Private Letter Ruling   
Number: 202017018   
Internal Revenue Service   
November 29, 2019   
     
     
     
Internal Revenue Service   
Department of the Treasury   
Washington, DC 20224   
     
Number: 202017018   
Release Date: 4/24/2020   
Index Number: 671.02-00, 2041.03-00, 2501.00-00, 2514.00-00     
Third Party Communication: None   
Date of Communication: Not Applicable   
Person To Contact:   
ID No.   
Telephone Number:   
Refer Reply To:   
CC:PSI:B01   
PLR-112945-19   
Date:  November 29, 2019   
     
Dear ********:     
     
This responds to a letter dated May 28, 2019, requesting rulings under the Internal Revenue Code.   
     
 Facts    
     
The information and representations submitted are as follows. Trust is an irrevocable trust, for the benefit of Grantor, Grantor's Spouse, Grantor's issue, Grantor's Parents, and the other issue of Grantor's Parents (collectively, the "Beneficiaries") created as of Date. Trust is a domestic trust administered in, and governed by, the laws of State 1. A corporate trustee (Trustee) is the sole trustee of Trust. Grantor resides in State 2.   
     
Grantor transferred certain property to Trust all of which is treated as separate property under the laws of State 2.   
     
While Grantor is alive, the Distribution Committee is to be in existence. Pursuant to the terms of Trust as amended, Trustee must distribute income and principal of the trust estate as directed in writing by the Distribution Committee, Grantor, or both, as follows: (1) Income or principal to any Beneficiary (other than Grantor's Spouse) as determined by a majority of the Distribution Committee, other than Grantor or Grantor's Spouse, acting in a non-fiduciary capacity, with the written consent of Grantor ("Grantor's Consent Power"); (2) Income or principal to any Beneficiary as determined by unanimous decision of the Distribution Committee, other than Grantor or Grantor's Spouse, acting in a non-fiduciary capacity ("Unanimous Committee Power"); and, (3) Principal to any Beneficiary (other than Grantor or Grantor's Spouse) as determined by Grantor, acting in a non-fiduciary capacity, for any one or more of such Beneficiary's support, health, or education (Grantor's Sole Power).   
     
Additionally, the Distribution Committee, either pursuant to the Grantor's Consent Power or the Unanimous Committee Power, has the power to direct Trustee to distribute assets from Trust to any trust for the benefit of one or more Beneficiaries.   
     
Grantor may appoint all or any part of the principal of Trust, outright or in trust, at his death in favor of the issue of Grantor's parents (other than Grantor, his estate, his creditors, or the creditors of his estate), Grantor's Spouse, or any one or more charitable organizations as Grantor designates ("Grantor's Testamentary Power"). Any part of the principal of Trust not effectively appointed by Grantor upon his death will be distributed to a designated trust.   
     
The Distribution Committee and/or Grantor, as applicable, may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of Trust to the exclusion of others. Other than as provided above, income and principal of Trust may not be distributed to Grantor.   
     
The Distribution Committee is initially composed of Grantor, Grantor's parents and Grantor's sister. Until the death of Grantor, the Distribution Committee must have at least two members, other than Grantor or Grantor's Spouse. If any member of the Distribution Committee ceases to act, the remaining members will act. If there are less than two remaining members, other than Grantor or Grantor's Spouse, the Trust Protector will appoint any one or more of the Beneficiaries other than Grantor's Spouse to the Distribution Committee, provided that the number of members does not exceed four and that any member of the Distribution Committee is an adult, competent person. Notwithstanding the above, if less than two individuals are eligible to serve, the Trust Protector shall appoint a guardian or other adult to serve on behalf of a minor Beneficiary.   
     
The members of the Distribution Committee in their capacities as such shall not serve or act in a fiduciary capacity. As long as the Distribution Committee is acting, Trustee will not have power to make distributions to the Beneficiaries without written guidance received from the Distribution Committee, Grantor, or both, as applicable. The Distribution Committee shall cease upon the death of Grantor, and Trustee shall have the powers held by the Distribution Committee. Trust will be amended effective Date to revise certain provisions of Trust so that the trust protector and Trustee do not hold any powers that would cause Grantor to be treated as the owner of Trust during the period that the Distribution Committee is in existence.   
     
You requested the following rulings:   
     
1. During the period the Distribution Committee is serving, no portion of the items of income, deductions, and credits against tax of Trust will be included in computing the taxable income, deductions, and credits of Grantor or of any member of the Distribution Committee under § 671;   
     
2. The contribution of property to Trust by Grantor will not be a completed gift subject to federal gift tax;   
     
3. Any distribution of property by the Distribution Committee from Trust to Grantor will not be a completed gift, subject to federal gift tax, by any member of the Distribution Committee;   
     
4. Any distribution of property by the Distribution Committee from Trust to any Beneficiary of Trust, other than to Grantor, will not be a completed gift, subject to federal gift tax, by any member of the Distribution Committee; and   
     
5. No member of the Distribution Committee upon his or her death will include in his or her estate any property held in Trust because such member is deemed to have a general power of appointment within the meaning of §§ 2041 and 2514 over property held in Trust.   
     
 Law and Analysis    
     
 Ruling 1    
     
Section 671 provides that where it is specified in subpart E of part I of subchapter J that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter 1 in computing taxable income or credits against the tax of an individual.   
     
Section 672(a) provides, for purposes of subpart E, the term "adverse party" means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or non-exercise of the power which he possesses respecting the trust.   
     
Sections 673 through 677 specify the circumstances under which the grantor is treated as the owner of a portion of a trust.   
     
Section 673(a) provides that the grantor shall be treated as the owner of any portion of a trust in which the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds five (5) percent of the value of such portion.   
     
Section 674(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.   
     
Section 674(b) provides that § 674(a) shall not apply to the powers described in § 674(b) regardless of whom held.   
     
Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable only by will, other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.   
     
Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute corpus to or for a beneficiary, provided that the power is limited by a reasonably definite standard.   
     
Under § 675 and applicable regulations, the grantor is treated as the owner of any portion of a trust if, under the terms of the trust agreement or circumstances attendant on its operation, administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust.   
     
Section 676(a) provides that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provision of part I, subchapter J, chapter 1, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse party, or both.   
     
Section 677(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under § 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be (1) distributed to the grantor or the grantor's spouse; (2) held or accumulated for future distribution to the grantor or the grantor's spouse; or (3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse.   
     
Section 678(a) provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject a grantor of a trust to treatment as the owner thereof.   
     
Section 679(a) provides that a United States person who directly or indirectly transfers property to a foreign trust shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust.   
     
Based solely on the facts and representations submitted, we conclude an examination of Trust, as amended, reveals none of the circumstances that would cause Grantor or any member of the Distribution Committee to be treated as the owner of any portion of Trust under sections 673, 674, 676, 677, 678, or 679 as long as the Distribution Committee remains in existence and serving and Trust remains a domestic trust.   
     
We further conclude that an examination of Trust, as proposed to be amended, reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of Grantor under section 675. Thus, the circumstances attendant on the operation of Trust will determine whether Grantor will be treated as the owner of any portion of Trust under section 675. This is a question of fact, the determination of which must be deferred until the federal income tax returns of the parties involved have been examined by the office with responsibility for such examination.   
     
 Rulings 2 and 3    
     
Section 2501(a)(1) provides for the imposition of a gift tax on the transfer of property by gift. Section 2511(a) provides that the gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.   
     
Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete as to any property with respect to which the donor has so parted with dominion and control as to leave the donor with no power to change the disposition of the property, whether for the donor's own benefit, or for the benefit of another. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and its scope determined.   
     
Section 25.2511-2(b) provides an example, where the donor transfers property in trust to pay the income to the donor, or accumulate it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder among the donor's descendants. The regulation concludes that no portion of the transfer is a completed gift. However, if the donor had not retained a testamentary power of appointment, but had instead provided that the remainder should go to X or his heirs, the entire transfer would be a completed gift.   
     
Section 25.2511-2(c) provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself. A gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard.   
     
Section 25.2511-2(f) provides that the relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by death of the donor, is regarded as the event which completes the gift and causes the gift tax to apply.   
     
Section 25.2511-2(g) provides that if a donor transfers property to himself as Trustee (or to himself and some other person, not possessing a substantial adverse interest, as Trustees), and retains no beneficial interest in the trust property and no power over it except fiduciary powers, the exercise or non-exercise of which is limited by a fixed or ascertainable standard, to change the beneficiaries of the transferred property, the donor has made a completed gift.   
     
Under § 25.2511-2(e), a donor is considered as possessing a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property. Section 25.2511-2(e) does not define "substantial adverse interest."   
     
Section 25.2514-3(b)(2) provides, in part, that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power. Section 25.2514-3(b)(2) also provides that a co-holder of a power is considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate.   
     
In Estate of Sanford v. Commissioner, 308 U.S. 39 (1939), the taxpayer created a trust for the benefit of named beneficiaries and reserved the power to revoke the trust in whole or in part, and to designate new beneficiaries other than himself. Six years later, in 1919, the taxpayer relinquished the power to revoke the trust, but retained the right to change the beneficiaries. In 1924, the taxpayer relinquished the right to change the beneficiaries. The Court stated that the taxpayer's gift is not complete, for purposes of the gift tax, when the donor has reserved the power to determine those others who would ultimately receive the property. Accordingly, the Court held that the taxpayer's gift was complete in 1924, when he relinquished his right to change the beneficiaries of the trust. A's retention of a power to change the beneficial interests in a trust causes the transfer to the trust to be incomplete for gift tax purposes, even though the power may be defeated by the actions of third parties. Goldstein v. Commissioner, 37 T.C. 897 (1962). See, also, Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).   
     
Grantor retained Grantor's Consent Power over the income and principal of Trust. Under § 25.2511-2(e), a donor is considered to have a power if it is exercisable in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. The Distribution Committee members are not takers in default for purposes of § 25.2514-3(b)(2). They are merely co-holders of the power. Under § 25.2514-3(b)(2), a co-holder of a power is only considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. In this case, the Distribution Committee ceases to exist upon Grantor's death. Accordingly, the Distribution Committee members do not have interests adverse to Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). Therefore, Grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained Grantor's Consent Power.   
     
Grantor also retained Grantor's Sole Power over the principal of Trust. Under § 25.2511-2(c), a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard. In this case, Grantor's Sole Power gives Grantor the power to change the interests of the beneficiaries. Grantor's Sole Power is a non-fiduciary power. Accordingly, the retention of Grantor's Sole Power causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.   
     
Further, Grantor retained Grantor's Testamentary Power to appoint the property in trust or outright to the issue of Grantor's parents (other than Grantor's estate, Grantor's creditors, or the creditors of Grantor's estate), Grantor's spouse, and any one or more charitable organizations described in § 501(c)(3). Under § 25.2514-3(b)(2), the retention of a testamentary power to appoint the remainder of a trust is considered a retention of dominion and control over the remainder. Accordingly, the retention of this power causes the transfer of property to Trust to be incomplete with respect to the remainder in Trust for federal tax purposes.   
     
Finally, the Distribution Committee members possess Unanimous Committee Power over income and principal. These powers are not conditions precedent to Grantor's powers. Grantor's powers over the income and principal are presently exercisable and not subject to a condition precedent. Grantor retains dominion and control over the income and principal of Trust until the Distribution Committee members exercise their Unanimous Committee Power. Accordingly, Unanimous Committee Power does not cause the transfer of property to be complete with respect to the income and principal interests in Trust for federal gift tax purposes.   
     
If the Distribution Committee ceases to exist, Trustee, in its fiduciary capacity, also has the power to distribute net income or principal to one or more Beneficiaries. The powers of Trustee are not conditions precedent to Grantor's powers. Grantor's Consent Power over income and principal and Grantor's Sole Power over principal are presently exercisable and not subject to a condition precedent. Grantor retains dominion and control over the principal of Trust until Trustee exercises its power to appoint income or principal. Thus, Trustee's power to distribute net income or principal does not cause the transfer of property to Trust to be complete for federal gift tax purposes. Accordingly, the retention of Grantor's Consent Power and Grantor's Sole Power causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.   
     
Based on the facts submitted and the representations made, we conclude that the contribution of property to Trust by Grantor is not a completed gift subject to federal gift tax. Any distribution from Trust to Grantor is merely a return of Grantor's property. Further, upon Grantor's death, the fair market value of the property in Trust is includible in Grantor's gross estate for federal estate tax purposes.   
     
 Rulings 4 and 5    
     
Section 2514(b) provides that the exercise or release of a general power of appointment created after October 21, 1942, shall be deemed a transfer of property by the individual possessing such power.   
     
Section 2514(c) provides that the term "general power of appointment" means a power which is exercisable in favor of the individual possessing the power (possessor), the possessor's estate, the possessor's creditors, or the creditors of the possessor's estate.   
     
Section 25.2514-1(c)(1) provides that a power of appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors, or the possessor's estate or the creditors of the estate.   
     
Section 2514(c)(3)(A) provides that, in the case of a power of appointment created after October 21, 1942, if the power is exercisable by the possessor only in conjunction with the creator of the power, such power is not deemed a general power of appointment.   
     
Section 2514(c)(3)(B) provides, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of the possessor, such power shall not be deemed a general power of appointment. For purposes of section 2514(c)(3)(8), a person who, after the death of the possessor, may be possessed of a power of appointment (with respect to the property subject to the possessor's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor's power.   
     
Section 25.2514-3(b)(2) provides, in part, that a co-holder of a power has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a co-holder of a power is considered as having an adverse interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y.   
     
Section 2041(a)(2) provides that the value of the gross estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under sections 2035 to 2038, inclusive.   
     
Under section 2041(b)(1), the term "general power of appointment" is defined, in relevant part, to mean a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.   
     
Section 2041(b)(1)(C)(ii) provides, however, that in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to the exercise of the power in favor of the decedent-such power shall not be deemed a general power of appointment. For purposes of § 2041(b)(1)(C)(ii), a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power.   
     
Section 20.2041-3(c)(2) of the Estate Tax Regulations provides, in part, that a co-holder of a power of appointment has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a co-holder of a power is considered as having an adverse interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y.   
     
The powers held by the Distribution Committee members under Grantor's Consent Power are powers that are exercisable only in conjunction with the creator, Grantor. Accordingly, under sections 2514(b) and 2041(a)(2), the Distribution Committee members do not possess general powers of appointment by virtue of possessing this power. The powers held by the Distribution Committee members under Unanimous Committee Power are not general powers of appointment for purposes of §§ 2514(b) and 2041(a)(2). As in the examples in §§ 25.2514-3(b)(2) and 20.2041-3(c)(2), the Distribution Committee members have substantial adverse interests in the property subject to this power.   
     
Accordingly, any distributions made from Trust to Beneficiary pursuant to the exercise of Grantor's Consent Power or Unanimous Committee Power are not gifts by the Distribution Committee members.   
     
Based on the facts submitted and representations made, we conclude that any distribution of property by the Distribution Committee from Trust to any beneficiary of Trust, other than Grantor, will not be a completed gift subject to federal gift tax, by any member of the Distribution Committee. Further, we conclude that any distribution of property from Trust to a beneficiary other than Grantor will be a completed gift by Grantor. Finally, we conclude that the powers held by the Distribution Committee are not general powers of appointment for purposes of section 2041(a)(2) and, accordingly, no member of the Distribution Committee upon his or her death will include in his or her estate any property held in Trust because such member is deemed to have a general power within the meaning of section 2041 over property held in Trust.   
     
Except as specifically ruled herein, we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code.   
     
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, copies of this letter are being sent to the taxpayer's authorized representative.   
     
Sincerely,   
     
  Faith P. Colson         
Faith P. Colson   
Senior Counsel, Branch 1   
Office of the Associate Chief Counsel   
(Passthroughs & Special Industries)   
     
Enclosures (2)   
Copy of this Letter   
Copy for § 6110 purposes   
     
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