PLR 201709020: Ruling on Proposed Modification Re S Corp Assets

In PLR 201709020, the Service ruled on the tax consequences of a transaction proposed by an irrevocable trust’s trustee to create eight separate trusts governed under the trust agreement for a family trust and each of the grantor’s children and to allocate assets transferred from the irrevocable trust to the new trusts except for the trust’s shares of an S corporation.

The requested rulings were as follows:

  1. The Trust created under Article FIRST of the trust agreement will be an eligible shareholder of an S corporation during Grantor’s lifetime and for the 60 day period beginning on the date of Grantor’s death because it will be a trust all of which is treated under subpart E of part I of subchapter J as owned by Grantor during Grantor’s lifetime, whether or not Spouse (or any other spouse of Grantor) is serving as trustee.
  2. Each separate QSST trust which, in accordance with the trust agreement, will be created within 60 days of Grantor’s death under Article SECOND of the trust agreement will be an eligible shareholder of an S corporation under section 1361(d), provided that an appropriate election is made under that section and based on the taxpayers’ representation that each QSST beneficiary will be a United States citizen and/or resident.
  3. The pro-rata transfer of assets from Trust into the Article THIRD Trusts will not result in treating any Trust property as paid, credited, or distributed for purposes of section 661 or section 1.661(a)-2(f) of the Income Tax Regulations, and so will not result in realization of any income, gain, or loss undersection 661 or 662 by Trust, the Article THIRD trusts, or a beneficiary of any of the trusts. In addition, pro-rata transfer of assets from Trust into the Article THIRD Trusts, will not result inthe realization of any income, gain or loss to Trust, the Article THIRD Trusts, or a beneficiary of anyof those trusts under section 61 or section 1001.
  4. The Article THIRD Trusts will be treated as separatetrusts for federal income tax purposes pursuant to section 643(f).
  5. The pro-rata transfer of assets from Trust into the Article THIRD Trusts will result in each Article THIRD Trust holding its share of Trust’s property with the same basis as it had when owned by Trust at the time of the transfer into the Article THIRD Trusts under section 1015.
  6. The pro-rata transfer of assets from Trust intothe Article THIRD trusts will not create or resultin a transfer of property subject to federal gifttax under section 2501 of the Internal Revenue Code (Code).
  7. Any trust created under the trust agreement willnot be included in the gross estate of Grantoror the gross estate of Spouse, assuming (as represented by the taxpayers) that Spouse will not make any transfers to any trust created under the trust agreement and that such trust will not acquire any policy of insurance on Spouse’s life.
  8. The pro-rata transfer of assets from Trust intothe Article THIRD Trusts will not cause any portion of the assets of Trust or the Article THIRD Truststo be includible in the gross estate of any beneficiary under section 2035, 2036, 2037, or 2038.
  9. The pro-rata transfer of assets from Trust into the Article THIRD trusts will not alter the inclusion ratio of Trust, and each Article THIRD trust will have the same inclusion ratio as Trust for GSTtax purposes.

See full PLR at PLR 201709020.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.