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ESTATES, TRUSTS & GIFTS

and be distributed, per stirpes, to Child’s grandfathered status: (1) whether the it was for estate planning purposes,
surviving descendants. modification shifts a beneficial interest but that is unlikely because the trust
The parent died prior to Sept. 25, in the trust to a beneficiary who occu- was already free from estate and GST
1985, therefore grandfathering Trust B pies a lower generation than the persons taxes — unless the trust was about to
for GST tax purposes (i.e., the trust was who held the beneficial interest prior to terminate and there was a desire among
not subject to GST tax). the modification and (2) whether the the parties to move assets to a new GST
A controversy arose regarding the modification extends the time for vest- tax-exempt trust using Child’s GST
administration of Trust B when the ing of any beneficial interest in the trust exemption. The likely reason is that it
trustee wanted to exercise its discretion beyond the period provided for in the was an income tax play to have assets of
to provide Child with a power of ap- original trust. the trust included in Child’s estate to get
pointment over certain assets of Trust B The IRS ruled that the settlement a basis step-up without incurring estate
(which authority the trustee had under agreement (1) did not shift a beneficial tax (because Child had available GST
the will). The other beneficiaries of the interest in Trust B to a person in a exemption). Then again, it could have
trust opposed the proposed exercise generation lower than those persons been done for both reasons.
of the trustee’s discretionary authority. included in the original trust and (2) did The ruling states that only Child’s
Litigation was commenced, and the not extend the time for vesting of any exercise of the testamentary general
parties reached a court-approved settle- beneficial interest in the trust beyond power of appointment would cause in-
ment agreement. the period provided for in the origi- clusion of Trust B property in his estate.
The settlement agreement granted nal trust. However, Sec. 2041(a)(2) applies to any
Child a testamentary general power of Regarding Child’s testamentary property over which a decedent had a
appointment to appoint “the largest por- general power of appointment, the general power of appointment at the
tion of Trust B that could be included in IRS looked to Sec. 2041(a)(2), which time of his or her death. Thus, the IRS’s
Child’s federal estate without increasing includes in a decedent’s estate any prop- ruling on the issue is that the property
the total amount of the ‘Transfer Taxes’ erty over which a decedent had a general over which Child had a general power
actually payable at Child’s death over power of appointment at the time of his of appointment is included in Child’s
and above the amount that would have or her death. estate regardless of whether Child exer-
been actually payable in the absence The IRS ruled that the settlement cises the power. However, if Child does
of this provision. The term ‘Transfer agreement would include in Child’s not exercise the power, what trust prop-
Taxes’ means all inheritance, estate, and estate only that property in Trust B over erty would be included in the taxpayer’s
other death taxes, plus all federal and which Child exercised a testamentary estate that would be stepped up?
state GST taxes, actually payable by general power of appointment.
reason of Child’s death.” In the event The ruling on the creation of a for- Trusts’ merger does not trigger
Child failed to exercise the testamen- mula testamentary clause is an issue that distributions or GST tax
tary general power of appointment, the IRS is not known to have previously In IRS Letter Ruling 202215015
property subject to the power was to be ruled on — not because it had a no-rule released April 15, 2022, the IRS ruled
distributed per stirpes to Child’s then- position on the issue, but because the that the merger of two trusts would not
living descendants. IRS has never been formally asked to result in a loss of a grandfathered ex-
The parties requested a ruling (1) rule on it. Many estate planners have emption from the GST tax and would
that the settlement agreement would not avoided using this formula testamentary not cause any distributions from the
result in the loss of Trust B’s GST tax- general power of appointment because merged trust to become subject to the
exempt status and (2) that Child’s testa- they believe it might include the entire GST tax.
mentary general power of appointment trust — not just the part of the trust The taxpayers, a married couple,
under the settlement agreement would subject to the power in the beneficiary’s created three irrevocable trusts, Trust 1,
result in only the property subject to the estate — or that the IRS may not give Trust 2, and Trust 3, for the benefit of
power being included in Child’s estate. it effect under some theory of economic their descendants. All three trusts had
Regarding the GST tax-exempt sta- substance. This ruling reflects the IRS’s an inclusion ratio of zero for GST tax
tus of Trust B, the IRS cited the criteria reasoning that it does not cause inclu- purposes. The beneficiaries of all three
in Regs. Sec. 26.2601-1(b)(4)(i)(D), sion of the entire trust. trusts were the same. The distribution,
as it normally does when considering Why did the trustee seek to grant dispositive, and trust power provi-
whether modifications to a grandfa- Child a testamentary general power of sions of all three trusts were substan-
thered trust cause the trust to lose its appointment? One reason may be that tially identical. Trust 1 and Trust 2 had

28 January 2023 The Tax Adviser