Source: http://www.bna.com/plr-201310002-hiatus-n17179873802/
Timestamp: 2016-10-22 19:43:49
Document Index: 729831243

Matched Legal Cases: ['§673', '§675', '§678', '§25', '§25', '§25', '§25', '§672', '§25', '§25', '§25', '§3570', '§25', '§2514', '§2514', '§25', '§2514', '§2514']

PLR 201310002: After Hiatus, IRS Approves Another Non-Grantor, Incomplete Gift Trust | Bloomberg BNA
In PLR 201310002, the IRS determined that: (1) the Grantor of an irrevocable trust (Trust) for the benefit of himself and his four sons and their issue will not be treated as the owner of the trust for income tax purposes; (2) the contribution of property to Trust by Grantor is not a completed gift subject to federal gift tax; (3) any distribution of property by the "Distribution Committee" (consisting of Grantor and his issue) from Trust to Grantor will not be a completed gift subject to federal gift tax, by any member of the Distribution Committee; and (4) 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.
Similar trusts, nicknamed "DING" ("Delaware Incomplete Gift Non-Grantor") trusts, have been approved in the past. See, e.g., PLR 200612002. Although not discussed in these and other rulings, one of the apparent purposes of establishing such trusts as non-grantor trusts is to save state income taxes. The trust is established in a jurisdiction, such as Delaware, that does not impose a state fiduciary income tax and does not tax distributions to out-of-state beneficiaries. Further, neither the trust nor its beneficiaries would normally be subject to state income tax in the beneficiaries' state of domicile on either the income or distributions of an out-of-state non-grantor trust. However, for the reasons discussed below, it is unlikely that the trust in PLR 201310002 was formed under Delaware law.
Grantor created an irrevocable trust (Trust) for the benefit of himself and his issue, consisting of his four sons and their issue. A corporate trustee (Trustee) is the sole trustee. During Grantor's lifetime, Trustee must distribute such amounts of net income and principal to Grantor and his issue either:
as directed by the Distribution Committee with the consent of the Grantor ("Grantor's Consent Power"); or
with the unanimous consent of the Distribution Committee (`Unanimous Member Power").
Also, Grantor, in a nonfiduciary capacity, may, but shall not be required to, distribute to any one or more of Grantor's issue, such amounts of the principal (including the whole thereof) as Grantor deems advisable to provide for the health, maintenance, support and education of Grantor's issue ("Grantor's Sole Power").
The Distribution Committee is initially composed of Grantor and all four of his sons. The Distribution Committee will cease to exist upon Grantor's death. Trust provides that at all times at least two "Eligible Individuals" - consisting of the adult issue of Grantor, and the parents or legal guardians of a minor issue of Grantor - must be members of the Distribution Committee.
Upon Grantor's death, the remaining balance of Trust shall be distributed to or for the benefit of any person or persons or entity or entities, other than Grantor's estate, Grantor's creditors, or the creditors of Grantor's estate, as Grantor may appoint by will. In default of the exercise of this limited power to appoint ("Grantor's Special Testamentary Power"), the balance of Trust will be distributed, per stirpes, to Grantor's then living issue in further trust. If none of Grantor's issue is then living, such balance shall be distributed, per stirpes, to the then living issue of Grantor's deceased father.
1. No Grantor Trust.
Grantor. The IRS reasoned, based on an examination of Trust, that the circumstances that would cause Grantor to be treated as the owner of any portion of Trust under §§673 (reversionary interest), 674 (powers over income and corpus), 676 (power to revoke), or 677 (income payable for the benefit of the grantor or grantor's spouse) either did not exist, or were exercisable only with the consent of an adverse party (Grantor's issue).
The IRS also concluded that none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of Grantor under §675 (administrative powers) existed. However, since the existence of such powers is a question of "facts and circumstances," the ultimate determination on their existence will be deferred until audit.
Members of Distribution Committee. Further, because none of the other Distribution Committee members have a power exercisable solely by himself to vest Trust income or corpus in himself (i.e., a general power of appointment), none should be treated as the owner of any portion of the Trust under §678(a).
2. No Completed Gifts.
Regs. §25.2511-2(b) provides that a gift is complete as to any property, or part thereof or interest therein, of which the donor has so parted with "dominion and control" as to leave in the donor no power to change its disposition, whether for the donor's own benefit or for the benefit of another.
Regs. §25.2511-2(b) also provides an example where the donor transfers property to another 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.
A gift may also be incomplete where a donor reserves the power of revocation or to name new beneficiaries or to change the interests of the beneficiaries, unless that power is limited by an ascertainable standard (e.g., health, education, maintenance and support). A power is considered to be held by a donor if it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom.
Regs. §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 nonexercise 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 and the entire value of the transferred property is subject to the gift tax.
a. By The Grantor.
Grantor's Consent Power. In PLR 201310002, Grantor retained the "Grantor's Consent Power" over the income and principal of Trust. The Distribution Committee members are co-holders of this power. The Distribution Committee ceases to exist upon the death of Grantor. Under Regs. §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. [Note that this definition of "adverse interest" is different than that in the regulations under §672, which applies for grantor trust purposes. The grantor trust definition does not require that the adverse interest persist after death in the manner described above.]
In this case, the Distribution Committee ceases to exist upon Grantor's death. Accordingly, its members do not have interests adverse to Grantor under Regs. §25.2514-3(b)(2) and for purposes of Regs. §25.2511-2(e). Therefore, Grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the Grantor's Consent Power. "The retention of this power [apparently in and of itself] causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes."
Grantor's Sole Power. Grantor also retained the "Grantor's Sole Power" over the principal of Trust. Under Regs. §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. In this case, Grantor's Sole Power gives Grantor the power to change the interests of the beneficiaries. Accordingly, the retention of the Grantor's Sole Power also causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.
Note: Because Delaware law neither permits the grantor of an "asset protection trust" to retain a lifetime power of appointment (which is what the Grantor's Consent Power and the Grantor's Sole Power amount to), or to be a member of the distribution committee that may make distributions to him or herself, it is unlikely that this trust, like the earlier "DING" trusts, was formed under Delaware law. See Del. Code, Title 12 §§3570(11)b.2. and 3570(8)d. Other commentators have observed that the trust in PLR 201310002 was created under Nevada law.
Effect of Retention of Grantor's Special Testamentary Power of Appointment. In PLR 201310002, Grantor retained "Grantor's Testamentary Power" to appoint the property in Trust to any person or persons or entity or entities, other than Grantor's estate, Grantor's creditors, or the creditors of Grantor's estate. Under Regs. §25.2511-2(b) 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 IRS ruled, the retention of this power "causes the transfer of property to Trust to be incomplete with respect to the remainder in Trust for federal gift tax purposes." (Emphasis supplied.)
This ruling is similar to that issued in PLR 201208026 on slightly different facts, in which the IRS ruled that a grantor's special testamentary power of appointment was not sufficient to make a gift incomplete with respect to the term interest in a trust where the grantor retained no other interest in or powers over the trust. PLR 201310002 reinforces this interpretation.
b. By The Distribution Committee.
Because the contribution of property by Grantor to the Trust was incomplete, any distribution from Trust to Grantor is merely a return of Grantor's property. "Therefore, … 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. [and]
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."
3. No General Powers of Appointment Held By Distribution Committee.
Under §2514(c), a "general power of appointment" is a power that is exercisable in favor of the individual possessing the power (possessor), the possessor's estate, the possessor's creditors, or the creditors of the individual's estate. Under §2514(c)(3)(A), 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. In addition, as noted above, if the post-1942 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, the power shall not be deemed a general power of appointment.
Under Regs. §25.2514-3(b)(2), 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.
The powers held by the Distribution Committee members under the Grantor's Consent Power are powers that are exercisable only in conjunction with the creator, Grantor. Accordingly, under §2514(c)(3)(A), the Distribution Committee members do not possess general powers of appointment by virtue of possessing this power. Further, the powers held by the Distribution Committee members under the Unanimous Member Powers are not general powers of appointment, because the Distribution Committee members have substantial adverse interests in the property subject to this power.
"Accordingly, any distribution made from Trust to a beneficiary, other than Grantor, pursuant to the exercise of these powers, the Grantor's Consent Power and the Unanimous Member Powers, are not gifts by the Distribution Committee members. Instead, such distributions are gifts by Grantor."
The Service also ruled that the property of Trust will be includible in Grantor's estate. It refused to comment or rule, however, on any decanting powers - i.e., powers to distribute to another trust - held by the trustee.
There is a backstory to PLR 201310002 that begins in 2007. PLR 200612002, noted above, was one of the last favorable DING trust rulings before 2013. (See also PLR 200502014, PLR 200637025, PLR 200647001, and PLR 200715005.)
Shortly thereafter, in IR-2007-127 (7/9/07), the IRS stated that it intended to reconsider at least one tax conclusion reached in a series of private rulings in which the grantor retained a right to distributions with the consent of a distribution committee composed of the beneficiaries, and requested comments regarding the question of whether the distribution committee members possess general powers of appointment under §2514. Cf. Rev. Rul. 76-503, 1976-2 C.B. 275 and Rev. Rul. 77-158, 1977-1 C.B. 285.
These rulings indicated that, because the committee members are replaced if they resign or die, they would be treated as possessing general powers of appointment over the trust corpus. [There was no indication in PLR 201310002 that the Distribution Committee members would be replaced unless three out of the four sons serving on the Committee ceased to serve. Query, whether they would be held to have general powers of appointment at that time.] Practitioners argued that the facts of those rulings were distinguishable because the grantors in the "questionable" PLRs all retained a special testamentary power of appointment, thus making the grantors' gifts to the trust incomplete.
PLR 201208026 casts some doubt on that argument in a context where the grantor retained no interest in the trust apart from his or her special testamentary power of appointment. PLR 201310002 alleviates some of this doubt/concern, but on facts considerably different from those in the 2012 ruling. However, practitioners would be well advised to follow the facts of this ruling closely - or to get their own ruling - to the extent possible.
This commentary will also appear in the May 2013 Estates, Gifts and Trusts Journal. For more information, in the Tax Management Portfolios, see Danforth and Zaritsky, 819 T.M., Grantor Trusts: Income Taxation Under Subpart E, Lischer, 845 T.M., Gifts, and Streng, 800 T.M., Estate Planning, and in Tax Practice Series, see ¶6120, Estate and Trust Income Taxation - General Rules, and ¶6350, Estate Planning.