Trust construction and six-way division preserved GST exemption

Plain-English summary

An irrevocable pre-September 25, 1985 trust passed through exercised limited powers of appointment into a trust for a grandchild and then a further trust for six great-grandchildren and their descendants. A state court construed the further trust's termination date under the applicable perpetuities period and approved dividing it into six equal family-line trusts. The IRS found that the construction resolved a bona fide ambiguity consistently with state law. The division did not shift a beneficial interest to a lower generation or extend vesting beyond the original trust period. Both actions therefore preserved exemption from generation-skipping transfer tax.

Ruling snapshot

• Question: Would a state-court construction and division of a grandfathered trust into six family-line trusts cause loss of GST-tax exemption?
• Outcome: Approved, GST-exempt status was preserved
• Key authorities: IRC §§ 2601, 2611, 2651; Treas. Reg. § 26.2601-1(b)(4); Commissioner v. Estate of Bosch

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202538016 Third Party Communication: None
Release Date: 9/19/2025 Date of Communication: Not Applicable
Index Number: 2601.00-00, 2601.04-01
Person To Contact:
----------------------------------------- ---------------, ID No. -----------------
-------------------------------------------------------- Telephone Number:

-------------------------------------------- Refer Reply To:
-------------------------------------- CC:PT&E:B04
PLR-122163-24
Date:
June 10, 2025
Re: -----------------------------------------

Legend

Settlor = --------------------------------
Spouse = ------------------------------
Trust 1 = --------------------------------------------------------------------------------

-

Trust 2 = --------------------------------------------------------------------------------

Trust 3 = --------------------------------------------------------------------------------

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

Grandchild = --------------------------------------
Great-Grandchild 1 = --------------------------------------
Great-Grandchild 2 = -------------------------------------------
Great-Grandchild 3 = -------------------------------
Great-Grandchild 4 = --------------------------------------
Great-Grandchild 5 = --------------------------------------------
Great-Grandchild 6 = --------------------------------------------
Individual = -------------------------------
Date 1 = ------------------------
Date 2 = -------------------------
Date 3 = -----------------
Date 4 = --------------------------
Date 5 = ---------------------------
Trust Company = --------------------------------------------
State = -------------
State Court = ----------------------------------------------------
State Statute 1 =----------------------------------------------------------------------------------------

PLR-122163-24 2

State Statute 2 = --------------------------------------------------------------------------
State Statute 3 = ---------------------------------------------------------------------------------

Case 1 = ----------------------------------------------------
Case 2 = ----------------------------------------------------

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

This letter responds to your authorized representative’s letter dated November 15,
2024, and subsequent correspondence, requesting a ruling with respect to the federal
generation-skipping transfer (GST) tax consequences of a state court construction and
proposed modification to divide a trust.

The facts and representations submitted are summarized as follows:

On Date 1, a date prior to September 25, 1985, Settlor created an irrevocable trust,
Trust 1, for the benefit of Spouse during Spouse’s lifetime. Paragraph 2 of Trust 1
granted Spouse a testamentary power to appoint the balance of Trust 1 upon Spouse’s
death to or for the benefit of such persons, other than Spouse, Spouse’s creditors,
Spouse’s estate or the creditors of Spouse’s estate, as Spouse shall direct and appoint.
Trust 1 is governed by the laws of State.

Spouse died testate on Date 2, also a date prior to September 25, 1985, survived by
Grandchild and other descendants. Pursuant to Clause Third of Spouse’s Will,
including one codicil, Spouse exercised the power of appointment over Trust 1 by
appointing a portion of the balance of Trust 1 to Trust 2 for the benefit of Grandchild.

Under the terms of Trust 2 as set forth in Clause Third of Spouse’s Will, the trustee is to
apply the net income of the trust for the use of Grandchild as the “beneficiary” during
Grandchild’s lifetime. The trustee has no authority to distribute principal. Trust 2
granted Grandchild a testamentary limited power of appointment to appoint Trust 2
upon Grandchild’s death, on such lawful terms and conditions, in favor of one or more of
Settlor’s and Spouse’s issue living at the death of Grandchild (excluding Grandchild), or
the wife or widow of such issue. To the extent Grandchild’s testamentary limited power
of appointment is not effectively exercised, the trustee shall transfer, pay over and
deliver the principal to the issue of Grandchild living at the expiration of the trust term, in
equal shares, per stirpes.

Grandchild died testate on Date 3, a date after September 25, 1985, predeceased by
Grandchild’s spouse and survived by six children, Great-Grandchild 1,
Great-Grandchild 2, Great-Grandchild 3, Great-Grandchild 4, Great-Grandchild 5, and
Great-Grandchild 6 (singly, Great-Grandchild; collectively, Great-Grandchildren), and
great-great grandchildren.

PLR-122163-24 3

In Article Fourth of Grandchild’s Will, as amended by the First Codicil (Grandchild’s
Will), Grandchild exercised multiple testamentary limited powers of appointment,
including the testamentary limited power to appoint the property of Trust 2, as follows:

I hereby exercise [the powers of appointment granted to Grandchild], by
directing the trustee or trustees of such trusts which are administering
such trusts at the time of my death, to continue to administer such trusts
as provided herein for the benefit of my then living children and the issue,
per stirpes, of any of my children who may then be deceased for the
longest possible terms of such trusts as they are limited in the above
described trust agreements or wills, as amended.

Under Article Fourteenth of Grandchild’s Will, each trust created under Grandchild’s
Will, including a trust created by an exercise of Grandchild’s power of appointment
“shall terminate only upon the expiration of the maximum period permitted by applicable
law of the jurisdiction governing such trust,” unless otherwise sooner terminated.

Based on the above, Grandchild’s exercise of the power of appointment caused the
property of Trust 2 to be held in further trust, Trust 3, with the following terms. The
trustee shall pay or apply all or so much of the income and the principal to or for
Grandchild’s children (Great-Grandchildren) and their issue, as the trustee, in its sole
and absolute discretion shall determine to be in the best interests of the beneficiaries.
Such distributions shall be made in proportionate shares (per stirpital shares in the case
of issue of deceased children) unless the trustee has a compelling reason to make such
distributions in disproportionate shares.

Termination Date

On Date 4, Trust Company, as the trustee of Trust 2 and Trust 3, filed a State Court
petition seeking a construction of relevant provisions of Clause Third of Spouse’s Will
and Article Fourth and Article Fourteenth of Grandchild’s Will that govern the
termination of Trust 3. On Date 5, State Court issued a Decree construing the
provisions of Clause Third of Spouse’s Will and Article Fourth and Article Fourteenth of
Grandchild’s Will and determined that Trust 3 will terminate at the expiration of the
permissible perpetuities period.

Under State Statute 1, the permissible period of the rule against perpetuities for a trust
created by the exercise of a limited power of appointment over a trust begins at the time
of the creation of the power of appointment. State Statute 2 provides that no estate in
property shall be valid unless it must vest, if at all, not later than twenty-one years after
one or more lives in being at the creation of the estate and any period of gestation
involved.

In the Date 5 Decree, State Court determined that the beginning of the permissible
perpetuities period for Trust 3 relates back to the Date 1 creation of the original limited

PLR-122163-24 4

power of appointment granted by Settlor to Spouse. Because none of the beneficiaries
of Trust 3 (Great-Grandchildren and their issue) were born prior to Date 1, Individual
(the youngest issue of Settlor who was living on Date 1) is the measuring life. Thus,
State Court concluded that Trust 3 terminates twenty-one years after the first to occur of
the death of all of Grandchild’s issue (as the beneficiaries of Trust 3), or the death of
Individual.

Proposed Division and Modification of Trust 3

In the same petition filed on Date 4, Trust Company petitioned State Court for the
modification and division of Trust 3 into six separate trusts along family lines.

State Statute 3 provides, in relevant part, that upon the petition of the trustee and upon
notice to all such persons, the court having jurisdiction of an express trust, may direct
the establishment of two or more separate trusts for any reason not directly contrary to
the primary purpose of the trust.

Under the terms of Trust 3, after Grandchild’s death on Date 3, all property of Trust 3
has continued to be held in one share for the benefit of Grandchild’s issue. Because
the Great-Grandchildren have different investment goals and distribution needs, Trust
Company petitioned State Court to divide Trust 3 into six equal, separate trust shares
for the benefit of each of the Great-Grandchildren and their respective issue (Resulting
Trusts).

The petition states that if State Court construes the relevant provisions of Spouse’s Will
and Grandchild’s Will, such that a favorable ruling is obtained, each Resulting Trust will
be identical to the terms of Trust 3 with the following modifications: (1) each Resulting
Trust shall terminate twenty-one years after the first to occur of the death of all of
Grandchild’s issue who are the beneficiaries of such Resulting Trust or the death of
Individual; and (2) if a Great-Grandchild dies during the term of his or her Resulting
Trust, the deceased Great-Grandchild’s Resulting Trust shall continue to be held in trust
for the benefit of such Great-Grandchild’s per stirpital issue, and in default of any such
issue, shall be divided equally among the remaining separate Resulting Trusts.

In the Date 5 Decree, State Court approved the division of Trust 3 into the Resulting
Trusts and the modifications to Trust 3, contingent upon the receipt of a favorable ruling
from the Internal Revenue Service.

It is represented that there have been no additions, constructive or actual, to Trust 2 or
Trust 3 after September 25, 1985.

You have requested the following rulings:

1. State Court’s construction will not cause Trust 3 or any Resulting Trust to lose its
   status as exempt from the application of GST tax imposed under § 2601.

PLR-122163-24 5

2. State Court’s modification and division of Trust 3 will not cause Trust 3 or any
   Resulting Trust to lose its status as exempt from the application of GST tax imposed
   under § 2601.

LAW AND ANALYSIS

Section 2601 imposes a tax on every generation-skipping transfer (GST), which is
defined under § 2611 as a taxable distribution, taxable termination, and a direct skip.

Section 1433(b)(2)(A) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(b)(1) of the
Generation-Skipping Transfer Tax Regulations provide that the GST tax shall not apply
to any GST under a trust that was irrevocable on September 25, 1985, but shall apply to
the extent that the 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)(1), (2), or (3) will not cause the trust to
lose its exempt status. The regulation provides that the rules contained in the
paragraph are applicable only for purposes of determining whether an exempt trust
retains its exempt status for GST tax purposes. 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)(C) provides that a judicial construction of a governing
instrument to resolve an ambiguity in the terms of the instrument or to correct a
scrivener’s error will not cause an exempt trust to be subject to the GST provisions if:
(1) the judicial action involves a bona fide issue; and (2) the construction is consistent
with applicable state law that would be applied by the highest court of the state.

Section 26.2601-1(b)(4)(i)(E), Example 3, considers a situation where, in 1980, Grantor
established an irrevocable trust for the benefit of Grantor’s children, A and B, and their
issue. The trust is to terminate on the death of the last to die of A and B, at which time
the principal is to be distributed to their issue. However, the provision governing the
termination of the trust is ambiguous regarding whether the trust principal is to be
distributed per stirpes, only to the children of A and B, or per capita among the children,
grandchildren, and more remote issue of A and B. In 2002, the trustee filed a
construction suit with the appropriate local court to resolve the ambiguity. The court
issued an order construing the instrument to provide for per capita distributions to the
children, grandchildren, and more remote issue of A and B living at the time the trust
terminates. The court’s construction resolves a bona fide issue regarding the proper
interpretation of the instrument and is consistent with applicable state law as it would be

PLR-122163-24 6

interpreted by the highest court of the state. Therefore, the trust will not be subject to
the GST tax.

In Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), the Court considered
whether a state trial court’s characterization of property rights conclusively binds a
federal court or agency in a federal estate tax controversy. The Court concluded that
the decision of a state trial court as to an underlying issue of state law should not be
controlling when applied to a federal statute. Rather, the highest court of the state is the
best authority on the underlying substantive rule of state law to be applied in the federal
matter. If there is no decision by that court, then the federal authority must apply what it
finds to be state law after giving “proper regard” to the state trial court’s determination
and to relevant rulings of other courts of the state. In this respect, the federal agency
may be said, in effect, to be sitting as a state court.

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
transfer or the creation of a new GST transfer. However, a modification that is
administrative in nature that only indirectly increases the amount transferred (for
example, by lowering administrative costs or income taxes) will not be considered a shift
in a beneficial interest in a trust.

Section 26.2601-1(b)(4)(i)(E), Example 5, illustrates a situation where, in 1980, Grantor
established an irrevocable trust for the benefit of Grantor’s 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.

PLR-122163-24 7

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 in the original trust. Therefore, the two partitioned trusts resulting from
the division will not be subject to the provisions of chapter 13.

In this case, Grandchild’s exercise of the power of appointment under Article Fourth of
Grandchild’s Will created a bona fide issue regarding the termination date and final
distribution of Trust 3. State Court’s construction of the relevant provisions in Clause
Third of Spouse’s Will and Article Fourth and Article Fourteenth of Grandchild’s Will is
consistent with applicable state law that would be applied by the highest court of the
state. See Case 1; Case 2. Accordingly, based on the facts submitted and the
representations made, we conclude that State Court’s construction will not cause
Trust 3 or any Resulting Trust to lose its status as exempt from the application of GST
tax under § 2601.

Further, the proposed modification and division of Trust 3 into Resulting Trusts will not
result in a shift of any beneficial interest to any beneficiary who occupies a generation
lower than the persons holding the beneficial interests prior to the modification and
division. The proposed modification and division of Trust 3 into Resulting Trusts will not
extend the time for vesting of any beneficial interest beyond the period provided for in
Trust 3, as construed by State Court Decree. Accordingly, based on the facts submitted
and the representations made, we conclude that State Court’s modification and division
of Trust 3 will not cause Trust 3 or the Resulting Trusts to lose its status as exempt from
the application of GST tax imposed under § 2601.

Except as expressly provided herein, we neither express nor imply any opinion
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 taxpayers accompanied by penalty of perjury statements executed by
the appropriate parties. While this office has not verified 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 6100(k)(3) provides
that it may not be used as precedent.

PLR-122163-24 8

Sincerely,

Karlene M. Lesho

Karlene M. Lesho
Chief, Branch 4
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

Enclosure:
Copy for § 6110 purposes

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