n-08-63.pdf

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Notice 2008-63

TEXT

I. Overview and Purpose

This notice sets forth the contents of a proposed revenue ruling concerning the
income, estate, gift, and generation-skipping transfer tax consequences in situations in
which family members create a private trust company to serve as the trustee of trusts
having family members as grantors and beneficiaries.
This notice solicits public comments regarding the proposed revenue ruling. The
IRS and the Treasury Department anticipate issuing a final revenue ruling after the
comments have been considered. The IRS and the Treasury Department intend that
the revenue ruling, once issued, will confirm certain tax consequences of the use of a
private trust company that are not more restrictive than the consequences that could
have been achieved by a taxpayer directly, but without permitting a taxpayer to achieve
tax consequences through the use of a private trust company that could not have been
achieved had the taxpayer acted directly. Comments are specifically requested as to
whether or not the draft revenue ruling will achieve that intended result.
II. Proposed Revenue Ruling

Part 1
Section 2036.—Transfers With Retained Life Estate
26 CFR 20.2036-1(b)(3): Transfers with retained life estate.
Also: § 2038, § 20.2038-1, § 2041, § 20.2041-1, § 2501, § 2511, § 25.2511, § 2601,
§ 26.2601-1, § 671, § 672(c), § 674, § 675, § 677, § 678)

Rev. Rul. [XXXX-XX]
ISSUES

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(1) If the private trust company (PTC) described in Situation 1 or Situation 2 is
appointed and serves as the trustee of a trust, will the value of the trust
assets be included in a grantor’s gross estate under §§ 2036(a) or
2038(a)?
(2) If the PTC described in Situation 1
or Situation 2 is appointed and serves
as the trustee of a trust, will the value of the trust assets be included in a
beneficiary’s gross estate under § 2041?
(3) If the PTC described in Situation 1
or Situation 2 is appointed and serves
as the trustee of a trust that provides the trustee with the discretionary
power to distribute income and/or principal to the grantor’s child or
descendants, will the grantor’s transfer to that trust constitute a completed
gift?
(4) Does the appointment and service of a PTC as the trustee of a trust affect
the exempt status of a trust that is otherwise exempt from the generation-
skipping transfer (GST) tax under § 2601, or change the inclusion ratio of
a trust?
(5) If the PTC described in Situation 1
or Situation 2 is appointed and serves
as the trustee of a trust, is the grantor or any beneficiary of that trust
treated as the owner of any portion of the trust under §§ 671 through 678?
FACTS
A and B, who are husband and wife, have three children, C, D, and E. C, D, and
E are each married, and each has children. References to Family include A, B, their
children, the spouses and former spouses of their children, and each other descendant

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of A and B (both now living and future) and the spouses and former spouses of such
descendants.
A and B have established separate irrevocable trusts for each of their children
and grandchildren. In addition, C, D, and E have established irrevocable trusts for their
respective descendants. Each child or grandchild of A and B is the primary beneficiary
of the trust established for that child or grandchild. Each trust receives contributions
only from the person who created the trust. All grantors and beneficiaries are United
States persons and no trust is a foreign trust.
Each trust instrument provides the trustee with discretionary authority to
distribute income and/or principal to the primary beneficiary of the trust during the
primary beneficiary’s lifetime. In addition, each trust provides the primary beneficiary
with the testamentary power to appoint the trust corpus to or for the benefit of one or
more members of Family (other than the primary beneficiary) and/or one or more
organizations described in §§ 170(c), 2055(a) and 2522(a) of the Internal Revenue
Code. Each trust also provides that the grantor, or the primary beneficiary if the grantor
is not living, may appoint a successor trustee other than himself or herself if the current
trustee either resigns or is no longer able to fulfill the duties of trustee. Finally, each
trust provides that the trust will 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 of the creation
of the trust.
Situation 1 -- PTC formed under laws of a state that has enacted a private trust
company statute. The facts and the terms of the trusts are as described above. All
trusts are governed by the laws of State 1, a state that has enacted a private trust

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company statute (Statute). Statute provides that any PTC formed under Statute must
create a Discretionary Distribution Committee (DDC) and delegate to the DDC the
exclusive authority to make all decisions regarding discretionary distributions from each
trust for which it serves as trustee. Discretionary distributions are defined as
permissible distributions that are not mandated in the trust instrument or by applicable
law. Statute does not restrict who may serve on the DDC, but provides that no member
of the DDC may participate in the activities of the DDC with regard to any trust of which
that DDC member or his or her spouse is a grantor, or any trust of which that DDC
member or his or her spouse is a beneficiary. In addition, Statute provides that a DDC
member may not participate in the activities of the DDC with respect to any trust with a
beneficiary to whom that DDC member or his or her spouse owes a legal obligation of
support. Statute provides that only officers and managers of the PTC may participate in
decisions regarding personnel of the PTC (including the hiring, discharge, promotion
and compensation of employees). Statute also provides that nothing in Statute or in
PTC’s governing documents may override a more restrictive provision in the trust
instrument of a trust for which PTC is acting as a trustee. Finally, Statute provides that
no Family member may enter into any reciprocal agreement, express or implied,
regarding discretionary distributions from any trust for which PTC is serving as a
trustee.
In 2008, Family formed a corporation that is a PTC under Statute. PTC’s
governing documents create a DDC that will make all decisions with respect to
discretionary distributions from all trusts for which it serves as trustee, consistent with
Statute. PTC’s governing documents do not restrict who may serve on the DDC.

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Family owns all of the stock in PTC, either outright or through trusts and/or other
entities. A, C, and D are officers of PTC and serve on PTC’s Board of Directors. A, C,
and D also serve on the DDC. B and E own shares of PTC, but neither is on the DDC
and neither is an officer or director of PTC. E is a manager and employee of PTC.
X, a financial institution organized under the banking laws of State 1, has served
as trustee of each of the trusts since their inception. No grantor of any of the trusts has
a relationship with X other than as a customer or client of X.
Subsequent to PTC’s formation, X resigned as trustee of each of the trusts and
PTC was appointed as the successor trustee of each trust. In addition, A created and
transferred property to three additional irrevocable trusts (the 2008 trusts), one for the
primary benefit of each of A’s children, C, D, and E, and that child’s descendants. The
terms of each of the 2008 trusts are the same as those described above, except that
these trusts provide that the trustee has discretionary authority to distribute income
and/or principal to any one or more beneficiaries during the beneficiary’s life. Each
2008 trust receives contributions only from A. PTC will serve as the initial trustee of
each of the 2008 trusts.
Situation 2 -- PTC formed in a state without a statute governing private trust
companies. The facts and the terms of the trusts are as described above. In 2008,
Family formed a corporation that is a PTC in State 2, a state that has not enacted
specific legislation governing the formation or operation of a private trust company.
PTC is established for the specific purpose of acting as the trustee for the various trusts
established by members of Family. Family owns all of the stock in PTC, either outright
or through trusts and/or other entities.

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PTC’s governing documents create a DDC and delegate to the DDC the
exclusive authority to make all decisions regarding discretionary distributions from each
trust for which it serves as trustee. Discretionary distributions are defined as
permissible distributions that are not mandated in the trust instrument or by applicable
law. PTC’s governing documents do not restrict who may serve on the DDC, but
provide that no member of the DDC may participate in the activities of the DDC with
regard to any trust of which that DDC member or his or her spouse is a grantor, or any
trust of which that DDC member or his or her spouse is a beneficiary. In addition, the
governing documents provide that a DDC member may not participate in the activities of
the DDC with respect to any trust with a beneficiary to whom that DDC member or his or
her spouse owes a legal obligation of support. PTC’s governing documents also
provide that only officers and managers of the PTC may participate in decisions
regarding personnel of the PTC (including the hiring, discharge, promotion and
compensation of employees). PTC’s governing documents also provide that nothing in
PTC’s governing documents may override a more restrictive provision in the trust
instrument of a trust for which PTC is acting as a trustee. In addition, PTC’s governing
documents also provide that no Family member may enter into any reciprocal
agreement, express or implied, regarding discretionary distributions from any trust for
which PTC is serving as a trustee.
PTC’s governing documents also provide for the creation of an Amendment
Committee, a majority of whose members must always be individuals who are neither
Family members nor persons related or subordinate (as described in §672(c)) to any
shareholder of PTC. The governing documents further provide that the Amendment

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Committee, by no less than majority vote, shall have the sole authority to make any
changes to PTC’s governing documents regarding the creation, function, or
membership of the DDC or of the Amendment Committee itself, the provisions
delegating exclusive authority regarding personnel decisions to the officers and
managers, and the prohibition of reciprocal agreements between Family members. The
vesting of these powers exclusively in the Amendment Committee is not contrary to any
applicable provision of the law of State 2. F, G, and A are the initial members of the
Amendment Committee. F and G are not members of Family, are not employed by
PTC, and are not otherwise related or subordinate to any Family member as defined in
§ 672(c).
A, C, and D are officers of PTC. A, C, D, F, and G serve on PTC’s Board of
Directors. A, C, and D also serve on the DDC. B and E own shares of PTC, but neither
is on the DDC and neither is an officer or director of PTC. E is a manager and
employee of PTC.
X, a financial institution organized under the banking laws of State 2, has served
as trustee of each of the trusts since their inception. No grantor of any of the trusts has
a relationship with X other than as a customer or client of X.
Subsequent to PTC’s formation, X resigned as trustee of each of the trusts and
PTC was appointed as the successor trustee of each trust. In addition, A created and
transferred property to three additional irrevocable trusts (the 2008 trusts), one for the
primary benefit of each of A’s children, C, D, and E, and that child’s descendants. The
terms of each of the 2008 trusts are the same as those described above, except that
these trusts provide that the trustee has discretionary authority to distribute income

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and/or principal to any one or more beneficiaries during the beneficiary’s life. Each
2008 trust receives contributions only from A. PTC will serve as the initial trustee of
each of the 2008 trusts.
LAW AND ANALYSIS
Issue 1

Section 2036(a) provides that the value of the gross estate shall include the
value of all property to the extent of any interest therein of which the decedent has at
any time made a transfer (except in the case of a bona fide sale for an adequate and full
consideration in money or money’s worth), by trust or otherwise, under which he has
retained for his life or for any period not ascertainable without reference to his death or
for any period that does not in fact end before his death – (1) the possession or
enjoyment of, or the right to the income from, the property, or (2) the right, either alone
or in conjunction with any person, to designate the persons who shall possess or enjoy
the property or the income therefrom.
Section 20.2036-1(b)(2) of the Estate Tax Regulations provides that the “use,
possession, right to the income, or other enjoyment of the transferred property” is
considered as having been retained by or reserved to the decedent to the extent that
the use, possession, right to the income, or other enjoyment is to be applied toward the
discharge of a legal obligation of the decedent, or otherwise for the decedent’s
pecuniary benefit. The term “legal obligation” includes a legal obligation to support a
dependent during a decedent’s lifetime.
Section 20.2036-1(b)(3) provides, in part, that the phrase “right . . . to designate
the person or persons who shall possess or enjoy the transferred property or the

9
income therefrom” includes a reserved power to designate the person or persons to
receive the income from the transferred property, or to possess or enjoy non-income-
producing property, during the decedent’s life. With respect to such power, it is
immaterial: (i) whether the power was exercisable alone or only in conjunction with
another person or persons, whether or not having an adverse interest; (ii) in what
capacity the power was exercisable by the decedent or by another person or persons in
conjunction with the decedent; and (iii) whether the exercise of the power was subject to
a contingency beyond the decedent’s control which did not occur before his death. The
phrase, however, does not include a power over the transferred property itself which
does not affect the enjoyment of the income received or earned during the decedent’s
life. (See, however, § 2038 for the inclusion of property in the gross estate on account
of such a power.) Nor does the phrase generally apply to a power held solely by a
person other than the decedent.
Section 2038(a)(1) provides that the value of the gross estate shall include the
value of all property to the extent of any interest therein of which the decedent has at
any time made a transfer (except in the case of a bona fide sale for an adequate and full
consideration in money or money’s worth), by trust or otherwise, where the enjoyment
thereof was subject at the date of the decedent’s death to any change through the
exercise of a power (in whatever capacity exercisable) by the decedent alone or by the
decedent in conjunction with any other person (without regard to when or from what
source the decedent acquired the power), to alter, amend, revoke, or terminate, or
where any power is relinquished during the three-year period ending on the date of the
decedent’s death.

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Under § 2038, the discretionary authority to distribute or withhold income is a
right to alter, amend, revoke, or terminate a trust. Thus, if a grantor holds these powers
at death, or if any such power is relinquished during the three-year period ending on the
date of the decedent’s death, the value of the trust corpus is includible in the grantor’s
gross estate under § 2038 and § 2035, respectively. See Rev. Rul. 70-348, 1970-2
C.B. 193.
In Situation 1
, PTC is the trustee of the Family trusts. All distribution decisions
are to be made by the DDC, and no Family member serving on the DDC may
participate in making discretionary distribution decisions with respect to any trust of
which that person or his or her spouse is either a grantor or a beneficiary, or with
respect to any trust of which the beneficiary is a person to whom the Family member or
his or her spouse owes an obligation of support. Further, Statute prohibits any
shareholder(s) of PTC from changing the governing provisions regarding the DDC.
Therefore, no Family member, either alone or with any other person, has any right or
power described in § 2036(a) or § 2038(a) with regard to a Family trust solely by reason
of PTC’s service as trustee or of the Family member’s ownership of or relationship(s)
with PTC. In addition, no Family member may insert themselves into the position of
holding such a power. As a result, provided that PTC operates as required by State 1’s
Statute, no portion of the value of a Family trust will be includible in the gross estate of
A, C, or D under § 2036(a) or § 2038(a) by reason of PTC’s service as trustee or that
person’s service as an officer, director, or member of the DDC. Finally, for the same
reasons, no portion of the value of the trust will be includible in the gross estate of B or
E solely because B and E are shareholders and/or a manager or employee of PTC.

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In Situation 2, no Family member currently has a power described in § 2036(a) or
§ 2038(a) because of the provisions in PTC’s governing documents regarding the DDC.
With regard to whether any Family member may acquire such a power, however,
Situation 2
differs from Situation 1. As in Situation 1, Family owns all of the stock in
PTC but, unlike Situation 1, State 2 has no state statute restricting the ability of PTC’s
shareholders to change the applicable provisions governing the DDC. In Situation 2,
Family members who are PTC’s shareholders do have a power to amend PTC’s
governing documents. However, PTC’s Amendment Committee has the sole authority
to amend PTC’s governing documents with regard to the DDC and the Amendment
Committee, with regard to the authority to make personnel decisions, and with regard to
the prohibition on reciprocal agreements. Thus, as in Situation 1
, even a sole
shareholder of PTC does not have the authority to change the provisions regarding the
Amendment Committee. Under these facts, no Family member, including A who is a
member of the Amendment Committee, will be deemed to have a power to change the
governing provisions regarding the DDC that would thereby result in the inclusion of any
part of a Family trust in a Family member’s gross estate. Therefore, if PTC operates in
a manner consistent with its governing documents as described above, and if the
provisions described above are not changed (those regarding the DDC, the Amendment
Committee, the authority over personnel decisions, and the prohibition of reciprocal
agreements), no portion of the value of a Family trust will be includible in the gross
estate of a grantor under § 2036(a) or § 2038(a) by reason of PTC’s service as Trustee,
a grantor’s interest in PTC, or a grantor’s service as an officer, director, manager,
employee, or member of the DDC or the Amendment Committee of PTC.

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Issue 2
Section 2041(a)(2) provides that 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 his death, a general power of appointment created after
October 21, 1942, or with respect to which the decedent has at any time exercised or
released a power of appointment by a disposition that is of such nature that, if it were a
transfer of property owned by the decedent, the property would be includible in the
decedent’s gross estate under §§ 2035 to 2038, inclusive. For purposes of
§ 2041(a)(2), the power of appointment shall be considered to exist on the date of the
decedent’s death even though the exercise of the power is subject to a precedent giving
of notice or even though the exercise of the power takes effect only on the expiration of
a stated period after its exercise, whether or not notice has been given or the power has
been exercised on or before the date of the decedent’s death.
Section 2041(b)(1) provides that a general power of appointment is a power that
is exercisable in favor of the decedent, the decedent’s estate, the decedent’s creditors,
or the creditors of the decedent’s estate. However, a power to consume, invade, or
appropriate the property for the benefit of the decedent that is limited by an
ascertainable standard relating to the health, education, support, or maintenance of the
decedent shall not be deemed a general power of appointment.
Section 20.2041-1(b)(1) provides that a donee may have a power of appointment
if he has the power to remove or discharge a trustee and appoint himself as trustee.
For example, if under the terms of the instrument, the trustee or a successor trustee has
the power to appoint the principal of the trust for the benefit of individuals including the

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decedent, and the decedent has the unrestricted power to remove or discharge the
trustee at any time and appoint any other person including himself or herself as trustee,
the decedent is considered to have 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 fiduciary duties, is not a
power of appointment.
Section 2041(b)(1) defines a general power of appointment as a power
exercisable in favor of the decedent, his estate, his creditors, or the creditors of his
estate. The regulations contemplate that a beneficiary may possess a power of
appointment over trust property. Section 20.2041-1(b)(1). Thus, if a trust instrument
provides a beneficiary with the power to appropriate or consume the principal of a trust,
the power is a general power of appointment. The fact that the beneficiary holds the
power in a fiduciary capacity as a trustee will not prevent the power from being a
general power of appointment. Estate of Lanigan v. Commissioner
, 45 T.C. 247, 251
(1965).
In Situation 1, the governing documents of the Family trusts provide a trustee
with the discretionary authority to distribute income or principal to a beneficiary of a
trust. Under State 1’s Statute, however, PTC’s powers to make discretionary
distributions are delegated exclusively to the DDC, and no beneficiary who is a member
of the DDC is permitted to participate in discretionary distribution decisions with respect
to a trust in which that beneficiary has a beneficial interest (including a trust whose

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beneficiary is a person to whom the beneficiary owes an obligation of support). In
addition, Family members are prohibited from entering into reciprocal arrangements
designed to affect distribution decisions. Under these circumstances, C and D, as
beneficiaries who also serve as officers, directors, and members of PTC’s DDC, do not
have the unrestricted power to distribute trust assets to themselves as contemplated by
§ 2041. Similarly, neither E nor any other beneficiary will be deemed to have a general
power of appointment under § 2041 solely because a particular beneficiary is a
shareholder or otherwise participates in the daily activities of PTC, such as decisions
regarding investments, or the retention of attorneys, accountants, or other professional
advisors.
In Situation 2
, the PTC’s governing documents rather than applicable law restrict
the powers of members of the DDC. PTC’s governing documents preclude a
beneficiary from having the power as a member of the DDC to affect the beneficial
enjoyment of the trust property as described in § 2041. In addition, Family members
are prohibited from entering into reciprocal arrangements designed to affect distribution
decisions. Therefore, C and D, as beneficiaries who also serve as officers, directors,
and members of PTC’s DDC, do not have the power to distribute trust assets to
themselves as contemplated by § 2041. Further, neither E nor any other beneficiary will
be deemed to have a general power of appointment under § 2041 solely because a
particular beneficiary is a shareholder or otherwise participates in the daily activities of
PTC. In addition, based on the facts of Situation 2
, and for the reasons discussed
regarding Issue 1, no beneficiary who is a member of the Amendment Committee will

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be deemed to have a general power of appointment under § 2041 solely because such
beneficiary serves on the Amendment Committee.
Issue 3

Section 2501 imposes a tax on any transfer of property by gift by any individual.
Section 2511 provides for application of the gift tax regardless of the nature of the
property transferred and whether the transfer is direct or indirect, or in trust or
otherwise.
Section 25.2511-1(g)(1) provides, in part, that a transfer by a trustee of trust
property in which the trustee has no beneficial interest does not constitute a gift by the
trustee (but such a transfer may constitute a gift by the creator of the trust, if until the
transfer the creator had the power to change the beneficiaries by amending or revoking
the trust).
Section 25.2511-2(b) provides that, as to any property, or part thereof or interest
therein, of which the donor has so parted with dominion and control as to leave in him
no power to change its disposition, whether for his own benefit or for the benefit of
another, the gift is complete. But if upon a transfer of property (whether in trust or
otherwise) the donor reserves any power over its disposition, the gift may be wholly
incomplete, or may be partially complete and partially incomplete, depending upon all
the facts in the particular case.
Section 25.2511-2(c) provides that a gift is incomplete if the grantor has reserved
the power to revest the beneficial title to the property in the grantor, or to the extent that
the grantor has reserved a power to name new beneficiaries or to change the interests

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of the beneficiaries as between themselves, unless the power is a fiduciary power
limited by a fixed or ascertainable standard.
Section 25.2511-2(e) provides that a grantor is considered to hold a power if the
power is exercisable by the grantor in conjunction with any other person not having a
substantial adverse interest in the disposition of the transferred property or the income
therefrom. A trustee, merely by reason of that fiduciary position, does not have such an
adverse interest.
In Situation 1
and Situation 2, subsequent to the formation of PTC, A, a Family
member, creates and transfers property to the 2008 trusts, one for the benefit of each of
A and B’s children, C, D, and E, and that child’s descendants. Each trust instrument
provides the trustee with discretionary authority to distribute income and/or principal to
the child and/or the child’s then-living descendants. PTC will serve as the trustee of
each trust, and the DDC will make all of the decisions with respect to discretionary
distributions. Statute in Situation 1
and the governing documents in Situation 2 do not
prohibit A from serving on the DDC, and in each situation, A is a member of the DDC.
However, pursuant to Statute in Situation 1
and the governing documents in Situation 2,
no member of the DDC may participate in the activities of the DDC with regard to any
trust of which that DDC member or his or her spouse is a grantor, or any trust of which
that DDC member or his or her spouse is a beneficiary. Further, in both situations,
Family members are prohibited from entering into any reciprocal agreements designed
to affect distribution decisions. If PTC operates in accordance with Statute in Situation
1 or the governing documents in Situation 2 as the case may be, A will not have the
power to change the interests of the beneficiaries of the 2008 trusts. In addition, A will

17
not be considered to hold a power exercisable by A in conjunction with any other person
not having a substantial adverse interest in the disposition of the transferred property or
the property’s income merely because of A’s membership on the DDC. Thus, in each
situation, the value of the property transferred by A to the 2008 trusts will be considered
completed gifts for purposes of chapter 12 of the Code. Also, in Situation 1
and
Situation 2, the provisions of the DDC prohibit any beneficiary who is a member of the
DDC from participating in decisions with regard to any trust in which the beneficiary has
a beneficial interest. Thus, distributions of income or principal from a trust of which PTC
is the trustee will not be deemed to be a gift by any member of the DDC. See
§ 25.2511-1(g).
Issue 4

Section 2601 imposes a tax on every generation-skipping transfer. Under
§ 1433(b)(2)(A) of the Tax Reform Act of 1986 and § 26.2601-1(b)(1)(i), the GST tax
provisions do not apply to any generation-skipping transfer under a trust (as defined in
§ 2652(b)) that was irrevocable on September 25, 1985, but only to the extent that the
transfer is not made out of corpus added to the trust after September 25, 1985 (or out of
income attributable to corpus so added).
Section 26.2601-1(b)(1)(ii)(A) provides that any trust in existence on
September 25, 1985, is considered an irrevocable trust, except as provided in
§§ 26.2601-1(b)(ii)(B) or (C) relating to property includible in a grantor’s gross estate
under §§ 2038 and 2042, respectively.
Section 26.2601-1(b)(1)(v)(B) provides that the release, exercise, or lapse of a
power of appointment (other than a general power of appointment as defined in

18
§ 2041(b)) is not treated as an addition to a trust if – (1) the power of appointment was
created in an irrevocable trust that is not subject to chapter 13 under § 26.2601-1(b);
and (2) in the case of an exercise, the power of appointment is not exercised 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 trust, extending beyond any life in being at the date of creation of the trust plus a
period of 21 years plus, if necessary, a reasonable period of gestation (the perpetuities
period). For purposes of § 26.2601-1(b)(1)(v)(B)(2), the exercise of a power of
appointment 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 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 power is exercised by creating another
power, it is deemed to be exercised to whatever extent the second power may be
exercised.
Section 26.2601-1(b)(4) provides rules for determining when a modification,
judicial construction, settlement agreement, or trustee action with respect to a trust that
is exempt from the GST tax under § 26.2601-1(b)(1), (2), or (3) (hereinafter referred to
as an exempt trust) will not cause the trust to lose its exempt status. In general, unless
specifically provided otherwise, the rules contained in § 26.2601-1(b)(4) are applicable
only for purposes of determining whether an exempt trust retains its exempt status for
GST tax purposes. Unless specifically noted, the rules do not apply in determining, for
example, whether the transaction results in a gift subject to gift tax, or may cause the

19
trust to be included in the gross estate of a beneficiary, or may result in the realization of
capital gain for purposes of § 1001.
Section 26.2601-1(b)(4)(i)(D)(1) provides that a modification of the governing
instrument of an exempt trust 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 if the modification does not shift a beneficial interest in the trust
to any beneficiary who occupies a lower generation (as defined in § 2651) than the
person or persons who held the beneficial interest prior to the modification, and if the
modification does not extend the time for vesting of any beneficial interest in the trust
beyond the period provided in the original trust. Furthermore, a modification that is
administrative in nature that only indirectly increases the amount transferred (for
example, by lowering administrative costs or income taxes) will not be considered a shift
in a beneficial interest in a trust.
In Situation 1
and Situation 2, X resigned as trustee of each of the pre-2008
trusts and PTC replaced X as trustee. Under the facts of Situation 1 and Situation 2,
the change in trustee will not subject the value of the trust corpus to the tax under
Chapter 11 or 12, and this modification is an administrative change that does not shift a
beneficial interest in a trust to any beneficiary who occupies a lower generation (as
described in § 2651) than the person or persons who held the beneficial interest prior to
the modification. In addition, each trust will terminate no later than 21 years after the
death of the last to die of certain designated individuals living at the time of the creation
of the trust. Thus, even if PTC is formed and operates in a jurisdiction other than that of
the original trustee, the appointment of PTC alone will not extend the time for vesting of

20
any beneficial interest in a trust for which PTC acts as trustee beyond the date provided
for in the original trust. See § 26.2601-1(b)(4)(i)(E), Example 4 and Example 10.
Therefore, under the facts of Situation 1
and Situation 2, the appointment of PTC as
trustee does not change the status of a trust that was otherwise exempt from the GST
tax by virtue of having been irrevocable (as defined in § 26.2601-1(b)(1)(ii)(A)) on
September 25, 1985.
Further, as discussed in Issues 1 and 2, if PTC operates in a manner consistent
with Statute and/or its governing documents, no portion of the value of a Family trust will
be includible in the gross estate of a grantor under § 2036(a) or § 2038(a) by reason of
PTC’s service as trustee, the grantor’s interest in PTC, or the grantor’s service as an
officer, director, manager, employee, or member of the DDC or the Amendment
Committee of PTC. Similarly, beneficiaries who also serve as officers, directors, and
members of PTC’s DDC, do not have the power to distribute trust assets to themselves
as contemplated by § 2041, and no beneficiary will be deemed to have a general power
of appointment under § 2041 solely because a particular beneficiary is a shareholder, or
otherwise participates in the daily activities, of PTC. Therefore, under the
circumstances described in Situation 1
and Situation 2, appointing PTC as the trustee of
the Family trusts does not affect the inclusion ratio of a trust subject to Chapter 13.

21
Issue 5
Section 671 provides that, where it is specified in subpart E of Part I of
subchapter J that the grantor or another person shall be treated as the owner of any
portion of a trust, there shall then be included in computing the taxable income and
credits of the grantor or the other person those items of the trust’s income, deductions,
and credits against tax which are attributable to that portion of the trust to the extent that
such items would be taken into account under chapter 1 in computing taxable income or
credits against the tax of an individual.
Section 672(a) provides that the term “adverse party” means any person having
a substantial beneficial interest in the trust which would be adversely affected by the
exercise or nonexercise of the power which he possesses respecting the trust. A
person having a general power of appointment over the trust property shall be deemed
to have a beneficial interest in the trust.
Section 672(c) provides that, for purposes of subpart E, part 1, subchapter J,
chapter 1, subtitle A of the Code, the term “related or subordinate party” means any
nonadverse party who is any one of the following: the grantor’s spouse if living with the
grantor; the grantor’s father, mother, issue, brother or sister; an employee of the
grantor; a corporation or any employee of a corporation in which the stock holdings of
the grantor and the trust are significant from the viewpoint of voting control; a
subordinate employee of a corporation in which the grantor is an executive.
Section 674(a) provides, in general, that the grantor shall be treated as the owner
of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the

22
income therefrom is subject to a power of disposition, exercisable by the grantor or a
nonadverse party, or both, without the approval or consent of any adverse party.
Section 674(c) provides that § 674(a) shall not apply to a power solely
exercisable (without the approval or consent of any other person) by a trustee or
trustees, none of whom is the grantor, and no more than half of whom are related or
subordinate parties who are subservient to the wishes of the grantor: (1) to distribute,
apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or
within a class of beneficiaries; or (2) to pay out corpus to or for a beneficiary or
beneficiaries or to or for a class of beneficiaries (whether or not income beneficiaries).
Under § 675 and applicable regulations, the grantor is treated as the owner of
any portion of a trust if, under the terms of the trust agreement or circumstances
attendant on its operation, administrative control is exercisable primarily for the benefit
of the grantor rather than the beneficiaries of the trust.
Section 675(4) provides that the grantor shall be treated as the owner of any
portion of a trust in respect of which a power of administration is exercisable in a
nonfiduciary capacity by any person without the approval or consent of any person in a
fiduciary capacity. For purposes of § 675(4), the term “power of administration” means
any one or more of the following powers: (A) a power to vote or direct the voting of stock
or other securities of a corporation in which the holdings of the grantor and the trust are
significant from the viewpoint of voting control; (B) a power to control the investment of
the trust funds either by directing investments or reinvestments, or by vetoing proposed
investments or reinvestments, to the extent that the trust funds consist of stocks or
securities of corporations in which the holdings of the grantor and the trust are

23
significant from the viewpoint of voting control; or (C) a power to reacquire the trust
corpus by substituting other property of an equivalent value.
Section 677(a)(1) provides that the grantor shall be treated as the owner of any
portion of a trust, whether or not the grantor is treated as such owner under § 674,
whose income, without the approval or consent of any adverse party, is, or, in the
discretion of the grantor or a nonadverse party, or both, may be distributed to the
grantor or the grantor’s spouse.
Section 1.677(a)-1(d) of the Income Tax Regulations provides that, under § 677,
a grantor is, in general, treated as the owner of a portion of a trust whose income is, or
in the discretion of the grantor or a nonadverse party, or both, may be applied in
discharge of a legal obligation of the grantor or, in certain situations, of the grantor’s
spouse. However, § 1.677(b)-1(a) provides that a grantor is not treated as the owner of
a trust merely because its income may, in the discretion of any person other than the
grantor (except when the grantor is acting as trustee or cotrustee), be applied or
distributed for the support or maintenance of a beneficiary (other than the grantor’s
spouse in the case of income from property transferred in trust after October 9, 1969),
such as the child of the grantor, whom the grantor or his spouse is legally obligated to
support. If income of the current year of the trust is actually so applied or distributed,
the grantor may be treated as the owner of any portion of the trust under § 677 to that
extent, even though that income might have been applied or distributed for other
purposes.
Section 678(a)(1) provides that a person other than the grantor is treated as the
owner of any portion of a trust with respect to which the person has a power,

24
exercisable solely by that person, to vest the corpus or the income therefrom in that
person. This rule does not apply, however, to a power over income if a grantor or other
transferor is otherwise treated as the owner of the trust.
In Situation 1
, the existence of and provisions governing the DDC, as well as the
provisions of Statute regarding the DDC, render the identity of the trustee irrelevant to
the determination of whether any person is treated as an owner of a trust under §§ 675,
677, or 678. None of the terms of the Family trusts, the provisions of Statute, or the
governing documents of PTC reveal any of the circumstances that would cause
administrative controls to be considered exercisable primarily for the benefit of the
grantors of the Family trusts for which PTC will act as trustee under § 675.
Nevertheless, the circumstances attendant on the operation of the PTC, the DDC, and
the Family trusts for which the PTC is acting as trustee will determine whether any
grantor will be treated as the owner of any portion of those trusts under § 675. Whether
or not a trust is a grantor trust by reason of a power described in § 675 is a question of
fact, the determination of which is deferred until the examination of the federal income
tax returns of the parties involved.
Similarly, nothing in the facts indicates that any grantor or beneficiary of the trust
would be deemed to be an owner of a trust under § 673, § 676, § 677, or § 678, and
Statute would prevent any grantor or beneficiary from acquiring any right or power that
would result in such treatment. Under § 677(b), the grantor will be deemed to be the
owner of the trust to the extent that trust income is actually used to discharge a support
obligation of the grantor, but this will be true regardless of the identity of the trustee.
Thus, the appointment and service of PTC as trustee does not affect whether or not the

25
grantor or any other person will be treated as the owner of a trust under these
provisions, and none of the grantors or beneficiaries of the Family trusts for which PTC
is acting as trustee will be treated as an owner of those trusts or any portion thereof
under §§ 673, 675, 676, 677, or 678 solely by reason of their ownership or management
of, or employment by, PTC.
The identity of the trustee is relevant with regard to whether the grantor will be
treated as the owner of a trust under § 674. The general rule is that powers must be
subject to the approval or consent of an adverse party as defined in § 672(a) in order to
avoid treating the grantor as the owner of a trust for income tax purposes. In Situation 1

and Situation 2, Statute or the governing documents, as the case may be, prohibit a
DDC member from acting with regard to each trust in which that DDC member has an
interest, so there will be no adverse party with the power to grant approval or consent.
Some powers (specifically, those described in § 674(b) and (d)) may be held by
any trustee without causing the grantor to be deemed to be the owner of the trust under
this section. The appointment and service of PTC as trustee is irrelevant with regard to
these powers. Section 674(c), however, describes powers that will not cause the
grantor to be treated as the owner of the trust as long as those powers are held by
trustees, none of whom is the grantor and no more than half of whom are related or
subordinate to the grantor as defined in § 672(c).
Two clauses of § 672(c)(2) have relevance with regard to the facts described in
Situation 1
and Situation 2. The first is the clause defining “related or subordinate party”
as including a corporation or any employee of a corporation in which the stock holdings
of the grantor and the trust are significant from the viewpoint of voting control.

26
For purposes of this test, voting control of PTC has been made irrelevant as it
applies to the power to make distributions from the Family trusts by the provisions of
Statute (in Situation 1
) or the presence of the Amendment Committee (in Situation 2)
with regard to the DDC and by the delegation of all PTC personnel decisions to the
officers and managers of PTC. Thus, the ownership of voting stock of PTC (even the
sole ownership of all of that voting stock) should not be deemed to be “significant” under
§ 672(c) for this purpose. “Voting control” is relevant insofar as it gives a grantor or
trusts created by a grantor power over distributions made in the discretion of the
corporate trustee or power over the employees of the corporate trustee who make such
discretionary distribution decisions on behalf of the corporation. Under Situation 1
and
Situation 2, adequate safeguards protect against the exercise of such powers.
The second relevant clause of § 672(c)(2) is that which defines “related or
subordinate party” as including a subordinate employee of a corporation in which the
grantor is an executive.
In Situation 1
and Situation 2, the trust instruments do not require the trustee to
be a person or entity that is not related or subordinate to the grantor as defined in
§ 672(c). In fact, it is possible that more than half of the members of the DDC may be
nonadverse parties who are related or subordinate to the grantor.
In determining whether or not PTC as trustee is related or subordinate for
purposes of this second clause, one must look at the members of the DDC who are
authorized to act with regard to that particular trust (as if those DDC members
individually were the trustees). This partial look-through is necessary to ensure that a
grantor cannot achieve income tax results indirectly through a PTC trustee that could

27
not be achieved with an individual trustee or trustees. A subordinate employee of a
corporation in which the grantor is an executive will still be deemed to be subordinate to
the grantor under § 672(c). Thus, under Situation 1
and Situation 2 a non-Family
member serving on the DDC who is an employee of PTC will be related and
subordinate to A, C, D, and E, but not to B who is not an officer or manager of PTC.
In summary, whether or not a grantor will be treated as the owner of a trust or
any portion thereof under § 674 depends both upon the powers of the trustee and upon
the proportion of the members of the DDC with authority to act with regard to that trust
who are related or subordinate to the grantor applying a “look-through” test in which
each employee of PTC serving on the DDC, if any, is tested as if that employee was a
trustee of the trust in his or her individual capacity, rather than as a member of a
committee existing within and functioning on behalf of PTC. For purposes of this test,
the ownership of the voting stock of PTC in Situation 1
and Situation 2 shall be deemed
to be not significant.
For these purposes, the analysis and tax consequences under Situation 1
and
Situation 2
are substantially identical.
HOLDINGS
Under the facts set forth in Situation 1 and Situation 2:
(1) Neither the appointment nor the service of PTC as the trustee of a Family
trust described in Situation 1
or Situation 2 will alone cause the value of the trust assets
to be included in a grantor’s gross estate under §§ 2036(a) or 2038(a).

28
(2) Neither the appointment nor the service of PTC as the trustee of a Family
trust described in Situation 1 or Situation 2 will alone cause the value of the trust assets
to be included in a beneficiary’s estate under § 2041.
(3) Neither the appointment nor the service of PTC as the trustee of the trusts
in which the trustee has the discretionary power to distribute income and/or principal to
the grantor’s child or descendants in Situation 1
or Situation 2 will alone cause the
grantor’s transfer to that trust to be deemed to be an incomplete gift under § 2511, or
any distribution from the trust to be a gift by any DDC member.
(4) Neither the appointment nor the service of PTC as trustee of a Family trust
in Situation
1 and Situation 2 will alone affect the exempt status of that trust if the trust is
otherwise exempt from the GST tax under § 26.2601-1(b)(1)(i), or change the inclusion
ratio of a trust.
(5) Neither the appointment nor the service of PTC as the trustee of a Family
trust in either Situation 1
or Situation 2 will alone cause any grantor or beneficiary of that
trust to be treated as the owner of that trust or any portion thereof under §§ 673, 676,
677, or 678. Whether any grantor is treated as an owner of the trust or any portion
thereof under § 675 is a question of fact, the determination of which must be deferred
until the federal income tax returns of the parties involved have been examined by the
office with responsibility for such examination. Whether any grantor is treated as an
owner of the trust or any portion thereof under § 674 will depend upon the particular
powers of the trustee and may depend upon the proportion of the members of the DDC
with authority to act with regard to that trust who are related or subordinate to the

29
grantor. For purposes of this determination, the ownership of voting stock of PTC shall
be deemed to be not significant under § 672(c).
The conclusions regarding the tax consequences of PTC as trustee of the Family
trusts would not change even if (1) in Situation 2
, F and/or G also serve on the Board of
Directors, (2) any of the discretionary distributions are made pursuant to a reasonably
definite external standard provided in the trust instrument; or (3) a single Family
member was the sole owner of PTC. Distribution powers subject to such a standard
would generally not cause the grantor or beneficiary to be treated as the owner of a
trust or any portion of a trust under §§ 674 and 678, unless a grantor or spouse of a
grantor is the trustee, regardless of the terms of Statute or the existence of the
Amendment Committee.
The conclusions in Situation 1
and Situation 2 are otherwise limited to the facts of
those situations. If the Statute in Situation 1 was changed, or if the Amendment
Committee in Situation 2
exercised its powers to change the provisions regarding the
DDC and/or the Amendment Committee itself, then the federal tax treatment of the
Family trusts for which PTC acts as trustee, and/or the grantors and/or beneficiaries of
those trusts, may be different from that described for Situation 1
and Situation 2.
III. Request for Comments

Comments are requested regarding the proposed revenue ruling. The IRS and
the Treasury Department also welcome comments regarding any potential alternative
scenarios that should be addressed in the final revenue ruling. In particular, the IRS
and the Treasury Department request comments on whether additional guidance is
necessary where trust assets include stock in a controlled corporation or life insurance,

30
and whether the creation of similar special committees for tax sensitive issues relating
to such assets would be helpful. All comments will be available for public inspection
and copying. Comments must be submitted by November 4, 2008. Comments should
be addressed to:
Internal Revenue Service
Office of the Associate Chief Counsel
(Passthroughs and Special Industries), CC:PSI
Attn: Mary Berman, Room 5300
1111 Constitution Avenue, NW
Washington, DC 20224.

In addition, comments may be submitted electronically via the Internet by
sending them in an e-mail to notice.comments@irscounsel.treas.gov
and specifying that
the comments concern Notice 2008-63.
DRAFTING INFORMATION
The principal authors of this notice are Mary Berman and Bradford Poston of the
Office of the Associate Chief Counsel (Passthroughs & Special Industries). However,
other personnel from the IRS and the Treasury Department participated in its
development. For further information regarding the estate, gift, and generation-skipping
transfer tax issues, contact Ms. Berman at (202) 622-3090 (not a toll-free call); for
further information regarding the income tax issues, contact Mr. Poston at (202) 622-
3060 (not a toll free call).