein (except in the case of a bona fide sale for an
adequate and full consideration in money or money's worth) under which the decedent
retained an interest in, or power over, the income or corpus of the transferred property.
In the present case, the proposed division of Trust does not constitute a transfer within
the meaning of §§ 2036 through 2038. The beneficiaries of Grandchild 1 Trust and the
beneficiaries of Grandchild 2 Trust will have the same interests after the division that
they had as beneficiaries under Trust. Accordingly, based on the facts submitted and
the representations made, we conclude that the proposed division of Trust will not
cause the assets of Trust, Grandchild 1 Trust, or Grandchild 2 Trust to be includible in
the gross estate of any beneficiary of such trusts for federal estate tax purposes under
§ 2035, 2036, 2037, or 2038.

Ruling 5

   Section 61(a)(3) provides that gross income includes gains derived from dealings

in property.

   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) states 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) of the Income Tax Regulations 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.

PLR-120623-20 12

   Section 1.1001-1(h)(1) provides that the severance of a trust 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.

   In this case, Settlor’s will provides the terms governing distribution of Trust for

Child and her descendants. It is represented that the proposed division of Trust into two
equal separate trusts will be funded with assets of equal value. In addition, the trustee
is authorized by both the will’s express terms under Article VII.H and State Statute 2 to
make non-pro rata allocations of trust property in a severance. Given the beneficiaries’
different investment objectives and risk tolerances, the trustee plans to fund the new
equal separate trusts non-pro rata, but both trusts will be funded with assets of total
equal value. In addition, Trust will receive nothing in exchange for its allocation of trust
assets among the new trusts. Grandchild 1 Trust and Grandchild 2 Trust will transfer
nothing to Trust in exchange for their receipt of assets from Trust. Further, the
proposed division does not shift beneficial interests in Trust among the beneficiaries
who will enjoy equivalent legal entitlements before and after the proposed division.
Accordingly, based on the facts submitted and the representations made we conclude
that the proposed division of Trust will not cause Trust, Grandchild 1 Trust, Grandchild 2
Trust, or any beneficiary of any such trust to recognize any gain or loss from a sale or
other disposition of Trust assets under §§ 61 and 1001.

Ruling 6

    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-120623-20 13

    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 thereof. Thus, neither gain nor loss is realized on a
partition. See Rev. Rul. 56-437, 1956-2 C.B. 507 (conversion of a joint tenancy in stock
to a tenancy in common in order to eliminate the survivorship feature and the partition of
a joint tenancy in stock are not sales or exchanges).

    Similarly, divisions of trusts are also not sales or exchanges of trust interests

where each asset is divided pro rata among the new trusts. See Rev. Rul. 69-486,
1969-2 C.B. 159 (pro rata distribution of trust assets not a sale or exchange). Rev. Rul.
69-486 involved two beneficiaries of a trust who by mutual agreement, requested that
the trustee distribute all of the trust corpus consisting of notes to one of the beneficiaries
and all of the trust corpus consisting of common stock to the other beneficiary. The
trust instrument as well as local law was silent regarding whether the trustee had the
authority to make such a non-pro rata distribution of property in kind. Because the
trustee was not specifically authorized to make an allocation of specific property in kind,
the beneficiaries were treated as having an absolute right to a ratable in-kind
distribution. Rev. Rul. 69-486 treated the beneficiaries as receiving the notes and
common stock pro rata, followed by an exchange between the beneficiaries giving all of
the common stock to one and all of the notes to the other. Because, in substance, an
exchange between the beneficiaries was deemed to occur, Rev. Rul. 69-486 held that
the beneficiaries recognized gain under §§ 1001 and 1002. Thus, non-pro rata
distributions from trusts have the potential for being treated as pro rata distributions to
beneficiaries and then an exchange of the assets between the trusts which can
recognize gain or loss.

    In this case, as stated above, Trust’s assets will be distributed equally among

Grandchild 1 Trust and Grandchild 2 Trust, with each successor trust containing an
equal share of the assets of Trust. State Statute 2 authorizes the trustees to divide
Trust; and any non-pro rata funding of the new trusts resulting from the modifications
and division, whether mandatory or in the discretion of the trustee, is authorized by the
governing instrument under Article VII.H. Accordingly, based on the facts submitted
and the representations made, we conclude that the proposed division is not a
distribution under § 661 or § 1.661(a)-2(f). We further conclude that the proposed
division of Trust assets will not cause Trust, Grandchild 1 Trust, Grandchild 2 Trust, or
any beneficiary of any such trust to recognize any income, gain, or loss under § 662.

Ruling 7

   Section 1015(b) provides that if property is acquired after December 31, 1920, by

a transfer in trust (other than a transfer in trust by a gift, bequest, or devise), the basis
shall be the same as it would be in the hands of the grantor increased in the amount of
gain or decreased in the amount of loss recognized to the grantor on such transfer.

PLR-120623-20 14

   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 it is acquired, there shall be included the period for which
the property was held by any other person, if under this chapter such property has, for
the 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 the other person.

   In this case, as stated above, § 1001 does not apply to the proposed transaction.

Thus, after the division of Trust and transfer of the assets into the new trusts, the basis
in each asset will be the same in Grandchild 1 Trust and Grandchild 2 Trust as it was in
Trust under § 1015. Furthermore, we conclude that, under § 1223(2), the holding
period of the assets received by the new trusts will be the same as the holding period of
the assets in Trust.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

   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.

   The rulings in this letter pertaining to the federal estate and/or

generation-skipping transfer tax apply only to the extent that the relevant sections of the
Internal Revenue Code are in effect during the period at issue.

PLR-120623-20 15

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                              Sincerely,


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

  Enclosures
        Copy for § 6110 purposes
        Copy of this letter

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