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The IRS will not issue letter rulings on whether an act of self-dealing
occurs when a private foundation, or other entity subject to Sec. 4941,
owns or receives an interest in an LLC or other entity that owns a
promissory note issued by a disqualified person.

identical termination provisions, while been no guidance for GST-exemption issue letter rulings on whether certain
the provisions of Trust 3 would allow trusts like that provided in Regs. Sec. transactions constitute self-dealing
it to exist in perpetuity. The taxpayers 26.2601-1(b)(4)(i), the IRS stated that, under Sec. 4941(d).⁵ This announce-
proposed to merge Trusts 2 and 3 into at a minimum, a change that would ment represents an addition to the
Trust 1 to save administrative costs not affect the GST status of a grand- IRS’s no-rule list published in Rev.
and enhance the management of the fathered trust should similarly not Proc. 2021-3.
trusts’ investments. affect the status of a trust that is GST Generally, Sec. 4941(d) prohibits a
Regs. Sec. 26.2601-1(b)(4)(i) tax–exempt. private foundation and any disquali-
provides rules for determining when Noting that Trust 3 with no termi- fied person from entering into any of
a modification, judicial construction, nation date and Trust 2 with the same several direct or indirect transactions
settlement agreement, or trustee action termination date as Trust 1 would be between them: (1) sales, exchanges,
with respect to a trust that is grandfa- merged into Trust 1, the IRS ruled that or leases of property; (2) lending of
thered for GST tax purposes will not merger would not (1) shift a beneficial money or other extensions of credit;
cause the trust to lose its exempt status. interest in the trust to any benefi- (3) furnishing of goods, services, or
The regulation provides that a modifi- ciary who occupied a lower generation facilities; (4) payment of compensation;
cation of the governing instrument of than the person or persons who held and (5) transfers of assets to, or for the
an exempt trust by judicial reformation, the beneficial interest prior to the benefit of, the disqualified person. It
or nonjudicial reformation that is valid modification or (2) extend the time also prohibits agreements by a private
under applicable state law, will not cause for vesting of any beneficial interest in foundation to make any payment of
a grandfathered trust to be subject to the trust beyond the period provided money or other property to a govern-
GST tax if (1) the modification does for in the original trust. Therefore, the ment official, other than certain em-
not shift a beneficial interest in the trust merger of the trusts would not result ployment agreements.
to any beneficiary who occupies a lower in a loss of GST tax-exempt status On occasion, donors may try to
generation⁴ than the person or persons of any trust and would not cause any circumvent these rules by entering
who held the beneficial interest prior to distributions from the merged Trust 1 into a transaction with an LLC that,
the modification and (2) the modifica- to become subject to GST tax. by itself, does not meet the definition
tion does not extend the time for vest- It is likely that the IRS would not of a disqualified person. For example,
ing of any beneficial interest in the trust have ruled or would have ruled nega- a potential donor may provide assets,
beyond the period provided for in the tively if Trust 1 and Trust 2 were being including promissory notes, to an LLC
original trust. merged into Trust 3, which would in exchange for a nonvoting interest in
The IRS noted, as it has in other never terminate, as it would likely vio- the LLC and then gift or bequeath the
letter rulings, that there is no similarly late both of the criteria cited in Regs. same nonvoting interest to a private
published guidance regarding the ap- Sec. 26.2601-1(b)(4)(i). foundation. By providing the private
plication of GST tax to the modifica- foundation with nonvoting rights, the
tion of trusts that are GST tax-exempt Other developments donor can essentially avoid a negative
because they have an inclusion ratio of No-rule list updated for private outcome, as the private foundation
zero (i.e., not grandfathered, but GST foundation self-dealing would lack the “control” element
exemption was allocated to transfers The IRS updated its no-rule list to in- necessary for self-dealing. Because of
to the trust sufficient to make the trust clude certain self-dealing transactions. the specific facts and circumstances
GST tax-exempt). Noting that there has The IRS announced that it will not involved in these transactions, many

4. As defined in Sec. 2651. 5. Rev. Proc. 2021-40.

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