IRS Rules on Tax Ramifications of Incomplete Non-Grantor Trust

The Internal Revenue Service (IRS) addressed income and gift-tax consequences relating to an incomplete non-grantor trust in PLR 201729009. In the case at issue, the settlor created an irrevocable trust in order to benefit himself, his wife, charitable organizations, siblings, and children. The trust instrument provided for a Distribution Committee to disperse income and principal from the trust to named beneficiaries for their health, education, maintenance, and support (HEMS).

After a request for rulings, the IRS concluded that the settlor’s contributions to the trust did not qualify as a gift for federal gift-tax purposes. This characterization entails that distributions from the trust will be treated as a return of the settlor’s property and, as such, will be included in the settlor’s gross estate upon death.

The IRS ruling also held that the powers maintained by the Distribution Committee were such that transfers to the trust were not complete with respect to the trust’s income interest; the relationship between the settlor and the committee allowed the settlor to retain too much power over distributions of income and principal.

See Jillian Merns, IRS Rules on Tax Ramifications of Incomplete Non-Grantor Trust, Wealth Management.com, August 2, 2017.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.