Summary

In two related rulings, PLRs 201208006 and 201208031, the Service ruled favorably on proposed modifications to a multi-generational trust.

Extended Summary

The trust was created sometime after September 25, 1985, the effective date of the present GST tax statute, but the taxpayer represented that sufficient exemption amounts were allocated to the transfer to give the trust a zero inclusion ratio.

The initial trustee divided the trust into three separate trusts, one for each of the settlor's children and his or her respective descendants. PLR 201208006 related to "Trust 1" and PLR 201208031 to "Trust 3," though the proposed modifications would affect all three trusts.

At the time of the ruling requests, there were three co-trustees, one of whom was the settlor's spouse. The co-trustees proposed to petition a state court to approve a rather comprehensive list of modifications to the trust document.

Among other things, the co-trustees proposed to change the situs of the trust, while clarifying that the perpetuities period would not be extended. They proposed to add language reciting the settlor and his spouse irrevocably released any powers that might cause the trust to be treated as a "grantor" trust for income tax purposes.

Each trust provided for distribution of a "maintenance allowance" to the beneficiaries, based on an ascertainable standard, and each also allowed for discretionary distributions in excess of the maintenance allowance. The proposed modification would allow only the independent co-trustees to participate in exercising this discretion.

Existing language giving the settlor's spouse authority to remove and appoint co-trustees would be modified to specify that she could appoint only independent trustees and could not remove a trustee if the result would be to leave fewer than half the remaining trustees independent.

Mechanisms by which children and more remote beneficiaries could participate in the removal and appointment of co-trustees would also be modified. Language would be added expressly authorizing the trustees to invest in a closely held business controlled by the settlor's family; provided, the purchase price was determined by an independent appraisal or by an agreement that allowed for adjustment of the price "based upon a final agreement with the Internal Revenue Service or a final and non-appealable determination of value by a court of appropriate jurisdiction."

The Service ruled neither the change in situs, nor the proposed modifications, which it characterized as "administrative," would affect the GST-exempt status of the trust, and that the proposed modifications would not be treated as a taxable gift by any trust beneficiary.

CPC Commentary

The ruling did not indicate, presumably because the co-trustees did not ask, whether the proposed modifications had the effect of removing the settlor's spouse ability, directly or indirectly, to make discretionary distributions in excess of the maintenance allowance, not subject to an ascertainable standard. If she had this ability, the trust would likely have been treated as a grantor trust for income tax purposes under Section 674(a), because under Section 672(e) this power would be treated as held by the settlor himself.

Relevant Documents

	201208006: Irrevocable Trusts	2/24/12
	201208031: Irrevocable Trusts	2/24/12
	Section 2038: Revocable transfers	3/24/10
	Section 674: Power to control beneficial enjoyment	3/24/10
	Section 672: Definitions and rules	3/24/10