[Federal Register Volume 64, Number 222 (Thursday, November 18, 1999)]
[Proposed Rules]
[Pages 62997-63001]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29920]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 26
[REG-103841-99]
RIN 1545-AX08
GST Issues
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
application of the effective date rules of the generation-skipping
transfer (GST) tax imposed under chapter 13 of the Internal Revenue
Code. The proposed regulations provide guidance with respect to the
type of trust modifications that will not affect the exempt status of a
trust. In addition, the proposed regulations clarify the application of
the effective date rules in the case of property transferred pursuant
to the exercise of a general power of appointment. The proposed
regulations are necessary to provide guidance to taxpayers so that they
may properly determine if chapter 13 of the Code is applicable to a
particular trust.
DATES: Written and electronic comments must be received by February 16,
2000. Outlines of topics to be discussed at the public hearing
scheduled for March 15, 2000 at 10:00, must be received by February 23,
2000.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-103841-99), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may also be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG-103841-99), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may
submit comments electronically via the internet by selecting the ``Tax
Regs'' option on the IRS Home Page, or by submitting comments directly
to the IRS internet site at http://www.irs.gov/tax__ regs/reglist.html.
The public hearing will be held in room 2615, Internal Revenue Service
Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
James F. Hogan, (202) 622-3090; concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the
[[Page 62998]]
hearing, Michael L. Slaughter, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The GST tax provisions were enacted as part of the Tax Reform Act
of 1986 (TRA), Pub. L. 99-514, 1986-3 (Vol. 1) C.B. 1, 634. Under
section 1433(a) of the TRA, the GST tax generally applies to all
generation-skipping transfers made after October 22, 1986, the date the
TRA was enacted.
Section 1433(b)(2) of the TRA exempts transfers from certain trusts
from the GST tax. Hereinafter, a trust that is exempt under section
1433(b)(2) is referred to as an ``exempt trust.''
First, under section 1433(b)(2)(A) of the TRA, the GST tax does not
apply to any transfer from a trust that was irrevocable on September
25, 1985, to the extent the transfer is not made out of additions to
the trust after September 25, 1985 (the day before the House Ways and
Means Committee began considering the bill containing the GST
provisions). Under Sec. 26.2601-1(b)(1)(ii) of the Generation-skipping
Transfer Tax Regulations, a trust created on or before September 25,
1985, is considered irrevocable on that date unless: (1) The settlor
retained a power that would cause the trust to be included in the
settlor's gross estate for federal estate tax purposes by reason of
section 2038 of the Code, if the settlor had died on September 25,
1985; or (2) the property held in the trust is a life insurance policy
transferred by the insured and the insured possessed, on September 25,
1985, any incident of ownership that would have caused the value of the
trust to be included in the insured's gross estate under section 2042
of the Code if the insured had died on September 25, 1985.
Second, under section 1433(b)(2)(B) of the TRA, as amended by the
Technical and Miscellaneous Revenue Act of 1988, the GST tax does not
apply to any generation-skipping transfer under a will or revocable
trust executed before October 22, 1986, if the decedent died before
January 1, 1987.
Third, under section 1433(b)(2)(C) of the TRA, the GST tax does not
apply to any generation-skipping transfer under a trust to the extent
such trust consists of property included in the gross estate of a
decedent or reinvestments thereof, but only if the decedent was, on
October 22, 1986, under a mental disability to change the disposition
of the decedent's property and did not regain competence to dispose of
the property before death.
Numerous taxpayers have requested private letter rulings regarding
the effect that a proposed modification or construction will have on an
exempt trust for GST tax purposes. In rulings in this area, the IRS has
held that a modification will not cause the trust to lose its exempt
status if the modification does not result in any change in the
quality, value, or timing of any beneficial interest under the trust.
Although the statute does not specifically address modifications to
trusts that are exempt under section 1433(b)(2) of the TRA, Treasury
and the IRS believe that a trust that is modified such that none of the
beneficial interests change can be viewed as the same trust that was in
existence on September 25, 1985.
The majority of the ruling requests received by the Service concern
proposed modifications intended to enable the trust to adapt to changed
circumstances or to enable the trustee to administer the trust
properly. These proposed modifications often are not inconsistent with
the purpose of the TRA effective date provisions. Accordingly, as
discussed below, these proposed regulations adopt a more liberal
standard with respect to changes that may be made to the trust without
the loss of exempt status. Treasury and the IRS intend that the
regulations, when finalized, provide sufficient guidance concerning
modifications that the need for private letter rulings will be greatly
diminished. Comments are requested regarding whether the proposed
regulations will achieve this result.
In addition, the proposed regulations clarify the application of
the effective date provisions when the exercise or lapse of a general
power of appointment over an otherwise grandfathered trust results in
property passing to a skip person.
Explanation of Provisions
1. Modifications to Trusts
The proposed regulations provide guidance regarding the types of
modifications, constructions, and settlements of controversies that
will not cause a trust to lose its exempt status. However, the rules
contained in these proposed regulations apply only for GST tax
purposes. Thus, the rules do not apply in determining, for example,
whether a modification will result in a gift for gift tax purposes, or
may cause inclusion of the trust assets in the gross estate, or may
result in the realization of gain for purposes of section 1001 of the
Code.
Under the proposed regulations, a court order in a construction
proceeding that resolves an ambiguity in the terms of a trust
instrument will not cause the trust to lose its exempt status. The
judicial action, however, must involve a bona fide issue and the
court's decision must be consistent with applicable state law that
would be applied by the highest court of the state. Commissioner v.
Estate of Bosch, 387 U.S. 456 (1967). Construction proceedings
determine a settlor's intent as of the date the instrument became
effective, and thus, a court order construing an instrument that
satisfies these requirements does not alter or modify the terms of the
instrument.
Similarly, under the proposed regulations, a court-approved
settlement of a bona fide controversy relating to the administration of
a trust or the construction of terms of the governing instrument of a
trust will not cause a trust to lose its exempt status. This will be
the case, however, only if the settlement is the product of arm's
length negotiations, and the settlement is within the range of
reasonable outcomes under the governing instrument and applicable state
law addressing the issues resolved by the settlement. See Ahmanson
Foundation v. United States, 674 F.2d 761 (9th Cir. 1981); Estate of
Suzuki v. Commissioner, T.C. Memo. 1991-624. For example, A and B are
the sole remainder beneficiaries of a trust established by their
parent. They disagree as to the portion of the remainder each is
entitled to under the terms of the trust when the trust terminates. A
settlement dividing the corpus equally among A, B, and C, B's child and
the grandchild of the parent who established the trust, would not be
considered within the range of reasonable outcomes because C is not a
potential remainderman under any construction of the trust agreement.
The proposed regulations also address the situation in which a
trustee distributes trust principal to a new trust for the benefit of
succeeding generations. In some cases, the governing instrument grants
the trustee broad discretionary powers to distribute principal to or
for the benefit of the trust beneficiaries, outright or in trust. Under
these circumstances, distributions by the trustee to trusts for the
benefit of trust beneficiaries will not cause the original trust or the
new trusts to lose exempt status provided the vesting of trust
principal is not postponed beyond the perpetuities period applicable to
the original trust.
Finally, under the proposed regulations, a trust may be modified
and remain exempt for GST purposes. The modification, however, must not
shift a beneficial interest in the trust to any beneficiary who
occupies a lower generation (as defined in section 2651)
[[Page 62999]]
than the person or persons who held the beneficial interest prior to
the modification and must not extend the time for vesting of any
beneficial interest in the trust beyond the period provided for in the
original trust.
2. Exercise of a General Power of Appointment After September 25, 1985
In Simpson v. United States, 183 F.3d 812 (8th Cir. 1999), the
decedent exercised a testamentary general power of appointment granted
under a marital trust that was created in 1966. Pursuant to the
decedent's exercise of the general power of appointment, the property
passed to her grandchildren who were skip persons under section 2612.
The court concluded that the transfer to the grandchildren was exempt
from the GST tax under section 1433(b)(2)(A) of the TRA, because the
transfer was ``under a trust'' that was irrevocable on September 25,
1985.
The facts in Simpson are similar to those presented in Peterson
Marital Trust v. Commissioner, 78 F.3d 795 (2nd Cir. 1996). In
Peterson, the decedent had a testamentary general power to appoint
property in a pre-September 25, 1985 marital trust created under her
husband's will. Rather than appointing the property outright, the
taxpayer allowed the power to lapse and the property passed to her
husband's grandchildren, who were skip persons under section 2612. The
court concluded that the transfer was subject to the GST tax. The court
noted that the effective date provisions in section 1433(b)(2) of the
TRA were ``designed * * * to protect those taxpayers who, on the basis
of pre-existing rules, made arrangements from which they could not
reasonably escape and which, in retrospect, had become singularly
undesirable.'' Peterson Marital Trust, at 801 (footnote omitted). The
court concluded that there was no basis to apply the protection
provided in section 1433(b)(2) to the marital trust because the
arrangement could have been changed to avoid the GST tax through the
exercise of the decedent's general power of appointment.
Treasury and the IRS believe that there is no substantive
difference between the situation in Simpson where property passed
pursuant to the exercise of a general power of appointment and the
situation in Peterson Marital Trust where property passed pursuant to a
lapse of a general power of appointment. An individual who has a
general power of appointment has the equivalent of outright ownership
in the property. Estate of Kruz v. Commissioner, 101 T.C. 44, 50-51,
59-60 (1993). The value of the property subject to the general power is
includible in the powerholder's gross estate at death under section
2041(a). In either case, the powerholder can avoid the consequences of
the GST tax by appointing the property to nonskip persons. Therefore,
as the court noted in Peterson Marital Trust, there is no basis for
exempting such dispositions from the GST tax under the TRA effective
date provisions.
Accordingly, the proposed regulations clarify that the transfer of
property pursuant to the exercise, release, or lapse of a general power
of appointment created in a pre-September 25, 1985 trust is not a
transfer under the trust, but rather is a transfer by the powerholder
occurring when the exercise, release, or lapse of the power becomes
effective, for purposes of section 1433(b)(2)(A) of the TRA.
Special Analysis
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because these
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, the
regulations will be submitted to the Small Business Administration for
comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely (in the
manner described in ADDRESSES) to the IRS. Treasury and the IRS
specifically request comments on the clarity of the proposed
regulations and how they can be made easier to understand. All comments
will be available for public inspection and copying.
A public hearing has been scheduled for March 15, 2000 at 10:00
a.m. in room 2615, Internal Revenue Building, 1111 Constitution Avenue,
NW, Washington, DC. Due to building security procedures, visitors must
enter at the 10th Street entrance, located between Constitution and
Pennsylvania Avenues, NW. In addition, all visitors must present photo
identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more
than 15 minutes before the hearing starts. For information about having
your name placed on the building access list to attend the hearing, see
the FOR FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons
that wish to present oral comments at the hearing must submit comments
by February 16, 2000, and submit an outline of the topics to be
discussed and the time to be devoted to each topic (signed original and
eight (8) copies) by February 23, 2000. A period of 10 minutes will be
allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is James F.
Hogan, Office of the Chief Counsel, IRS. Other personnel from the IRS
and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 26
Estate taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 26 is proposed to be amended as follows:
PART 26--GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX
REFORM ACT OF 1986
Paragraph 1. The authority citation for part 26 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Paragraph 2. In Sec. 26.2600-1 the Table is amended under
Sec. 26.2601-1 by revising the entry for paragraphs (b) and (b)(4) and
adding an entry for paragraph (b)(5) to read as follows:
Sec. 26.2600-1. Table of contents.
Sec. 26.2601-1. Effective dates.
* * * * *
(b) Exceptions.
* * * * *
(4) Retention of trust's exempt status in the case of
modifications, etc.
(5) Exceptions to additions rule.
Paragraph 3. Section 26.2601-1 is amended as follows:
[[Page 63000]]
1. Adding four sentences to the end of paragraph (b)(1)(i).
2. Redesignating paragraph (b)(4) as paragraph (b)(5).
3. Adding a new paragraph (b)(4).
4. Paragraph (c) is amended by adding a new sentence to the end of
the paragraph.
The additions read as follows:
Sec. 26.2601-1 Effective Dates.
* * * * *
(b) * * *
(1) * * *
(i) * * * Further, the rule in the first sentence of this paragraph
(b)(1)(i) does not apply to a transfer of property pursuant to the
exercise, release, or lapse of a general power of appointment that is
treated as a taxable transfer under chapter 11 or chapter 12. The
transfer is made by the person holding the power at the time the
exercise, release, or lapse of the power becomes effective, and is not
considered a transfer under a trust that was irrevocable on September
25, 1985. See Sec. 26.2601-1(b)(1)(v)(B) regarding the treatment of the
release, exercise, or lapse of a power of appointment that will result
in a constructive addition to a trust. See Sec. 26.2652-1(a) for the
definition of a transferor.
* * * * *
(4) Retention of trust's exempt status in the case of
modifications, etc. (i) In general. This paragraph provides rules for
determining when a modification, judicial construction, settlement
agreement, or trustee action with respect to a trust that is exempt
from the generation-skipping transfer tax under paragraphs (b)(1),
(b)(2), or (b)(3) of this section (hereinafter referred to as an exempt
trust) will not cause the trust to lose its exempt status. The rules
contained in this paragraph (b)(4) are applicable only for purposes of
determining whether an exempt trust retains its exempt status for
generation-skipping transfer tax purposes. The rules do not apply in
determining, for example, whether the transaction results in a gift
subject to gift tax, or may cause the trust to be included in the gross
estate of a beneficiary, or may result in the realization of capital
gain for purposes of section 1001 of the Code.
(A) Trustee's discretionary powers. The distribution of trust
principal from an exempt trust to a new trust will not cause the new
trust to be subject to the provisions of chapter 13, if--
(1) The terms of the governing instrument of the exempt trust
authorize the trustee to make distributions to the new trust without
the consent or approval of any beneficiary or court, and
(2) The terms of the governing instrument of the new trust do not
extend the time for vesting of any beneficial interest in the trust in
a manner that may postpone or suspend the vesting, absolute ownership,
or power of alienation of an interest in property for a period,
measured from the date of creation of the original trust, extending
beyond any life in being at the date of creation of the original trust
plus a period of 21 years, plus if necessary, a reasonable period of
gestation. For purposes of this paragraph (b)(4)(i)(A), the exercise of
a trustee's distributive power that validly postpones or suspends the
vesting, absolute ownership, or power of alienation of an interest in
property for a term of years that will not exceed 90 years (measured
from the date of creation of the original trust) will not be considered
an exercise that postpones or suspends vesting, absolute ownership, or
the power of alienation beyond the perpetuities period. If a trustee's
distributive power is exercised by creating another power, it is deemed
to be exercised to whatever extent the second power may be exercised.
(B) Settlement. A court-approved settlement of a bona fide
controversy regarding the administration of the trust or the
construction of terms of the governing instrument will not cause an
exempt trust to be subject to the provisions of chapter 13, if--
(1) The settlement is the product of arm's length negotiations, and
(2) The settlement is within the range of reasonable outcomes under
the governing instrument and applicable state law addressing the issues
resolved by the settlement.
(C) Judicial construction. A judicial construction of a governing
instrument to resolve an ambiguity in the terms of the instrument or to
correct a scrivener's error will not cause an exempt trust to be
subject to the provisions of chapter 13, if--
(1) The judicial action involves a bona fide issue, and
(2) The construction is consistent with applicable state law that
would be applied by the highest court of the state.
(D) Other changes. A modification of the governing instrument of an
exempt trust (including a trustee distribution, settlement, or
construction that does not satisfy paragraphs (b)(4)(i)(A), (B), or (C)
of this subsection) by judicial reformation, or nonjudicial reformation
that is valid under applicable state law, will not cause an exempt
trust to be subject to the provisions of chapter 13, but only if--
(1) The modification does not shift a beneficial interest in the
trust to any beneficiary who occupies a lower generation (as defined in
section 2651) than the person or persons who held the beneficial
interest prior to the modification, and
(2) The modification does not extend the time for vesting of any
beneficial interest in the trust beyond the period provided for in the
original trust.
(E) Examples. The following examples illustrate the application of
this paragraph (b)(4). In each example, assume that the trust
established in 1980 was irrevocable for purposes of Sec. 26.2601-
1(b)(1)(ii) and that there have been no additions to any trust after
September 25, 1985.
Example 1. Trustee's power to distribute principal authorized
under trust instrument. In 1980, Grantor established an irrevocable
trust (Trust) for the benefit of Grantor's child, A, A's spouse, and
A's issue. At the time Trust was established, A had two children, B
and C. A corporate fiduciary was designated as trustee. Under the
terms of Trust, the trustee has the discretion to distribute all or
part of the trust income to one or more of the group consisting of
A, A's spouse or A's issue. The trustee is also authorized to
distribute all or part of the trust principal to one or more trusts
for the benefit of A, A's spouse, or A's issue under terms specified
by the trustee in the trustee's discretion. Any trust established
under Trust, however, must terminate 21 years after the death of the
last child of A to die who was alive at the time Trust was executed.
Trust will terminate on the death of A, at which time the remaining
principal will be distributed to A's issue, per stirpes. In 2000,
the trustee distributed part of Trust's principal to a new trust for
the benefit of B and C and their issue. The new trust will terminate
21 years after the death of the survivor of B and C, at which time
the trust principal will be distributed to the issue of B and C, per
stirpes. The terms of the governing instrument of Trust authorize
the trustee to make the distribution to a new trust without the
consent or approval of any beneficiary or court. In addition, the
terms of the governing instrument of the new trust do not extend the
time for vesting of any beneficial interest in a manner that may
postpone or suspend the vesting, absolute ownership or power of
alienation of an interest in property for a period, measured from
the date of creation of Trust, extending beyond any life in being at
the date of creation of Trust plus a period of 21 years, plus if
necessary, a reasonable period of gestation. Accordingly, neither
Trust nor the new trust will be subject to the provisions of chapter
13 of the Code.
Example 2. Trustee's power to distribute principal pursuant to
state statute. In 1980, Grantor established an irrevocable trust
(Trust) for the benefit of Grantor's child, A, A's spouse, and A's
issue. At the time Trust was established, A had two children, B and
C. A corporate fiduciary was designated as trustee. Under the terms
of Trust, the trustee has the discretion to distribute all or part
of the trust income or principal to one or more of the group
consisting of A, A's spouse or
[[Page 63001]]
A's issue. Trust will terminate on the death of A, at which time the
trust principal will be distributed to A's issue, per stirpes. Under
a state statute applicable to Trust, a trustee who has the absolute
discretion under the terms of a testamentary instrument or
irrevocable inter vivos trust agreement to invade the principal of a
trust for the benefit of the income beneficiaries of the trust, may
exercise the discretion by appointing so much or all of the
principal of the trust in favor of a trustee of a trust under an
instrument other than that under which the power to invade is
created, or under the same instrument. The trustee may take the
action either with consent of all the persons interested in the
trust but without prior court approval, or with court approval, upon
notice to all of the parties. The exercise of the discretion,
however, must not reduce any fixed income interest of any income
beneficiary of the trust and must be in favor of the beneficiaries
of the trust. In 2000, the trustee distributes one-half of Trust's
principal to a new trust that provides for the payment of trust
income to A for life and further provides that, at A's death, one-
half of the trust remainder will pass to B or B's issue and one-half
of the trust will pass to C or C's issue. Because the state statute
requires the consent of all of the parties, the transaction
constitutes a modification of Trust. However, because the
modification does not shift any beneficial interest in Trust to a
beneficiary or beneficiaries who occupy a lower generation than the
person or persons who held the beneficial interest prior to the
modification, neither Trust nor the new trust will be subject to the
provisions of chapter 13 of the Code.
Example 3. Construction of an ambiguous term in the instrument.
In 1980, Grantor established an irrevocable trust for the benefit of
Grantor's children, A and B, and their issue. The trust is to
terminate on the death of the last to die of A and B, at which time
the principal is to be distributed to their issue. However, the
provision governing the termination of the trust is ambiguous
regarding whether the trust principal is to be distributed per
stirpes, only to the children of A and B, or per capita among the
children, grandchildren, and more remote issue of A and B. The
trustee files a construction suit with the appropriate local court
to resolve the ambiguity. The court issues an order construing the
instrument to provide for per capita distributions to the children,
grandchildren, and more remote issue of A and B living at the time
the trust terminates. The court's construction is consistent with
applicable state law as it would be interpreted by the highest court
of the state and resolves a bona fide controversy regarding the
proper interpretation of the instrument. Therefore, the trust will
not be subject to the provisions of chapter 13 of the Code.
Example 4. Change in trust situs. In 1980, Grantor, who was
domiciled in State X, executed an irrevocable trust for the benefit
of Grantor's issue, naming a State X bank as trustee. Under the
terms of the trust, the trust is to terminate, in all events, no
later than 21 years after the death of the last to die of certain
designated individuals living at the time the trust was executed.
The provisions of the trust do not specify that any particular state
law is to govern the administration and construction of the trust.
In State X, the common law rule against perpetuities applies to
trusts. In 2000, a State Y bank is named as sole trustee. The effect
of changing trustees is that the situs of the trust changes to State
Y, and the laws of State Y govern the administration and
construction of the trust. State Y law contains no rule against
perpetuities. In this case, however, in view of the terms of the
trust, the trust will terminate at the same time before and after
the change in situs. Accordingly, the change in situs does not shift
any beneficial interest in the trust to a beneficiary who occupies a
lower generation (as defined in section 2651) than the person or
persons who held the beneficial interest prior to the transfer.
Furthermore, the change in situs does not extend the time for
vesting of any beneficial interest in the trust beyond that provided
for in the original trust. Therefore, the trust will not be subject
to the provisions of chapter 13 of the Code. If, in this example, as
a result of the change in situs, State Y law governed such that the
time for vesting was extended beyond the period prescribed under the
terms of the original trust instrument, the trust would not retain
exempt status.
Example 5. Division of a trust. In 1980, Grantor established an
irrevocable trust for the benefit of his two children, A and B, and
their issue. Under the terms of the trust, the trustee has the
discretion to distribute income and principal to A, B, and their
issue in such amounts as the trustee deems appropriate. On the death
of the last to die of A and B, the trust principal is to be
distributed to the living issue of A and B, per stirpes. In 2000,
the appropriate local court approved the division of the trust into
two equal trusts, one for the benefit of A and A's issue and one for
the benefit of B and B's issue. The trust for A and A's issue
provides that the trustee has the discretion to distribute trust
income and principal to A and A's issue in such amounts as the
trustee deems appropriate. On A's death, the trust principal is to
be distributed equally to A's issue, per stirpes. The trust for B
and B's issue is identical (except for the beneficiaries), and
terminates at B's death at which time the trust principal is to be
distributed equally to B's issue, per stirpes. The division of the
trust into two trusts does not shift any beneficial interest in the
trust to a beneficiary who occupies a lower generation (as defined
in section 2651) than the person or persons who held the beneficial
interest prior to the division. In addition, the division does not
extend the time for vesting of any beneficial interest in the trust
beyond the period provided for in the original trust. Therefore, the
two partitioned trusts resulting from the division will not be
subject to the provisions of chapter 13 of the Code.
Example 6. Merger of two trusts. In 1980, Grantor established an
irrevocable trust for Grantor's child and the child's issue. In
1983, Grantor's spouse also established a separate irrevocable trust
for the benefit of the same child and issue. The terms of the
spouse's trust and Grantor's trust are identical. In 2000, the
appropriate local court approved the merger of the two trusts into
one trust to save administrative costs and enhance the management of
the investments. The merger of the two trusts does not shift any
beneficial interest in the trust to a beneficiary who occupies a
lower generation (as defined in section 2651) than the person or
persons who held the beneficial interest prior to the merger. In
addition, the merger does not extend the time for vesting of any
beneficial interest in the trust beyond the period provided for in
the original trust. Therefore, the trust that resulted from the
merger will not be subject to the provisions of chapter 13 of the
Code.
Example 7. Modification that does not shift an interest to a
lower generation. In 1980, Grantor established an irrevocable trust
for the benefit of Grantor's grandchildren, A, B, and C. The trust
provides that income is to be paid to A, B, and C, in equal shares
for life. The trust further provides that, upon the death of the
first grandchild to die, one-third of the principal is to be
distributed to that grandchild's issue, per stirpes. Upon the death
of the second grandchild to die, one-half of the remaining trust
principal is to be distributed to that grandchild's issue, per
stirpes, and upon the death of the last grandchild to die, the
remaining principal is to be distributed to that grandchild's issue,
per stirpes. In 2000, A became disabled. Subsequently, the trustee,
with the consent of B and C, petitioned the appropriate local court
and the court approved a modification of the trust that increased
A's share of trust income. The modification does not shift a portion
of the income interest to a beneficiary who occupies a generation
lower than the generation occupied by A, B and C, and does not
extend the time for vesting of any beneficial interest in the trust
beyond the period provided for in the original trust. Accordingly,
the trust as modified will not be subject to the provisions of
chapter 13 of the Code. However, the modification increasing A's
share of trust income is a transfer by B and C to A for federal gift
tax purposes.
(ii) Effective date. The rules in this paragraph (b)(4) are
effective as of [INSERT THE DATE OF PUBLICATION IN THE Federal Register
AS A FINAL REGULATION].
* * * * *
(c) * * * The last four sentences in paragraph (b)(1)(i) of this
section are effective as of November 18, 1999.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-29920 Filed 11-17-99; 8:45 am]
BILLING CODE 4830-01-U
