IRS written determination 201435009

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201435009
Release Date: 8/29/2014
Index Number: 2702.00-00
----------------------
---------------------------
--------------------------------------------
--------------------------------
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
-----------------------------------------------------
-----------------
Telephone Number:
----------------------
Refer Reply To:
CC:PSI:B04
PLR-144161-13
Date: APRIL 23, 2014
Legend
Husband----------------------------------------------
Proceeds Trust--------------------------------------------------------------------------
Year 1
Year 2
-------
--------
Wife -----------------------------------------------------
Child 1 -----------------------------------------------------
Child 2 ----------------------------------------------------
Child 3 ----------------------------------------------
Child 4 -------------------------------------------------------
Child 5 ------------------------------------------------
Child 6-------------------------------------------------
Individual-------------------------
Company---------------------------------
State 1 -------------
State 2---------
Property 1----------------------------
Property 2 -----------------------------
Date 1-------------------
Date 2 --------------------
Date 3 --------------
Date 4----------------------------
Agreement-------------------------------------------------------------------------
Addendum------------------------------------------------------------------------------
-------------------------------------------------------------
Statute 1--------------------------------------------------
Statute 2----------------------------------------------------
Statute 3----------------------------------------------------

PLR-144161-13
2
Dear ---------------:
This letter responds to your authorized representative’s letter dated
October10, 2013, requesting rulings regarding the gift tax consequences of a proposed
modification of the Proceeds Trust.
The facts and representations submitted are as follows:
In Year 1 and Year 2 (dates prior to October 8, 1990), Husband, Wife, and five of
their six children (Child 1, Child 2, Child 3, Child 4, and Child 5) purchased Property1,
located in State 1, from an unrelated party for fair market value. On Date 1 (a date prior
to October 8, 1990), Husband, Wife, and Children 1 through 5 executed an Agreement
in connection with the Property 1 acquisition. In accordance with the terms of the
Agreement, Husband, Wife, and Children 1 through 5 each paid the actuarial valueof
their respective interest from their own resources and none of the five children used any
funds acquired from their parents to acquire their interests. Pursuant to the Agreement,
Wife acquired a life interest in the use of and income from Property1, Husband
acquired a life interest in the use of and income from Property 1 that would become
effective upon the death of Wife, Child 1 acquired a one-third common undivided
interest in the remainder, and Children 2 through 5 each acquired a one-sixth common
undivided interest in the remainder. Husband and Wife are referred to as “Life Tenants”
and Children 1 through 5 are referred to as “Remaindermen.”
Although Child6 did not participate in the initial acquisition of Property 1 because
he was a minor,Article 8 of the Agreement provides for the transfer of a one-sixth
interest in the remainder estate from Child1 to Child6 upon Child 6’s attainment of
age 18. Consent by any party is not required provided that Child 6 agrees to be bound
by the terms of the Agreement. On Date 2 (a date prior to October 8, 1990), Child 6
attained the age of majority and received his one-sixth interest by conveyance from
Child 1.
On Date 3 (a date prior to October8, 1990), the Life Tenants, the
Remaindermen, and Child 6 executed an Addendum to the Agreement. The Addendum
provides that Child 6 is added as a one-sixth Remainderman upon the transfer,
pursuant to Article 8 of the Agreement, by his sister, Child 1, and that Child 6 agrees to
be bound by all of the terms and conditions of the Agreement, as amended.
The Addendum further provides that Article 10 is added to the Agreement.
Article10 provides that in the event the Life Tenants and the Remaindermen agree to
collectively acquire any subsequent real propertyas life tenants and remaindermen, the

PLR-144161-13
3
newly-acquired property shall be subject to the same terms and conditions as between
the Life Tenants and Remaindermen as set forth in the Agreement.
Subsequent to the execution of the Addendum, the Life Tenants and the
Remaindermen acquired additional property located in State 1 in the same manner of
holding title as they employed for Property 1. All of the properties so acquired, other
than Property 1, are referred to as Property 2. The parties represent that they have not
acquired any property as life tenants and remaindermen after October 8, 1990, and that
the Agreement and the Addendum have not been modified or amended after October 8,
1990.
On Date 4 (a date after October 8, 1990), Property 1 was sold to anunrelated
party and the proceeds were deposited in the ProceedsTrust. Article 5 of the
Agreement provides, in part, that if Property 1 should be disposed of prior to the
expiration of the respective life tenancies, the proceeds into which the property is
converted shall be placed in trust, and the Life Tenants (or the survivor) shall be the
trustees. Article 5 further provides that after the payment of income taxes, the
remaining proceeds shall be held by the trustees, invested and reinvested, and the
trustees shall pay to the Life Tenants, at least annually, all income (but not principal)
earned by the trust assets. Upon the death of both of the Life Tenants, the trust shall
terminate and the trust assets shall be immediately paid to the Remaindermen in
accordance with their respective interests.
Also on Date 4, the Life Tenants, in their capacity as trustees pursuant to
Article5 of the Agreement, established the trust required to be created under Article5
for the purpose of holding and administeringthe proceeds from the sale of Property 1.
The trust is referred to as the Proceeds Trust and the instrument names the Life
Tenants as the trustees of the Proceeds Trust.
The terms of the Proceeds Trust incorporate the dispositive terms of the
Agreement. Paragraph2 of the Proceeds Trust provides that the trustees shall invest
and reinvest the proceeds and pay to the Life Tenants, at least annually, all income (but
not principal or corpus), and upon the death of both Life Tenants, the trustees shall
terminate the Proceeds Trust and distribute the remaining trust assets to the
Remaindermen in accordance with their respective interests. Paragraph 3 provides
that, to the extent not inconsistent with the Agreement, the trustees shall have all
powers with respect to the Proceeds Trust and the trust property that are set forth under
State 2 law and, in carrying out its fiduciary obligations, the trustees shall be bound by
State2 law. Paragraph 4 provides that except as provided in the Agreement, no person
may add property to the Proceeds Trust, except that proceeds from a sale of Property2,
which is subject to the Agreement, may be added to the Proceeds Trust to the extent
provided by the terms of the Agreement. Paragraph 5 provides that upon the death of
either Life Tenant, the other Life Tenant shall serve as the sole trustee. Paragraph6

PLR-144161-13
4
provides that the Proceeds Trust is irrevocable and Paragraph 7 provides the trust situs
is State2.
On September 30, 2004, the Internal Revenue Service (Service) issued a private
letter ruling to Husband regarding the applicability of §2702 of the Internal Revenue
Code (Code) to the sales transaction and the deposit of the proceeds in the Proceeds
Trust. The ruling holds that the proceeds of a sale or other conveyance of Property 1,
and the principal proceeds of any investments or reinvestments that are held in trust
pursuant to the provisions of the Agreement will be treated as a transfer or transfers
occurring prior to October 8, 1990, for purposes of applying theprovisions of Chapter 14
of the Code and, therefore, Chapter 14 will not apply thereto. The ruling also holds that
after the sale of Property 1, Property 2 will continue to be treated as property acquired
pursuant to a transfer occurring prior to October8, 1990.
Currently, the Life Tenants and the Remaindermen propose to modify the terms
of the Proceeds Trust to appoint Individual as an independent trustee to serve with the
Life Tenants as a co-trustee and to provide for the appointment of a successor
independent trustee. The Modified Trust Agreement identifies Individual as the
independent co-trustee of the Proceeds Trust and further specifies:
There shall at all times be serving a Trustee who is not a beneficiary of the
Trust, and who either is a professional fiduciary or is an employee or
principal of [Company], or its successor (an “Independent Trustee”). A
“professional fiduciary” serving as Independent Trustee must be a bank or
trust company that is qualified to act as a fiduciary under applicable
federal or state law, or an attorney at law or a certified public accountant,
none of whom is related or subordinate to any beneficiary within the
meaning of [§ 672(c) of the Code].
In addition, the Modified Trust Agreement provides that the Life Tenants may
appoint, in writing, a successor Independent Trustee upon the death, resignation, or
incapacity of another Independent Trustee. The Life Tenants, by unanimous consent if
both are then serving as trustees, or the remaining Life Tenant if oneis then serving,
together with a majority of the Remaindermen, shall have the right to remove any
Independent Trustee appointed or serving. If at any time a party or parties remove an
Independent Trustee, such party or parties shall appoint a successor Independent
Trustee. If neither Life Tenant is then serving as trustee, the Remaindermen, by
majority consent, shall have the right to appoint and to remove any Independent Trustee
appointed or serving.
The Modified Trust Agreement makes no change to the distribution provisions or
to the term of the Proceeds Trust.

PLR-144161-13
5
Statute 1, a State 2 statute, provides that if the settlor and all beneficiaries
consent to the modification or termination of an irrevocable trust, the court shall enter an
order approving the modification or termination if the court finds that the modification or
termination is in the best interests of the beneficiaries, even if the modification or
termination is inconsistent with a material purpose of the trust.
Statute 2, a State 2 statute, provides, in relevant part, that a trustee may adjust
between principal and income by allocating an amount of income to principal or an
amount of principal to income to the extent the trustee considers appropriate if the terms
of the trust describe the amount that may or must be distributed to a beneficiary by
referring to the trust's income. A trustee may not make an adjustment under this section
if the trustee is a beneficiary of the trust.
Statute 3, a State 2 statute, provides, in relevant part, that unless expressly
prohibited by the terms of the trust, a trustee may release the power to adjust under
Statute 2 and convert a trust into a unitrust. The trustee must determine that the
conversion will improve the ability of the trustee to carry out the intent of the settlor and
the purposes of the trust. Statute 3 provides factors a trustee shall consider in making
this determination. Statute 3 further requires the trustee to give, to the current income
beneficiaries and the beneficiaries who would receive principal if the trust were to
terminate and no power of appointment were exercised, written notice of the trustee’s
intention to release the power to adjust and to convert the trust into a unitrust and of
how the unitrust will operate. A trustee may not convert a trust into a unitrust if any
beneficiary objects to the conversion to a unitrust in writing delivered to the trustee
within 60 days of the mailing of the required notice. For a trust to convert to a unitrust,
the trust must have at least one beneficiary eligible to receive income and at least one
beneficiary who would receive principal if the trust were to terminate and no power of
appointment were exercised. A trustee may not convert a trust into a unitrust if the
trustee is a beneficiary of the trust.
Statute 3 further provides, in relevant part, that after a trust is converted to a
unitrust, the trustee shall follow an investment policy seeking a total return for the
investments held by the trust, whether the return is to be derived from appreciation of
capital, from earnings and distributions from capital or from both. The trustee shall
make regular distributions in accordance with the terms of the trust construed in
accordance with the provisions of this section. The term “income” in the terms of the
trust means an annual distribution, known as the “unitrust distribution,” equal to four
percent, known as the “payout percentage,” of the net fair market value of the trust's
assets, whether such assets would be considered income or principal under other
provisions of this Part of Statutes, averaged over the lesser of the three preceding years
or the period during which the trust has been in existence.
It is represented that pursuant to Statute 2, the Independent Trustee of Proceeds
Trust may adjust between principal and income of the Proceeds Trust by allocating an

PLR-144161-13
6
amount of income to principal or an amount of principal to income to the extent the
Independent Trustee considers appropriate. It is further represented that, pursuant to
Statute 3, the Independent Trustee of the Proceeds Trust may release the power to
adjust between principal and income and convert the Proceeds Trust into a unitrust if
the requirements of Statute 3 are satisfied. The Life Tenants and the Remaindermen
prefer that the Independent Trustee administer the trust in a manner that would involve
the use of the power to adjust, or alternatively, to relinquish that power in favor of the
unitrust approach to thecomputation of income. Accordingly, it is represented that the
Life Tenants and the Remaindermen do not object to the Independent Trustee’s
prospective release of the power to adjust between principal and income and
conversion of the Proceeds Trust to a unitrust.
You have requested the following rulings:
1. The Life Tenants and the Remaindermen will not be treated as making a taxable
gift subject to Federal gift tax as a result of: (a)the agreement to modify the
provisions of the Proceeds Trust pursuant to the Modified Trust Agreement;
(b) the exercise by an Independent Trustee of the power to adjust between
principal and income pursuant to Statute 2; (c)the exercise by an Independent
Trustee of the power to release the power to adjust and convert the Proceeds
Trust to a unitrust pursuant to Statute 3; and (d)the failure on the part of the
Life Tenants and the Remaindermen to object to the conversion of the Proceeds
Trust to a unitrust.
2. The agreement to modify the provisions of the Proceeds Trust pursuant to the
Modified Trust Agreement,the exercise by an Independent Trustee of the power
to adjust between principal and income pursuant to Statute 2, and the exercise
by an Independent Trustee of the power to release the power to adjust and
convert the Proceeds Trust to a unitrust pursuant to Statute 3 will not cause
§ 2702 to apply to the Proceeds Trust.
Law and Analysis
Ruling 1
Section 2501(a)(1) imposes a tax for each calendar year on the transfer of
property by gift during such calendar year by an individual.
Section 2511(a) provides that the tax imposed by § 2501 shall apply whether the
transfer is in trust or otherwise and whether the gift is direct or indirect, and whether the
property is real or personal, tangible or intangible.
Section 2512(a) provides that, if a gift is made in property, the value thereof at
the date of the gift shall be considered the amount of the gift.

PLR-144161-13
7
Section 2514(b) provides that the exercise or release of a general power of
appointment created after October 21, 1942, shall be deemed a transfer of property by
the individual possessing such power.
Section 2514(c) provides that, subject to certain exceptions, a general power of
appointment is a power that is exercisable in favor of the individual possessing the
power (the possessor), his estate, his creditors, or the creditors of his estate.
Section 25.2514-1(b)(1) of the Gift Tax Regulations provides, in part, that a
donee may have a power of appointment if he has the power to remove or discharge a
trustee and appoint himself. For example, if under the terms of the trust instrument, the
trustee or his successor has the power to appoint the principal of the trust for the benefit
of individuals including himself, and A, another person, has the unrestricted power to
remove or discharge the trustee at any time and appoint any other person including
himself, A is considered as having a power of appointment. However, the mere power
of management, investment, custody of assets, or the power to allocate receipts and
disbursements as between income and principal, exercisable in a fiduciary capacity,
whereby the holder has no power to enlarge or shift any of the beneficial interests
therein except as an incidental consequence of the discharge of the fiduciary duties is
not a power of appointment.
Section 643(b) of subtitle A of the Code provides that the term “income,” when
not preceded by the words “taxable,” “distributable net,” “undistributed net,” or “gross,”
means the amount of income of the estate or trust for the taxable year determined
under the terms of the governing instrument and applicable local law.
Section 1.643(b)-1 of the Income Tax Regulations provides a comprehensive
definition of “income” as that term applies to trusts and estates. It provides, in part, that
an allocation of amounts between income and principal pursuant to applicable local law
will be respected if local law provides for a reasonable apportionment between the
income and remainder beneficiaries of the total return of the trust for the year, including
ordinary and tax-exempt income, capital gains, and appreciation. For example, a state
statute providing that income is a unitrust amount of no less than 3 percent and no more
than 5percent of the fair market value of the trust assets, whether determined annually
or averaged on a multiple year basis, is a reasonable apportionment of the total return
of the trust. Similarly, a state statute that permits the trustee to make adjustments
between income and principal to fulfill the trustee’s duty of impartiality between the
income and remainder beneficiaries is generally a reasonable apportionment of the total
return of the trust. Section 1.643(b)-1 further provides that a switch between methods
of determining trust income authorized by state statute will not result in a taxable gift
from the trust's grantor or any of the trust's beneficiaries. A switch to a method not
specifically authorized by state statute but valid under state law (including a switch via

PLR-144161-13
8
judicial decision or a binding non-judicial settlement) may result in taxable gifts from the
trust's grantor and beneficiaries based on the relevant facts and circumstances.
In this case, Individual is the only trustee with the power, pursuant to Statute2,
to make adjustments between income and principal and, pursuant to Statute3, to
convert the Proceeds Trust to a unitrust. No beneficiary of the Proceeds Trust has any
power over trust assets other than the power of management and investment of assets.
Consequently, the shared power to remove an Independent Trustee and to appoint a
successor Independent Trustee is not a general power of appointment within the
meaning of §2514. Accordingly, based on the facts submitted and the representations
made, we conclude that the modification of the Proceeds Trust will not cause the Life
Tenants and the Remaindermento be treated as having made a taxable gift for Federal
gift tax purposes.
Regarding the Independent Trustee’s authority to adjust between income and
principal pursuant to Statute2, we conclude the exercise of the Independent Trustee’s
authority to adjust between principal andincome pursuant to Statute 2 will not cause the
Life Tenants or the Remaindermento be treated as having made a taxable gift for gift
tax purposes. Cf. Treas. Reg. §26.2601-1(b)(4)(i)(E), Example 12(although the
example appears in the generation-skipping transfer tax regulations, the example
concludes in relevant part that where a trustee administers a trust in accordance with a
state statute that permits the trustee to make adjustments between income and
principal, no trust beneficiary will be treated as having made a gift for Federal gift tax
purposes).
Regarding the Independent Trustee’s authority to convert the Proceeds Trust to a
unitrust pursuant to Statute3, we conclude that the conversion will not shift any
beneficial interest in the Proceeds Trust. Accordingly, provided the proposed
conversion meets the requirements of Statute 3, we conclude that the conversion of the
Proceeds Trust pursuant to Statute 3 will not cause the Life Tenants or the
Remaindermento be treated as having made a taxable gift for gift tax purposes.
Since the conversion of the Proceeds Trust to a unitrust pursuant to Statute 3 will
not shift any beneficial interest in the Proceeds Trust, we conclude that upon the
Independent Trustee’s notice of the intent to convert toa unitrust, the failure to object to
the conversion will not cause the Life Tenants and the Remaindermen to be treated as
having made a taxable gift for Federal gift tax purposes.
Ruling 2
The provisions of Chapter 14 of the Code (§§ 2701-2704), wereadded by the
Revenue Reconciliation Act of 1990 and are effective for transfers occurring after
October8, 1990.

PLR-144161-13
9
Section 2702(a)(1) provides, generally, that solely for purposes of determining
whether a transfer of an interest in trust to (or for the benefit of) a member of the
transferor's family is a gift (and the value of such transfer), the value of any interest in
such trust retained by the transferor or any applicable family member shall be
determined as provided in § 2702(a)(2).
Section 2702(a)(2) provides that the value of any retained interest which is not a
qualified interest shall be treated as being zero. The value of any retained interests
which is a qualified interest shall be determined under § 7520.
In the instant case, the Service has previously ruled in a private letter ruling to
Husband that Chapter14 does not apply to the sales transaction and deposit of the
proceeds in the Proceeds Trust. The Life Tenants and the Remaindermen will have
substantially identical interests both before and after the execution of the Modified Trust
Agreement and the exercise of the Independent Trustee’s authority under Statute 2 or
Statute 3. The proposed modification of the Proceeds Trust and the exercise of the
Independent Trustee’s authority pursuant to Statute 2 and Statute 3 will not involve any
transfer of an interest among the Life Tenants and the Remaindermen. Based on the
facts submitted and representations made, we conclude the Modified Trust Agreement
and the exercise of the Independent Trustee’s authority pursuant to, and in accordance
with, the requirements of Statute 2 and Statute3, will not cause §2702 to apply to the
Proceeds Trust.
In accordance with the Power of Attorney on file with this office, we have sent a
copy of this letter to your authorized representatives.
Except as expressly provided herein, we neither express nor imply any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.
The rulings contained in this letter are based upon information and
representations submitted by the Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

PLR-144161-13
10
This ruling is directed only to the Taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.
Sincerely,
____________________________________
Karlene M. Lesho
Acting Senior Technician Reviewer, Branch 4
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosure:
Copy for § 6110 purposes