DINGed, but not Dented

DINGed, but not Dented

After a bumpy road, Delaware incomplete gift non-grantor trusts get a green light

Since their introduction in 2001, Delaware incomplete gift non-grantor (DING) trusts have been a specialty vehicle for state income tax planning. First created in Delaware, a DING trust gets its name from its uncommon treatment as a non-grantor trust that may be funded with contributions that aren’t taxable gifts for federal gift tax purposes. In a DING trust, a settlor may retain limited rights to receive trust distributions, as directed by a distribution committee (DC) comprised of other potential distributees whose interests are adverse to those of the settlor. Possible only in jurisdictions that permit the creation of asset protection trusts, a DING trust is most effective when settled under the laws of a jurisdiction that won’t tax the income or capital gains accumulated in the trust and created by a settlor whose state of residence won’t tax the trust merely on the basis of the settlor’s personal connection.1 Under such circumstances, a DING trust could allow the trust corpus to grow free of state income tax and be subject to federal gift tax only when distributions are made to individuals other than the settlor.2

Crafted to occupy a narrow but productive space in the estate-planning landscape, DING trusts have had a somewhat rocky history. After issuing a long series of private letter rulings favorably addressing DING trusts, particularly the gift tax consequences applicable to the DC, the Internal Revenue Service announced, in IR-2007-127, that it was reconsidering whether the PLRs were consistent with prior revenue rulings, which raised certain concerns among practitioners. Then, in 2010, DING trusts were effectively halted due to a change in gift tax laws applicable to non-grantor trusts during the period of estate tax repeal. This setback was followed by another stumbling block in 2012, when an IRS advice memorandum complicated the analysis of incomplete gifts. However, a brand new PLR has demonstrated that the DING trust structure, with a few variations to the original design, remains a viable tool for reducing or even eliminating a trust’s state income tax burden.


Three Hurdles

The settlor of a DING trust must strike a delicate balance to overcome three tax-related hurdles: (1) giving up enough rights to make the trust a non-grantor trust, (2) retaining enough rights to make transfers to the trust incomplete gifts, and (3) avoiding a completed gift taxable to the trust’s DC.  

Hurdle 1. Achieving non-grantor trust status for a self-settled DING trust is only possible in a state that allows self-settled asset protection trusts. Otherwise, the trust will be treated as a grantor trust on the grounds that the settlor’s creditors could attach trust assets.3

To comply with grantor trust rules, the settlor can’t retain any material reversionary interest.4 This includes a reversion to the settlor’s estate or revocable trust, but not the settlor’s eligibility to receive discretionary distributions. One must be cautious under the grantor trust rules not to give the settlor’s spouse any right or interest that would trigger grantor trust treatment if held by the settlor, due to the spousal attribution rules.5 Still, Internal Revenue Code Section 674 generally provides that the trust will be treated as a grantor trust if the beneficial enjoyment of the trust property is subject to a power of disposition exercisable by the settlor, a non-adverse party or both, without the approval or consent of any adverse party. The traditional DING trust structure avoided this problem by meeting two conditions: First, the trust income and principal were distributed or accumulated in the trust only with the consent of a DC, each of whose members was a current trust beneficiary and, therefore, an adverse party within the meaning of IRC Section 672(a). Second, the settlor’s power to control beneficial enjoyment was restricted to a testamentary limited power of appointment (POA), sometimes coupled with a power to consent to distribution decisions with a member of the DC (the settlor’s consent power (SCP)).  

Hurdle 2. To avoid making a completed gift without undermining the necessary creditor protection, settlors have traditionally structured DING trusts to retain only: (1) the SCP, and (2) a testamentary limited POA. Before the issuance of PLR 201310002 (released March 8, 2013), it was questionable whether the settlor could retain any other rights without affecting non-grantor status.  

Hurdle 3. Because the DC will always be composed of individuals eligible to receive distributions out of the trust estate, its members will have the power to distribute trust income and principal to themselves. If this power over distributions were deemed a general POA, then the DC’s exercise or release of such power would be a transfer of property taxable to the DC as a completed gift.

Broadly speaking, a “general power of appointment” means a power exercisable in favor of the individual possessing the power, the individual’s estate, the individual’s creditors or the creditors of the individual’s estate.6 However, it won’t be deemed a general power if the possessor can exercise it only in conjunction with a person who: (1) is the creator of the power, or (2) has a substantial interest in the property subject to the power that’s adverse to the exercise of the power in favor of the possessor.7 The other person shall be deemed to have such an adverse interest in the property if, after the death of the possessor of the power, the other person may have a power to appoint the property in his own favor.8

When setting up a DC, it’s important to remember that a co-holder of a POA has no adverse interest merely because of his joint possession of the power or because he’s a permissible appointee under a power. However, the IRS has expressly provided that a co-holder of a power is considered to have an adverse interest to the possessor of the power when the co-holder may possess the power after the possessor’s death and may exercise it at that time in favor of himself, his estate, his creditors or the creditors of his estate.9 Thus, if the DC membership is subject to a so-called “shrinking committee” structure, each co-holder of the power has an interest adverse to the exercise of the power in favor of the other possessors because the co-holder, assuming she survives the other possessors, stands to profit by refusing to exercise the power in favor of the possessors during their lifetimes. The adverse interests inherent in this tontine structure ensure that the distribution power won’t rise to the level of a general POA.


IRS Consideration

The IRS has considered DING trusts on a number of occasions.10 In the first PLR to evaluate the basic DING trust format, the IRS found that DING trusts succeeded in overcoming Hurdles 1 and 2—the presence of the DC defeated grantor trust status, and the settlor’s testamentary limited POA prevented settlor transfers to the trust from being completed gifts.

The PLRs after and including PLR 20050214 also addressed Hurdle 3—analyzing, in part, the gift tax consequences applicable to the DC under IRC Sections 2511 and 2514. Each of these later rulings concerned a DC that would at all times be composed of at least two trust beneficiaries other than the settlor or the settlor’s spouse. On the death of any DC member, the eldest trust beneficiary automatically succeeded the deceased member. Consequently, the deceased member’s power over distribution would always devolve to the surviving and successor members. Each of the PLRs that analyzed this type of structure concluded that the DC wouldn’t be treated as making a taxable gift under Section 2514 when it distributed income or principal to the settlor. Many of the PLRs also concerned DCs in which each member could exercise the distribution power, either in conjunction with the other members or with the consent of the settlor (the aforementioned SCP).



In 2007, the IRS raised the first of several roadblocks for DING trusts. On July 9, 2007, the IRS announced, in IR-2007-127,11 that it was reconsidering whether the conclusions in the PLRs regarding the application of Section 2514 were consistent with Revenue Rulings 76-503 and 77-158. In those two rulings, the IRS found that trustee co-holders of a POA didn’t have interests adverse to one another because, on the death of one of the co-holders, the surviving co-holders didn’t receive the entire power, but continued to share the power with the deceased co-holder’s automatic replacement. The rulings reasoned that the co-holders of the power wouldn’t necessarily be in a better economic position after a deceased co-holder’s death than they would be before the death; thus, they didn’t have an adverse interest sufficient to defeat the finding of a general POA. The IRS requested comments addressing whether the DC members might possess general POAs or whether the PLRs could be reconciled with the revenue rulings. Responses from the Delaware Bankers Association and Delaware State Bar Association, the American Bar Association (ABA) and the New York State Bar Association mapped out a variety of positions regarding the DC’s supposed general POA.

Delaware and ABA letter. The comment letter co-authored by the Delaware Bankers Association and the Delaware State Bar Association (the Delaware letter) and that of the Real Property, Trust and Estate Law Section of the ABA (RPTE Section letter), both asserted that the PLRs correctly concluded that distributions from the DING trusts wouldn’t be completed gifts by the DC members and that the DC members shouldn’t be treated as possessing a general POA for transfer tax purposes. Both letters stressed that the settlor’s continuing dominion and control over the trust property already ensured that distributions from the settlor to the trust were incomplete gifts, that distributions from the trust to any person other than the settlor would be completed gifts taxable to the settlor and that there was no authority suggesting that a taxpayer may hold a general POA over property owned by another person before the owner has made a completed gift of that property. The Delaware letter noted that if distributions from the trust were also considered taxable gifts by the DC members, then it would produce the following anomalous and unprecedented results: (1) distributions made back to the settlor would constitute taxable gifts made to the settlor of property already treated for transfer tax purposes as owned by the settlor; and (2) distributions to any other beneficiary would simultaneously constitute a taxable gift of the same property to the same person at the same time by both the settlor and the DC members.12 

Both letters noted that a clear safe harbor for addressing the DC’s general POA issue can be found in the shrinking committee example illustrated in Treasury Regulations Section 25.2514-3(b)(2). The RPTE Section letter also concluded that the Treasury regulations don’t require succession to power on the death of a co-holder for adversity, and the regulation simply provides a way to achieve adversity for those who are merely co-holders. It argued that, even without a shrinking DC structure, co-holders of a power may be adverse, as long as they possess some other economic interest, for example a life or remainder interest in the trust.  

Report of the New York State Bar Association Tax Section. The New York State Bar Association Tax Section (the NY Tax Section) took an entirely different position. It concluded that the DING PLRs were inconsistent with the prior revenue rulings. It argued that the settlor’s retention of the testamentary limited POA was insufficient to render the underlying gift incomplete, despite the PLRs’ conclusions to the contrary. It argued that the settlor’s power to consent to distributions was necessary for the incomplete gift ruling, and with that power, the settlor retained the effective ability to control the disposition of trust property among the DC members. Having concluded that the consent power was necessary for the incomplete gift ruling, the NY Tax Section went on to argue that this, necessarily, causes DING trusts to fail Hurdle 1 (avoiding grantor trust status) under IRC Section 674.13

Alternative drafting approaches. Following 2007, practitioners began using alternative structures for DING trusts. One approach, to draft around the NY Tax Section’s concerns regarding the SCP, was simply to eliminate the power altogether. The power had been added to previous ruling requests largely to provide settlors with a little more control, as the IRS had repeatedly ruled that the testamentary limited power alone was enough to cause incomplete gift tax treatment, and the SCP was neither argued in the ruling requests nor addressed in the IRS’ analysis. As discussed below, Chief Counsel Advisory 201208026, released in February 2012, undermines this solution by suggesting that a testamentary limited power will secure an incomplete gift only with respect to the trust’s remainder. Alternatively, one could address the NY Tax Section’s concerns by providing that any member of the DC can make a distribution with the consent of the settlor, provided that no such distribution may be made to the DC member initiating the distribution.

To address the concerns raised in IR-2007-127 regarding the DC’s possible general POA, the DC could be structured as a three-member shrinking committee to fall squarely within the safe harbor of Treas. Regs. Section 25.2514-3(b)(2). However, a shrinking DC raises other issues if one or more members die, including the question of whether to add new members or, if not, the exit strategy for such a structure.

The IRS has yet to address the questions raised in IR-2007-127.


IRC Section 2511(c)

In 2010, there was an outright freeze on DING trusts when Section 2511(c) became effective for one year. It provided: 


Notwithstanding any other provision of this section and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1. 


This provision, arguably, made it impossible in 2010 to create a trust that could be treated as both an incomplete gift and a non-grantor trust. This law went away on Jan. 1, 2011 and, thereafter, clients again began to form DING trusts.


CCA 201208026

On Feb. 24, 2012, DING trusts suffered yet another setback. The IRS issued CCA 201208026, in which it ruled that a transfer to a trust was a completed gift for federal tax purposes, even though the donor retained a testamentary limited POA over the entire trust. This memorandum immediately raised questions about whether the PLRs were correct in concluding that transfers to a DING trust are incomplete gifts for federal tax purposes merely due to the retention by the settlor of a testamentary limited POA and whether the funding of a DING trust under the traditional structure could give rise to a completed gift, notwithstanding the PLR conclusions to the contrary. It now appeared that some settlor control over a trust’s current interests might be necessary to achieve incomplete gift treatment.


PLR 201310002

On March 8, 2013, the IRS released PLR 201310002, which demonstrates that the IRS is, once again, prepared to recognize the basic DING trust structure with some slight variations.

Factual background. The settlor was a member of the DC for the trust under consideration. During the settlor’s lifetime, the trustee would distribute such amounts of net income and principal to the settlor and his issue as directed by the DC and/or settlor, as follows: (1) pursuant to the direction of a majority of the DC members, with the written consent of the settlor (the SCP); (2) pursuant to the direction of all of the DC members other than the settlor (the “unanimous member power”); and (3) such amounts of the principal (including the whole thereof) as the settlor deemed advisable to provide for the health, maintenance, support and education of the settlor’s issue (the “settlor’s sole power”). Although not explicitly stated in the PLR itself, under the facts giving rise to this ruling, there was no automatic replacement if any member of the DC ceased to serve. In addition, the DC would cease to serve if there were ever fewer than two members. 

Income tax ruling. The IRS held that: (1) none of the circumstances described in the PLR would cause the settlor to be treated as the owner of any portion of the trust under IRC Sections 673, 674, 676 or 677, and (2) because none of the other DC members had a power to vest trust income or corpus in himself without the consent of an adverse party, none would be treated as the owner of any portion of the trust under IRC Section 678(a). The income tax ruling was made with almost no analysis of the relevant authorities cited. 

Gift tax ruling. Because the DC ceased to exist on the settlor’s death, the IRS found that the DC members were merely co-holders of the power and not takers in default for purposes of Treas. Regs. Section 25.2514-3(b)(2). Consequently, the settlor could exercise the SCP without participation from a person with a substantial adverse interest, and the retention of such power caused the transfer of property to the trust to be “wholly incomplete for federal gift tax purposes.” This part of the ruling is interesting because the IRS seemed to conclude that the trust was a non-grantor trust and, consequently, the DC members were adverse parties with respect to the settlor for purposes of IRC Section 674; yet, the IRS also expressly concluded that the DC members didn’t have interests adverse to the settlor under Treas. Regs. Sections 25.2514-3(b)(2) or 25.2511-2(e).

The settlor of the trust in the PLR exercised the SCP as an actual member of the DC. The settlor of a Delaware asset protection trust can retain a substantively identical power, even though the settlor of such a trust can’t serve as a DC member.14

In addition, the IRS concluded that the SCP gave the settlor the power to change the interests of the beneficiaries and, accordingly, the retention of such power caused the transfer of property to the trust to be wholly incomplete for federal gift tax purposes under Treas. Regs. Section 25.2511-2(c).

Finally, consistent with CCA 201208026, the IRS concluded that the settlor’s retention of a testamentary power to appoint the remainder of a trust caused the transfer of property to the trust to be an incomplete gift, but only for the remainder.

No general power held by the DC members. The IRS held that the DC members didn’t possess general POAs. The SCP didn’t give them general powers because they could only exercise the SCP in conjunction with the creator of the power, the settlor.15 The unanimous member power didn’t give them general POAs either, because the trust’s shrinking committee structure gave them adversity.  

Finally, the IRS concluded that: (1) the trust’s assets were includible in the settlor’s taxable estate for federal estate tax purposes, (2) any distribution to the settlor from the trust was merely a return of the settlor’s property with no transfer tax consequences, (3) any distribution to a person other than the settlor would be a taxable gift by the settlor, and (4) distributions by the members of the DC weren’t taxable gifts made by the DC members.


New Options

Although PLR 201310002 can’t be relied on as precedent, its analysis gives taxpayers new options for creating DING trusts to accomplish their state income tax planning, especially settlors living in jurisdictions that don’t tax a non-grantor trust merely because of the
settlor’s residence in that jurisdiction. There are currently 15 U.S. jurisdictions that allow for the creation of some form of self-settled asset protection trust. Of those, only Nevada, Ohio and Wyoming expressly permit the settlor to retain an inter vivos POA, which would be necessary for the taxpayer to exactly replicate the structure in PLR 201310002.
However, the PLR clearly states that the retention of an SCP alone is sufficient to cause transfers to the trust to be wholly incomplete for federal gift tax purposes. That result should also be achievable in other popular asset protection trust jurisdictions, such as Alaska, Delaware, New Hampshire and South Dakota. 

Because DING trusts have a DC that directs the trust distributions, a settlor should also consider how a jurisdiction’s directed trust statute and precedent, if any, will affect the practical operation of the trust. Not all jurisdictions with directed trustee statutes are created equal.16 Many trust friendly jurisdictions don’t offer the best bifurcation and limitation of directed trustee liability, some provide investment, but not distribution, directions and others don’t address directed trusts by statute at all. Besides these concerns, settlors and their counsel will want to consider a jurisdiction’s trust infrastructure, including the sophistication of local counsel and corporate fiduciaries, the quality of its court system and the thoroughness of its case law. All of these factors should be weighed when deciding on an appropriate jurisdiction. Whatever a settlor’s preferences in this regard, PLR 201310002 not only shows that the IRS is again willing to rule on DING trusts, but also reaffirms the continuing utility of such a structure to reduce a settlor’s exposure to federal taxes and potentially eliminate a trust’s state income tax burden.                  



1. See Thomas R. Pulsifer and Todd A. Flubacher, “Eliminate a Trust’s State Income Tax,” Trusts & Estates (May 2006), at p. 30; Bruce D. Steiner, “The Accidentally Perfect Non-Grantor Trust,” Trusts & Estates (September 2005), at p. 28.

2. See, e.g., Private Letter Ruling  200502014 (Sept. 17, 2004).

3. Treasury Regulations Section 1.677(a)-1(d).

4. Internal Revenue Code Section 673.

5. IRC Section 672(e). To avoid an argument that a reversion exists, a Delaware incomplete gift non-grantor trust shouldn’t include a qualified terminable interest property (QTIP) trust following the settlor’s death. However, the settlor could accomplish the same result by exercising the testamentary limited power of appointment in favor of such a QTIP trust for the spouse.

6. IRC Section 2514(c).

7. IRC Section 2514(c)(3).

8. IRC Section 2514(c)(3)(B).

9. Treas. Regs. Section 25.2514-3(b)(2).

10. See, e.g., PLR 200148028 (Aug. 27, 2001); PLR 200247013 (Aug. 14, 2002); PLR 20050214 (Sept. 17, 2004); PLR 200612002 (Nov. 23, 2005); PLR 200637025 (June 5, 2006); PLR 200647001 (Aug. 7, 2006); PLR 200715005 (Jan. 3, 2007); PLR 200731019 (May 1, 2007); PLR 2007729025 (April 10, 2007).

11. IR-2007-127; 2007 IRB LEXIS 589.

12. Letter from the Delaware Bankers Association and the Delaware State Bar Association to the Office of the Associate Chief Counsel, Passthroughs & Special Industries, (Oct. 1, 2007) (on file with authors).

13. NYSBA Members Comment on Gift Tax Consequences of Trusts Employing Distribution Committee, Oct. 11, 2007, available at 2007 TNT 198-14.

14. 12 Delaware Code Section 3570.

15. IRC Section 2514(c)(3)(A).

16. See David A. Diamond and Todd A. Flubacher, “The Trustee’s Role In Directed Trusts,” Trusts & Estates (December 2010), at p. 24.