PLRs 201925005-201925010: Trusts with Power of Appointment Committee Not Grantor Trust

In PLRs 201925005-201925010 the IRS made the following rulings:

  • The trust was not a grantor trust as to either the grantor or any members of the Power of Appointment Committee.
  • Contributions of assets to the trust by the Grantor were not completed gifts.
  • Distributions to beneficiaries would not be completed gifts by Power of Appointment Committee members and trust assets would not be included in their estates at their deaths.

The facts recited in the PLRs were as follows:

The facts submitted and representations made are as follows. On Date, Grantor created Trust, an irrevocable trust, for the benefit of Grantor, Father, Mother, Sibling 1 and Sibling 2 (Lifetime Beneficiaries). Grantor is the only donor of all property contributed to Trust. A corporate trustee, Trustee, is the trustee of Trust. Trust is sitused in, and governed by the law of State.

Article Five, Section 5.01 of Trust provides that during Grantor’s lifetime, Trustee must retain all contributions to Trust in a single trust for the benefit of the Lifetime Beneficiaries. Further, pursuant to Section 5.02 of Article Five, Trustee must not make any distributions except as appointed by Grantor or the Power of Appointment Committee (Committee) as follows: During Grantor’s lifetime, Grantor may appoint trust principal (including the whole thereof) outright or in trust to or for the benefit of any one or more of the Lifetime Beneficiaries as Grantor deems advisable at any time and from time to time for the beneficiary’s health, education, maintenance, or support (Grantor’s Sole Power). Grantor may not exercise this power to appoint any interest in trust to Grantor, Grantor’s estate, Grantor’s creditors, or the creditors of Grantor’s estate. Grantor holds this power in a non-fiduciary capacity.

Section 5.02(b)(1) provides that during Grantor’s lifetime, a majority of the Committee members, with Grantor’s written consent, may (but are not required to) appoint Trust income or principal (including the whole thereof) outright or in trust to or for the benefit of Grantor or the Lifetime Beneficiaries for any purpose at any time and from time to time (Grantor’s Consent Power).

Section 5.02(b)(2) provides that during Grantor’s lifetime, the Committee members, other than Grantor, by unanimous vote, may (but are not required to) appoint Trust income (including the whole thereof) to or for the benefit of any one or more of Grantor or the Lifetime Beneficiaries for any purposes at any time and from time to time (Unanimous Member Power).

Section 5.03 provides that, during Grantor’s lifetime, if at any time the Committee ceases to exist, Trustee may (but is not required to) distribute income or principal to the Lifetime Beneficiaries, other than Grantor, as follows: (a) Independent Trustee may distribute any portion of Trust property outright or in trust to or for the benefit of any Lifetime Beneficiary as Independent Trustee determines advisable for any purpose, including distribution of all or part of the trust principal to fund a beneficiary’s business ventures, investment ventures, or charitable giving. An Interested Trustee must not make distributions from Trust. Independent Trustee is defined as any trustee who is not an Interested Trustee. An Interested Trustee is defined as a trustee who is a transferor or beneficiary, is related or subordinate to a transferor or beneficiary, can be removed and replaced by a transferor with either the transferor or a party who is related or subordinate to the transferor, or can be removed and replaced by a beneficiary with either the beneficiary or a party who is related or subordinate to the beneficiary.

Section 5.03(a) also provides that any net income not distributed must be accumulated and added to principal.

Section 5.03(d) provides that under no circumstances may Trustee make any distribution to any beneficiary in a manner that would discharge any of Grantor’s legal obligations.

Section 5.05 provides that upon Grantor’s death, Grantor may appoint the balance of Trust to any one or more persons or charities qualified under § 2055 in equal or unequal proportions, and on any terms or conditions Grantor designates. Grantor may not exercise this power for the purpose of discharging Grantor’s legal obligations or otherwise for Grantor’s pecuniary benefit and may not exercise this power to appoint any interest in Trust to Grantor, Grantor’s estate, Grantor’s creditors or the creditors of Grantor’s estate (Grantor’s Testamentary Power of Appointment). Further, Grantor may not exercise this power of appointment to create another power of appointment that, under any applicable law, can be validly exercised to postpone the vesting of any estate or interest in the property subject to the power, for a period ascertainable without reference to the first power of appointment.

Article Six, Section 6.01 provides that in default of Grantor’s exercise of Grantor’s Testamentary Power of Appointment, Trustee must distribute ten percent of the remaining trust property in equal shares to each member of the Committee, other than Grantor. Trustee shall administer the share for each beneficiary in a separate trust for the benefit of the beneficiary, as provided in Section 6.02. In addition, Trustee must distribute ten percent of the remaining trust property to one or more charities supported by Grantor during Grantor’s lifetime. Trustee, in Trustee’s sole discretion, may determine the charities, amounts, and charitable purposes of such distributions. Each charitable organization must be a charity of a type described in § 2055(a). Finally, Trustee must allocate the balance of the remaining trust property among Grantor’s descendants as provided in Section 6.02. Trustee, in Trustee’s sole discretion, may determine the beneficiaries, amounts, shares, and interests of the allocations, but must administer the allocation to a descendant as provided in Section 6.02.

Section 5.02 of Article Five also provides that any member of the Committee may resign as a member without prior approval of any court or the consent of any person. However, at all times there must be at least two members of the Committee in addition to Grantor. If at any time there are fewer than two members serving on the Committee, then the Committee automatically ceases to exist, and all trust distributions are governed under Section 5.03. Further, pursuant to Section 5.02(b)(1) and (2), as stated above, the Committee only has the authority to appoint under the Grantor Consent Power and the Committee Unanimous Member Power only during Grantor’s lifetime.

Article Five, Section 5.02(b) provides that the members of the Committee include Grantor, Father, Mother, Sibling 1, and Sibling 2. Committee will cease to exist upon Grantor’s death. Further, Committee members exercise their powers of appointment in a nonfiduciary capacity.

Article One, Section 1.06(a) provides that no Trustee may or any other person may make any discretionary distribution to Grantor, or any trust where Grantor is a beneficiary, or to any trust which is a grantor trust as to Grantor under §§ 672 through 679.

The rulings requested were as follows:

1. As long as the Power of Appointment Committee is serving, no portion of the items of income, deductions and credits against tax of Trust shall be included in computing under § 671 the taxable income, deductions, and credits of Grantor or any other member of the Committee.

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 Committee from Trust to Grantor will not be a completed gift, subject to federal gift tax, by any member of the Committee.

4. Any distribution of property by the Committee from Trust to any beneficiary of the Trust, other than Grantor, will not be a completed gift by any member of the Committee, other than Grantor.

5. No member of the 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 over property held in Trust.

See full PLRs by clicking following links:

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal..

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