In a recent private letter ruling, (PLR 201438012 released Sept. 19, 2014), the Internal Revenue Service ruled that none of an approval committee’s (AC) powers while overseeing distributions from four separate trusts will be considered a general power of appointment under IRC Section 2041 or IRC Section 2514 while more than one of the trust creator’s children is acting on the committee.
Four Trusts Established
In the case that led to the ruling, the grantor had four children; he created a trust for the benefit of each child (the “primary beneficiary” of his trust) and more remote descendants. The trusts are all governed by the same irrevocable trust agreement. Each trust has an investment trustee, an administrative trustee and a distribution trustee. The grantor is the initial investment trustee, and a corporate trust company is the initial administrative trustee. The initial distribution trustee is an independent individual who’s neither a current beneficiary of any trust nor a related or subordinate party within the meaning of IRC Section 672. The trust agreement provides that when the primary beneficiary reaches age 30, he may serve as a distribution trustee of his/her respective trust in conjunction with the independent distribution trustee. The trust agreement further provides that when the primary beneficiary reaches age 40, he may serve as the sole distribution trustee of his/her respective trust.
The trust agreement provides that distributions of income and principal may be made by the administrative trustee to the primary beneficiary and his descendants for any purpose that the distribution trustee determines to be advisable, with the consent of the AC (that is, a 50 percent vote if three or more members of the AC are acting or a unanimous vote if two or fewer members are acting). The AC consists of the grantor’s four children. If any child ceases to be a member of the AC, no replacement is named and the remaining children will continue to act as the sole members of the AC. The AC terminates when no child of the grantor is serving.
The trust agreement further provides that prior to the date on which a primary beneficiary reaches age 30, the independent distribution trustee, with the unanimous consent of the AC, may: (1) amend the trust agreement, (2) distribute trust property to or for the benefit of such one or more persons or organizations (including the grantor’s children), as the independent distribution trustee determines in his discretion, and (3) exercise any power granted to the AC elsewhere in the trust agreement.
On the primary beneficiary’s death, he has a limited power of appointment (POA) over the property remaining in his respective trust. The AC, within nine months after the primary beneficiary’s death, by majority vote, may override the primary beneficiary’s exercise of such power in favor of his spouse and, by unanimous vote, may override the primary beneficiary’s exercise of such power in favor of anyone other than his spouse. If the primary beneficiary doesn’t exercise his limited POA, the trust property is divided per stirpes for the primary beneficiary’s then living descendants. The AC, by majority vote, may override this default disposition at the primary beneficiary’s death by allocating the trust property among the grantor’s descendants in such proportions as the AC decides. The independent distribution trustee has the authority to terminate the trust early under certain circumstances, but the AC may negate the distribution trustee’s decision by majority vote. Furthermore, the AC can come to an independent determination to terminate the trust by 50 percent vote if three members are acting or by unanimous vote if two or fewer members are acting. If the trust is terminated early, the AC can exercise its overriding POA to distribute trust property to the primary beneficiary or to one or more of the grantor’s descendants and private foundation, in such proportions as it determines.
Should there be a determination to terminate a trust earlier than contemplated by the trust agreement, the AC has various “minimization powers” to limit or eliminate distributions to the primary beneficiary, restrict or eliminate the primary beneficiary’s limited POA and deem the primary beneficiary deceased for the purpose of acting as or appointing any officeholder and for certain other purposes under the trust agreement.
Two Rulings Requested
The grantor of the trusts requested the following rulings from the IRS:
(1) While more than one of grantor’s children are acting on the AC, none of the committee powers will be considered a general POA under IRC Section 2041.
(2) While more than one of grantor’s children are acting on the AC, none of the committee powers will be considered a general POA under IRC Section 2514.
AC Members Have Adverse Interests
Property is included in a decedent’s estate to the extent the decedent had a general POA over the property at the time of his death (if said power was created after Oct. 21, 1942). Furthermore, if an individual exercises or releases such a general POA during life, he’s deemed to have made a transfer of the property for gift tax purposes. However, if the power is exercisable by an individual (during life or at death) only in conjunction with another person who has a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of said individual, such power isn’t deemed to be a general POA. A person who, after an individual’s death, holds a POA over property that was subject to said individual’s power, which he may exercise in his own favor, is deemed to have an interest in the property which is adverse to the exercise of said individual’s power. A taker in default of appointment under a power has an interest that’s adverse to an exercise of the power. A co-holder of a power is considered as having an adverse interest when he 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.
The IRS compared the situation at hand to the example cited in Treasury Regulations Sections 20.2041-3(c)(2) and 25.2514-3(b)(2) and concluded that while more than one of the grantor’s children are acting on the AC, none of the committee members will be considered to have a general POA under either Sections 2041 or 2514 because the members of the AC have interests that are adverse to the other members. The IRS emphasized the fact that the AC has the power to prevent all distributions from the trusts. Furthermore, after the primary beneficiary reaches age 30, the AC has a jointly-held overriding POA to appoint trust property to any person or organization, including themselves. On the death of one child of, the power will pass jointly to the surviving three children.