Section 2601 -- Generation-Skipping Transfer Tax
UIL Number(s) 2041.00-00, 2514.00-00, 2601.00-00
Date: December 10, 1996
Refer Reply to: CC:DOM:P&SI:4/PLR-59848-96
Re: * * *
LEGEND:
A = * * *
B = * * *
C = * * *
D = * * *
E = * * *
F = * * *
G = * * *
Trust A = * * *
Trust B = * * *
Trust C = * * *
Trust D = * * *
Trust E = * * *
Trust F = * * *
Dear * * *
[1] This is in response to your September 18, 1996, letter, and prior correspondence, in which you request rulings concerning the nature of specified powers of appointment under section 2041 and section 2514 of the Internal Revenue Code and the generation-skipping transfer tax consequences of a proposed court ordered appointment of trustees for, and modification of, six trusts.
FACTS:
[2] In 1969, A executed a revocable trust agreement that was entirely amended in 1973 and subsequently partially amended several times before A's death on April 9, 1977. At A's death, under Article IV of the trust agreement, a trust was created, divided into three equal shares, and administered as three substantially identical trusts, Trust A, Trust B, and Trust C, each for the benefit, respectively, of A's daughters, C, D, and E. You represent that there have been no actual or constructive additions to these trusts since they were established at A's death.
[3] Under the terms of these trusts, during her life, each daughter receives the net income of her trust and may receive distributions of principal under the following provision of Section 4.1.3 of the trust agreement:
If the payments from this Trust to which any beneficiary over
twenty-one (21) years of age at the time receiving benefits
hereunder is entitled [the payments of net income] shall be
insufficient in the discretion of the Trustees to provide for
his or her reasonable support, care, maintenance and education,
after taking into consideration to the extent the Trustees deem
advisable such beneficiary's income from sources outside of this
Trust of which the Trustees have actual knowledge, the Trustees
may pay to such beneficiary or apply for his or her benefit so
much of such beneficiary's share of the trust estate as the
Trustees deem necessary and proper for that purpose.
C, D, and E are all over age 21. At the respective death of C, D, or E, her trust will be divided into shares and held for her surviving issue, by right of representation.
[4] E and G are the individual and corporate trustee, respectively, of Trust A, Trust B, and Trust C, under the current successor trustee provisions of Section 6.9 of the trust agreement. Under these provisions, the adult beneficiaries of a trust may act unanimously to remove (with or without cause) a corporate trustee and replace it with an individual.
[5] B died on August 12, 1971. Under his will, the residue of his estate was divided equally into three shares and held as Trust D, Trust E, and Trust F, for the benefit of C, D, and E, respectively. B was the uncle of C, D, and E. You represent that there have been no actual or constructive additions to the trusts since they were established at the decedent's death. Under state law, the three trusts are administered under a December 28, 1971 order of the probate court that incorporates the terms of B's will.
[6] Under paragraph 5.II.A. of the court order, during her life, each niece receives the net income of her trust and may receive distributions of principal under paragraph 5.II.B.:
If at any time, in the absolute discretion of the Trustees, any
of the said nieces shall for any reason be in need of funds for
her proper care, maintenance and support, the Trustees may, in
their absolute discretion, pay or apply for the benefit of any
such niece, in addition to the payments of income herein
provided for her, such amounts from the principal of her trust
estate up to the whole thereof as the Trustees may from time to
time deem necessary or advisable for her use and benefit.
[7] In addition, under paragraph 5.II.C., each niece has the power to withdraw one-third of the principal of her trust. You represent that each niece fully exercised this power by December 31, 1981. At the respective death of C, D, or E, her trust will be divided into shares and held for her surviving issue, by right of representation.
[8] F and G are the individual and corporate trustee, respectively, of Trust D, Trust E, and Trust F, under the current successor trustee provision in Article IV, paragraph (5) of B's will. Under this provision, if F fails to serve, G may serve alone. Any successor of G "whether by consolidation, merger, transfer of trust business, resignation or otherwise," will serve with all of the authority and power as if originally named as trustee.
[9] E and F plan to resign as trustees of Trusts A, B, and C and Trusts D, E, and F, respectively. The current income beneficiary of each trust will petition the local court for an order removing G as trustee and replacing G with the current income beneficiary of the trust. Thus, C would become the sole trustee of Trust A and Trust D; D would be the sole trustee of Trust B and Trust E; F would be the sole trustee of Trust C and Trust F. In addition, each petition will request the court to order the substitution of a new successor trustee provision instead of Section 6.9 of Trusts A, B, and C and Article IV, paragraph (5) of Trusts D, E, and F. Thus, each of the six trusts would contain a substantially identical successor trustee provision authorizing the income beneficiary, as trustee, to designate (and remove) individuals or corporations as co-trustees or successor trustees and listing the children of each income beneficiary-trustee successor trustees if none are designated by the income beneficiary.
[10] You have asked that we rule as follows:
1. C, D, and E, each acting, respectively, as a trustee of the trusts held for her benefit among Trusts A, B, C, D, E, and F will not hold a general power of appointment as defined under section 2041 or section 2514.
2. The judicial action appointing the respective income beneficiary of each trust among Trusts A, B, C, D, E, and F as the trustee and modifying the trustee succession provision of each trust will not cause these trusts to lose their status under section 1433(b)(2)(A) of the Tax Reform Act of 1986 (TRA 86) as exempt from the application of Chapter 13.
LAW AND ANALYSIS:
ISSUE 1:
[11] Under section 2041(a)(2), 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.
[12] Section 2041(b)(1) defines "general power of appointment" as a power which is exercisable in favor of the decedent, his estate, his creditors, or creditors of his estate. However, under section 2042(b)(1)(A), a power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent is not a general power of appointment.
[13] Under section 20.2041-1(c)(2), a power is limited by an ascertainable standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). The words "support" and "maintenance" are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard. In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.
[14] Under section 2514(b), the exercise or release of a general power of appointment created after October 21, 1942, is deemed the transfer of property by the individual possessing such power.
[15] Under section 2514(c), "general power of appointment" is defined as a power which is exercisable in favor of the individual possessing the power ("the possessor"), his estate, his creditors, or creditors of his estate. However, under section 2514(c)(1), a power to consume, invade, or appropriate property for the benefit of the possessor which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the possessor is not a general power of appointment.
[16] Under section 25.2514-1(c)(2), a power is limited by an ascertainable standard if the extent of the possessor's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). The words "support" and "maintenance" are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by an ascertainable standard. In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.
[17] Powers of appointment limited by an ascertainable standard are defined in the same way under sections 2041 and 2514. Powers of appointment have the same meaning for purposes of both the gift and estate tax. See, Rev. Rul. 76-547, 1976-2 C.B. 302.
[18] In Rev. Rul. 76-547, the income beneficiary of a trust held the power as trustee to invade principal for the individual's own "care, maintenance, health and enjoyment." Under the revenue ruling, the word "enjoyment" is not sufficiently restrictive to limit the power to an ascertainable standard under section 2514. However, the revenue ruling raises no concerns about the word "care."
[19] Here, the trustees' power to invade the principal of Trusts A, B, and C, can only be exercised for the "reasonable support, care, maintenance and education" of the respective income beneficiaries. The trustees' power to invade the principal of Trusts D, E, and F, can only be exercised for the "proper care, maintenance and support" of the respective income beneficiaries. Under both section 20.2041-1(c)(2) and section 25.2514-1(c)(2), a power to
invade principal is limited by an ascertainable standard and is, thus, not a general power of appointment, if exercise of the power is restricted to the health, education, or support of the holder. Further, the terms "support" and "maintenance" are treated as being synonymous. We believe that "care" is also synonymous with "support." See, Rev. Rul. 76-547, supra.
[20] Thus, the invasion powers over Trusts A, B, C, D, E, and F are limited by an ascertainable standard. Accordingly, we rule that C, D, and E, each acting, respectively, as a trustee of the trusts held for her benefit among Trusts A, B, C, D, E, and F will not hold a general power of appointment as defined under section 2041 or section 2514.
ISSUE 2:
[21] Section 2601 imposes a tax on each generation-skipping transfer.
[22] Section 1433(a) of the Tax Reform Act of 1986 provides the general rule that the generation-skipping transfer tax provisions apply only to "generation-skipping transfers," as defined in section 2611 that occur after October 22, 1986. Section 1433(b)(2)(A) provides that tax does not apply to any transfer under a trust that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985.
[23] Trusts A, B, and C were irrevocable on April 9, 1977. Trusts D, E, and F were irrevocable on August 12, 1971. You represent that there have been no constructive or actual additions to trusts since they became irrevocable.
[24] As we conclude above, neither C, D, nor E, as trustee of the trusts for her benefit among Trusts A, B, C, D, E, and F, will hold a general power of appointment. Further, in exercising the invasion powers over these trusts, C, D, and E, as trustee, will be subject, under state law, to fiduciary duties to the remainder beneficiaries. The appointment of the respective income beneficiary of each trust as sole trustee of the trust will not confer any additional powers or beneficial interests upon any of the beneficiaries. The proposed modifications of the successor trustee provisions of the trusts are administrative in nature. Thus, the proposed trustee appointments and the proposed modifications would not alter the intended quality, value, or timing of interests under the original terms of the trusts.
[25] Accordingly, we rule that the judicial action appointing the respective income beneficiary of each trust among Trusts A, D, C, D, E, and F as the trustee and modifying the trustee succession provision of each trust will not cause these trusts to lose their status under section 1433(b)(2)(A) of the Tax Reform Act of 1986 (TRA 86) as exempt from the application of Chapter 13.
[26] Except as we have specifically ruled herein, we express no opinion on the federal tax consequences of the transaction under the cited provisions of the Code or under any other provisions of the Code.
[27] This ruling letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.
[28] In accordance with the power of attorney on file, we are sending a copy of this letter to your authorized representative.
Sincerely,
Assistant Chief Counsel
(Passthroughs and Special
Industries)
By: Frances Schafer
Senior Technician Reviewer,
Branch 4
Enclosures
Copy for section 6110 purposes