The IRS Clarifies the Potential Impact of the GST on Irrevocable Trusts and Proposed Codicils

On February 25, 2014, the IRS published  PLR 201425007  which addressed the potential effects of the Generation-Skipping Transfer Tax (GST) on Irrevocable Trusts and successor trusts. The Settlor executed a Trust Agreement prior to September 25, 1985 which created the Irrevocable Trust in question.  The trust document defines “primary life beneficiary” as not only the Settlor’s children, but to all successors to beneficial interests under each trust estate. The term of the Trust Agreement for each trust extends to the end of life for the last primary life beneficiary to die, in being at the time of creation, plus 21 years. The Trust provided for a special power of appointment by each primary life beneficiary to lineal descendants, brothers or sisters, nephews, nieces, or cousins. No additions – actual or constructive – were made to the Irrevocable Trust’s corpus after September 25, 1985.

The Taxpayer requested a ruling that the exercise of his testamentary special power to appoint Trust assets, pursuant to the terms of their Proposed Codicil to their own Trust, will not cause distributions or successor trusts to be subject to the GST.

The IRS agreed with the requested ruling. The IRS found that the special power of appointment was not a general power of appointment because it excluded the Taxpayer, Taxpayer’s Creditors, the Taxpayer’s estate, and the estate’s creditors, and defined a class of individuals which were eligible to be appointed. The IRS acknowledged that under current regulations, the GST does not apply to irrevocable trusts created before September 25, 1985 to the extent that the distributions are not made out of corpus added after that date. The IRS analysed the Proposed Codicil and found that it did not disturb the Irrevocable Trust’s vesting, absolute ownership or the power of alienation beyond the perpetuities period. Accordingly, the IRS ruled favorably with the Taxpayer based on the facts provided.

Posted by Christopher Lee, Associate Editor, Wealth Strategies Journal.