With some minor exceptions, the facts are the same in PLR 201525002& PLR 201525003. In these PLRs, the Grantor transferred funds to an irrevocable trust for the Grantor’s own benefit and the benefit of several charities. In each case, the trust was created in a state other than the state of residence of the Grantor. In addition to the Trustee, each trust had an Investment Advisor, a Distribution Advisor, a Charity Distribution Advisor and a Trust Protector, none of whom were trust beneficiaries, except that the Charity Distribution Advisor was the Grantor’s spouse who was a potential appointee.
The Distribution Advisor had the power to direct the Trustee as to whether to make Quarterly Distributions, Support Distributions and Special Contingent Distributions to the Grantor, and also had the power to direct the Trustee as to whether to make Quarterly Distributions to the charities.
The Grantor had a limited testamentary power to appoint the trust among her spouse and charities.
The Investment Advisor had the power to direct the Trustee as to trust investments.
The Grantor had certain discretionary veto powers over distributions to the Grantor, and certain discretionary and objective veto powers over distributions to the charities. The Grantor could release any of these veto powers at any time.
Certain distributions to the charities were subject to the consent of the Charity Distribution Advisor or Trust Protector, whichever did not have a substantial adverse interest to the Grantor.
The Trust Protector also had the power to remove and replace all of the other advisors.
The Grantor proposed (1) to release her objective veto powers over distributions to the charities and (2) to transfer additional property to the Trust after she releases her objective veto powers over the charitable distributions. Further, Grantor also intended to execute a springing durable special power of attorney that would permit the attorney-in-fact to exercise Grantor’s remaining veto powers in the event Grantor were to become incapacitated as defined by the Trust, but the attorney-in-fact would not have the power to release any of Grantor’s veto powers.
The taxpayer asked the Service to rule that none of (1) the initial trust transfer, (2) the proposed trust transfer, (3) the release of Grantor’s veto power, (4) Grantor’s incapacity, or (5) the existence of the springing durable power of attorney, would result in a completed gift, and that valuation rules would not apply to any of Grantor’s transfers to the trust.
The Service issued several rulings.
First, the Service ruled that because of Grantor’s testamentary power of appointment and her veto powers, neither the initial trust transfer nor the proposed trust transfer would be completed gifts.
The Service further stated that any distribution to any of the charities from the trust would be completed gifts.
The Service ruled that the release of Grantor’s objective veto power over distributions to the charities would not result in a completed gift because Grantor still had significant veto powers exercisable by her without the consent of an adverse person (the spouse’s interest as a potential appointee under Grantor’s limited testamentary power of appointment was not a substantial adverse interest).
Further, the Service ruled that the Grantor’s incapacity would not cause the transfers to be completed gifts, and the fact that Grantor had a springing durable power of attorney under which the attorney-in-fact has the power to veto trust distributions in the event of the Grantor’s incapacity would not result in a release of the veto power by Grantor and would not result in a completed gift.
Finally, since none of the transfers to the trust would result in a completed gift, the Service ruled that the valuation rules do not apply.
Now one may wonder why the taxpayers went to the expense of requesting these rulings. What may be going on here is that the taxpayers want to set up trusts that are asset protected for the grantor and can continue after the grantor’s death as an asset-protected trust for the grantor’s spouse. The charities may have been added to eliminate the ability of the grantor’s or the grantor’s spouse’s creditors from reaching the trust assets, because the grantor is not the only beneficiary during the grantor’s lifetime.
However, since the trust would not qualify as a charitable split interest trust, if it were a completed gift, the grantor would be treated as having given away the entire value of the trust and that gift would not qualify for a charitable deduction (a distinctly bad result). Therefore, it was important that this not be a completed gift at the time of the transfer.
Since this trust will still be taxed as a grantor trust for Federal income tax purposes (since the grantor is entitled to distributions of income without the consent of an adverse party), whenever a transfer is made to a charity under the terms of the trust, that transfer will be treated as a completed gift from the grantor to charity for which the grantor would then receive a charitable deduction.
• No gift tax on the transfer of assets to the trust;
• No gift tax on the distribution of funds to charity from the trust;
• An income tax deduction on a distribution of funds to charity from the trust;
• No estate tax on the grantor’s death as the grantor will get either a marital or charitable deduction at death;
• During the grantor’s lifetime, the assets may be exempt from the grantor’s creditors, depending on the grantor’s state of residence and the state in which the trust is located.
*Thanks to Alex Fersa for drafting assistance.