Not only is strict adherence to the structure set out in prior favorable rulings best, it is essential when it comes to obtaining a favorable ING ruling. The provisions in the trust document need to carve a very fine line through the grantor trust/incomplete gift rules to obtain a favorable ING ruling. The goal is to have the Service rule that a trust is not a grantor trust for income tax purposes yet not a completed gift for gift tax purposes and included in the grantor’s estate to get a basis adjustment at death.
The earliest ruling, ILM 201208026, fell short of a favorable ruling with the Service finding that the retained testamentary power of appointment was insufficient to avoid a completed gift. By 2014, practitioners had carefully studied this early ruling and devised a set of trust provisions that successfully walked the tight rope through the grantor trust/incomplete gift rules to obtain favorable rulings in a series of private letter rulings. Each of those rulings contained the following elements:
• The Trust was created in an asset protection jurisdiction;
• The grantor was a discretionary beneficiary;
• A distribution committee with at least two adverse parties, acting unanimously, had total distribution discretion for distributions among the grantor and the other beneficiaries;
• A corporate trustee would make discretionary distributions among the grantor and the grantor’s descendants, as directed by a majority of the distribution committee, with the grantor’s consent but without the participation of any recipient;
• A corporate trustee would make discretionary distributions to the grantor’s descendants as directed by the grantor in a non-fiduciary capacity for the health, education, maintenance and support of any such descendant; and
• The grantor retained a broad testamentary special power of appointment.
Now in PLR 201642019, the Service has singled out one of those prior previously favorable rulings (identified in this ruling as PLR 140408-13) that deviated from this formulaic approach in a seemingly small way, and revoked that prior favorable ruling. This deviating trust provision directed the trustee to distribute the trust property to the grantor in the event (1) neither of grantor’s children was serving as a member of the Distribution Committee or (2) there remained only one member of the Distribution Committee. The Service now ruled that this provision resulted in the grantor having a reversionary interest in the trust corpus far exceeding the 5% threshold in § 673 of the Code. As a result the trust was a grantor trust for income tax purposes under § 673. In fact, the Service valued this reversionary interest at 100% of the value of the trust corpus because the members of the Distribution Committee could resign at any time, terminating the trust and distributing the whole trust corpus to the grantor.
The moral of this ruling is that when you attempt to copy a favorable tax structure, don’t vary the terms.