Splitting a GST-grandfathered trust into five family trusts triggers no tax

Plain-English summary

A family asked the IRS how dividing one irrevocable trust into five separate trusts, one for each branch of the family, would be taxed. The original trust was created before the generation-skipping transfer (GST) tax took effect and is "grandfathered," meaning it is exempt from GST tax. A court had approved splitting it into five equal trusts along family lines, each funded with one-fifth of every asset and otherwise governed by the same terms, contingent on a favorable IRS ruling. The IRS ruled the division is tax-free across the board. It does not cost the trust its grandfathered GST status, because no beneficial interest shifts to a lower generation and no vesting date is pushed back. It is not a sale or a taxable distribution, so no income or gain is recognized under Sections 61, 661, 662, or 1001 (a pro rata division of trust assets is not a sale or exchange). The five new trusts keep the old trust's basis and holding period under Sections 1015 and 1223. The assets are not pulled into any beneficiary's gross estate under Sections 2036 through 2038, and no gift occurs under Section 2501, because the beneficiaries' interests are substantially the same before and after. This is one of a set of companion rulings issued to related trusts; it was signed by the Office of Associate Chief Counsel (Passthroughs & Special Industries).

Ruling snapshot

• Question: Does dividing one GST-grandfathered irrevocable trust into five pro rata family trusts cause any income, gift, estate, or GST tax?
• Outcome: Approved (all five requested rulings granted; the division is tax-free).
• Key authorities: IRC §§ 61, 661, 662, 1001, 1015, 1223, 2036-2038, 2501, 2601; Treas. Reg. § 26.2601-1(b)(4)(i) (including Example 5); Rev. Rul. 56-437; Rev. Rul. 69-486.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202303009 Third Party Communication: None
Release Date: 1/20/2023 Date of Communication: Not Applicable
Index Number: 1001.00-00, 1015.00-00,
1015.03-00, 1015.03-01, Person To Contact:
1223.00-00, 2036.00-00, ----------------, ID No. -----------------
2036.01-00, 2038.00-00, Telephone Number:
2038.01-00, 2038.01-01, ---------------------
2501.00-00, 2501.01-00, Refer Reply To:
2601.00-00, 2601.01-00, CC:PSI:4
61.00-00, 661.00-00, 662.00- PLR-110422-22
00 Date:
October 18, 2022

-----------------------------

     Re: ----------------------------------------------

------------------------------------------------------------

Legend

Grandparent = ------------------------------
Date 1 = ---------------------
Trust 1 = ---------------------------------------------
---------------------------
Trust 2 = ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-----------------------------
--------
Will = -------------------------------------------------------------------
--------------------------------------
Grandchild 1 = --------------------------------
-------
Grandchild 2 = ----------------------
---------
Great- = ---------------------------
Grandchild 1 -------
Great- = -----------------------------------
Grandchild 2 -------
Great- = -------------------------
Grandchild 3 -------

Great- = ----------------------------
Grandchild 4 -------
Great- = ------------------------
Grandchild 5 -------------------------
Great- = ------------------------
Grandchild 6 -------
Trustees = ---------------------------------------------------------
Resulting = ---------------------------------------------------------
Trusts -------------------------------------------------------
----------------------------------------------------
---------------------------------------------------------
-----------------------------------------------------------------
Statutes = ---------------------------------------------------------------------------------------
------------
Court = ----------------------------------------------
Date 2 = -------------------
Date 3 = ---------------------

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

This letter responds to your authorized representatives’ letter of May 19, 2022, and
subsequent correspondence, requesting rulings regarding the income, estate, gift, and
generation-skipping transfer (GST) tax consequences of the proposed division of
Trust 1.

The facts and representations submitted are as follows:

Grandparent died on Date 1, leaving the residue of Grandparent’s probate estate in
equal shares to Trust 1 and Trust 2, testamentary trusts established under Will. Trust 1
is held for the benefit of Grandchild 1 and Grandchild 1’s descendants, and Trust 2 is
held for the benefit of Grandchild 2 and Grandchild 2’s descendants. Grandchild 1 has
five children, Great-Grandchild 1, Great-Grandchild 2, Great-Grandchild 3, Great-
Grandchild 4, and Great-Grandchild 5. Grandchild 2 has one child, Great-Grandchild 6.
Neither Grandchild 1 nor Grandchild 2 has any deceased children. Trustees serve as
trustees of Trust 1. Trust 1 is the subject of this ruling request.

Section 9(a) of Trust 1 provides that Trustees may distribute the net income of Trust 1
to or for the benefit of Grandchild 1 and Grandchild 1’s descendants in such proportions
and at such times as Trustees determine is desirable or necessary, considering their
needs, best interests, and other sources of income, or may annually accumulate and
add all or part of the net income to the principal of Trust 1.

Section 9(b) of Trust 1 provides that Trustees may distribute the principal of Trust 1 to
or for the benefit of Grandchild 1 and Grandchild 1’s descendants in such proportions

and at such times as Trustees determine is desirable or necessary for their medical
care, comfortable maintenance, education, or general support and welfare, considering
their other resources.

Section 9(c) of Trust 1 provides that Trust 1 will terminate 21 years after the death of the
survivor of Grandchild 1 and Grandchild 2, and the principal of Trust 1 will be distributed
to Grandchild 1’s descendants, per stirpes. If, however, Grandchild 1 and
Grandchild 1’s descendants all die before that date, Trust 1 will terminate early, and the
principal of Trust 1 will be distributed to Trust 2.

Grandchild 1’s descendants have differing personal and financial situations and,
consequently, Trustees, propose to divide Trust 1 along family lines into five separate
shares (Resulting Trusts), one for the benefit of each of Grandchild 1’s children and
their respective descendants plus Grandchild 1, and to fund each Resulting Trust with
one-fifth of each asset of Trust 1 (Proposed Division). Any distribution to Grandchild 1
from a Resulting Trust will be made pro rata from each Resulting Trust. The provisions
of each Resulting Trust otherwise will be identical and unchanged from the provisions of
Trust 1.

In accordance with Trust 1, each Resulting Trust will terminate 21 years after the death
of the survivor of Grandchild 1 and Grandchild 2, and the principal will be distributed to
the child of Grandchild 1 for whom Resulting Trust was created or, if such child is
deceased, to the child’s descendants, per stirpes. If, however, Grandchild 1, the child of
Grandchild 1 for whom Resulting Trust was created, and such child’s descendants all
die before that date, Resulting Trust will terminate early, and the principal will be
distributed equally among the other Resulting Trusts. If Grandchild 1 and
Grandchild 1’s descendants all die before that date, the principal instead will be
distributed to Trust 2.

Under the authority of Statutes, Court issued Order on Date 2 and Amended Order on
Date 3 authorizing the Proposed Division upon receipt of a favorable private letter ruling
from the Internal Revenue Service.

Trust 1 was irrevocable prior to September 25, 1985, and no additions, actual or
constructive, have been made to Trust 1.

You request the following rulings:

1. Proposed Division will not cause Trust 1 or any Resulting Trust to lose
   grandfathered status for purposes of the GST tax, or otherwise become subject to
   GST tax.

2. Proposed Division will not be treated as a distribution and cause any Resulting Trust
   to recognize income, gain or loss from a sale or other disposition of property under
   § 61, § 661, § 662, or § 1001.

3. The adjusted basis and holding period of each of the Resulting Trust assets will be
   the same as the adjusted basis and holding periods of the Trust 1 assets under
   § 1015 and § 1223(2).

4. Proposed Division will not cause such assets to be includable in the gross estate of
   any of the beneficiaries under § 2036, § 2037, or § 2038.

5. Proposed Division will not constitute a transfer subject to federal gift tax under
   § 2501.

Ruling 1

Section 2601 imposes a tax on every GST, which is defined under § 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 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 will not cause the trust to lose its exempt status. In general,
unless specifically provided otherwise, the rules contained in this paragraph are
applicable only for purposes of determining whether an exempt trust retains its exempt
status for GST tax purposes. Thus (unless specifically noted), 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 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 (including a trustee distribution, settlement, or construction that does
not satisfy § 26.2601-1(b)(4)(i)(A), (B), or (C)) by judicial reformation, or nonjudicial
reformation that is valid under applicable state law, will not cause an exempt trust to be
subject to the provisions of chapter 13, 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.

Section 26.2601-1(b)(4)(i)(E), Example 5, provides as follows. In 1980, Trustor
established an irrevocable trust for the benefit of his two children, A and B, and their
issue. Under the terms of the trust, the trustee has the discretion to distribute income
and principal to A, B, and their issue in such amounts as the trustee deems appropriate.
On the death of the last to die of A and B, the trust principal is to be distributed to the
living issue of A and B, per stirpes. In 2002, the appropriate local court approved the
division of the trust into two equal trusts, one for the benefit of A and A's issue and one
for the benefit of B and B's issue. The trust for A and A's issue provides that the trustee
has the discretion to distribute trust income and principal to A and A's issue in such
amounts as the trustee deems appropriate. On A's death, the trust principal is to be
distributed equally to A's issue, per stirpes. If A dies with no living descendants, the
principal will be added to the trust for B and B's issue. The trust for B and B's issue is
identical (except for the beneficiaries), and terminates at B's death at which time the
trust principal is to be distributed equally to B's issue, per stirpes. If B dies with no living
descendants, principal will be added to the trust for A and A's issue. The division of the
trust into two trusts does not shift any beneficial interest in the trust to a beneficiary who
occupies a lower generation (as defined in § 2651) than the person or persons who held
the beneficial interest prior to the division. In addition, the division does not extend the
time for vesting of any beneficial interest in the trust beyond the period provided for in
the original trust. Therefore, the two partitioned trusts resulting from the division will not
be subject to the provisions of chapter 13.

In the present case, Trust 1 was irrevocable on September 25, 1985. It is represented
that no additions, actual or constructive, have been made to Trust 1 after that date.

Proposed Division is substantially similar to the situation described in § 26.2601-
1(b)(4)(i)(E), Example 5. Under Proposed Division, Resulting Trusts will, except as
described above, be administered under the original provisions of Trust 1.

Based on the facts submitted and the representations made, we conclude that
Proposed Division will not shift any beneficial interest in Trust 1 to a person who
occupies a lower generation than the persons holding the beneficial interest prior to
Proposed Division. In addition, Proposed Division will not extend the time for vesting of
any beneficial interest beyond the period provided for in Trust 1. Accordingly, Proposed
Division will not cause Trust 1 or any Resulting Trust to lose grandfathered status for
purposes of the GST tax, or otherwise become subject to GST tax.

Ruling 2

Section 61(a)(3) and (15) provides that gross income includes gains derived from
dealings in property and income 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.

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) 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.

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).

In the present case, the legal entitlements, as well as the rights and powers, of the
beneficiaries will remain the same in kind and extent after Proposed Division.
Accordingly, based on the facts submitted and representations made, Proposed
Division will not result in the realization of gain or loss under § 61 and § 1001.
Moreover, based solely on the facts submitted and representations made, we conclude
that Proposed Division is not a distribution under § 661 or § 1.661(a)-2(f). We further
conclude that Proposed Division will not cause Trust 1, Resulting Trusts, or the
beneficiaries of Trust 1 or any Resulting Trust to recognize any income under § 662.

Ruling 3

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 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.

Based on the facts submitted and the representations made, we conclude that because
§ 1001 does not apply to Proposed Division, under § 1015 the basis of the assets
received by Resulting Trusts will be the same as the respective basis of the assets held
by Trust 1. We further conclude that under § 1223(2) the holding periods of the assets
received by Resulting Trusts will be the same as the holding periods of the assets in
Trust 1.

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 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.

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 decedent’s 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 beneficiaries of Resulting Trusts will have the same interests
after Proposed Division that they had as beneficiaries under Trust 1. The distribution,
management, and termination provisions of each Resulting Trust will be substantially
similar to the current distribution, management, and distribution provisions of Trust 1.
Accordingly, based on the facts submitted and the representations made, we conclude
that Proposed Division will not cause any portion of the assets of Resulting Trusts to be
includible in the gross estate of any of the beneficiaries of Resulting Trusts under
§ 2036, § 2037, or § 2038.

Ruling 5

Section 2501 imposes a tax for each calendar year on the transfer of property by gift
during such calendar year by any individual, resident or nonresident.

Section 2511 provides that, subject to certain limitations, the gift tax applies whether the
transfer is in trust or otherwise, direct or indirect, and whether the property transferred is
real or personal, tangible or intangible.

Section 2512(a) provides that if the gift is made in property, the value thereof at the date
of the gift is considered the amount of the gift.

Section 2512(b) provides that where property is transferred for less than an adequate
and full consideration in money or money's worth, then the amount by which the value
of the property exceeded the value of the consideration is deemed a gift that is included
in computing the amount of gifts made during the calendar year.

In the present case, the beneficial interests, rights, and expectancies of the
beneficiaries will be substantially the same, both before and after Proposed Division.
Thus, no transfer of property will be deemed to occur as a result of Proposed Division.
Accordingly, based on the facts submitted and representations made, we conclude that
Proposed Division will not result in a transfer by any beneficiary of Trust 1 that is subject
to the gift tax under § 2501.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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.

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 representatives.

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)

                                By:      Melissa C. Liquerman
                                      Melissa C. Liquerman
                                      Senior Counsel, Branch 4
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purposes

cc: