Part 6: Incomplete Gift Non-Grantor Trusts
By David A. Handler and Alison E. Lothes
Originally written for WealthManagement.com
The IRS issued a ruling (PLR 201410001 (released March 7, 2014)) confirming the incomplete non-grantor trust strategy, in which a taxpayer establishes a trust in another state—usually Delaware or Nevada—to take advantage of a favorable income tax environment, while avoiding a completed gift. This ruling follows on the heels of a series of rulings issued last year (see
PLRs 201310002-201310006 (released March 8, 2013)).
The grantor established an irrevocable trust for the benefit of herself, her children and her stepchildren and appointed a corporate trustee. The trustee could make distributions as directed by a distribution committee (which consisted of the grantor, her children and stepchildren) and the grantor under the following circumstances:
- Net income and principal to the grantor or other beneficiaries, as directed by a majority of the distribution committee with the grantor’s consent;
- Net income and principal to the grantor or other beneficiaries, as directed by the unanimous decision of the members of distribution committee (other than the grantor);
- Principal to beneficiaries other than the grantor, as the grantor directs for their health, maintenance, support and education; and
- Net income or principal to other trusts, as directed by the distribution committee.
The grantor retained a testamentary limited POA; in default of her exercise of her POA, the trust property would be distributed on her death to the grantor’s spouse’s then-living descendants.
As in the 2013 rulings, the IRS held that the trust wouldn’t be a grantor trust as to the grantor under IRC Sections 673, 674, 676 or 677(a). Nor would any other member be treated as the grantor of the trust under IRC Section 678. Lastly, there were no administrative powers that caused grantor trust status under IRC Section 675.
And, similar to prior rulings, the grantor’s gifts to the trust were considered incomplete due to the grantor’s consent right, the power to distribute trust property to other beneficiaries under an ascertainable standard and the limited POA.
Lastly, distributions made to the grantor or any other beneficiary wouldn’t be taxable gifts by any member of the distribution committee. Distributions to other beneficiaries, however, would be taxable gifts by the grantor.