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Effect of Confidence Amendments to a Settlement Agreement

In Private Letter Ruling 202206008 (issued February 11, 2022), the grantor established Trust B (which was generation-skipping tax (GST) exempt) and made it irrevocable until September 25, 1985, for the grantor’s survival benefit. Gave. child (child). Trust B stipulated that the trustee must distribute all net income from Trust B to the child during the child’s life. The trustee may, at his discretion, make distributions of principal as deemed necessary for maintenance, education, welfare and comfort. Youthat beneficiary or beneficiary. Upon the child’s death, Trust B assets will be distributed among the child’s descendants (per stir), otherwise the heir-at-law of the grantor’s spouse. No additions were made to Trust B at the time of the original funding.

The parties entered into a judicial agreement, which stipulated that Trust B would be modified to assign a defined share to the child’s assets to give the child a testamentary generation power (GPA) of appointment. The “defined portion” equals the largest portion of Trust B that can be included in the child’s federal estate without increasing the total transfer taxes payable upon the child’s death (the amount that would be payable without the GPA). Essentially, this provision caused the amount to be included in the child’s wealth to be used to use up an amount equal to the less of the child’s remaining wealth tax exemption or GST tax exemption. The settlement defined “transfer tax” broadly as all inheritance, estate and other death taxes, as well as all federal and state GST taxes that are actually payable due to the child’s death.

The taxpayer requested the following rulings: (1) The exercise of his discretionary authority over Trust B by the Trustee under the terms of the settlement agreement will not result in a transfer of assets that are subject to GST tax, and Trust B shall retain its GST free . situation, and (2) shall result in the trustee exercising his discretionary authority over the Trust B principal Only the defined portion to be included in the gross assets of the child (under section 2041(a)(2) of the Internal Revenue Code).

gst tax issue

Under Treasury Regulations Section 26.2601-1(a), the GST tax generally applies to GST made after October 22, 1986. GST tax is not applicable on transfer under a trust which was irrevocable as on 25 September 1985, only that such transfer has not been made out of funds added to the trust after 25 September 1985.

treasure. Registration section 26.2601-1(b)(4)(i) provides rules to determine when amendment, judicial creation, settlement or trustee action is exempt from GST tax under trees. The trust shall not lose its exempt status due to registration section 26.2601-1(b).

treasure. Registration section 26.2601-1(b)(4)(i)(D)(1) states that from amendment of the trust instrument of an exempt trust by means of judicial or non-judicial constitution valid under the law of the State Exempt trust to be subject to the provisions of Chapter 13, if the amendment does not transfer a beneficial interest in the trust to the beneficiary who is a “lower generation” (as defined in IRC section 2651) than that person or persons ) who has a beneficial interest. prior to the amendment, and the amendment does not extend the vesting period of any beneficial interest in the trust beyond the period originally provided for. (An amendment that is administrative that indirectly increases the amount transferred will not transfer the beneficial interest in the trust.)

Treasure, Reg 26.2601-1(b)(4)(i)(D)(2) states that a modification of an exempt trust will result in a change in beneficial interest to a lower generation beneficiary if the amendment may result in : (1) an increase in the amount of a GST tax transfer, or (2) the creation of a new GST tax transfer. To determine whether a modification of an irrevocable trust will transfer a beneficial interest in a trust to a beneficiary who occupies a lesser generation, the effect of the instrument on the date of the amendment shall be equal to the effect of the instrument in the immediate first existence. is measured against. Change.

Here, the trust would be amended to give the child a testamentary GPA under IRC section 2041(a)(2), so that the child has the ability to add to his assets. To the extent that the property is not exercised (or the property is not subject to this power), the trustee shall distribute the property among the surviving descendants of the child, if any, and, if none, to the heirs of the spouse. Therefore, the PLR ​​is of the view that this action does not transfer the beneficial interest in Trust B to any beneficiary who occupies less generation (per section 2651) than the person(s) who held the beneficial interest before the amendment. takes, and the revision doesn’t extend the inherent time.

Involvement in child estate

Section 2041(a)(2) provides that to the extent of any property in respect of which a GPA was made after the 21st day of October, 1942 at the time of the death of the deceased, such asset shall be included in the gross wealth of the deceased under IRC sections will be involved. From 2035 to 2038. Thereafter, the PLR ​​considers that only property that is subject to the child’s testamentary GPA is included in the child’s gross estate under section 2041(a)(2).

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