not even pretending anymore

Two weeks ago IRS released yet another private letter ruling giving cover to the so-called "incomplete nongrantor trust" or ING.

But PLR 202017018 is different, even more egregious than the hundred-odd "favorable" rulings that have preceded it. If that is even possible.

With this ruling, IRS has dropped all pretense that the members of the distributions committee need actually have beneficial interests "adverse" to their participating in directing current distributions -- which is the entire rationale for saying this a nongrantor trust for income tax purposes.

We still have the prepackaged language saying we see nothing in the trust instrument that would trigger grantor trust status under section 674(a), but there is no actual analysis why the members of the distributions committee should be treated as "adverse" parties.

Of course, there never has been any analysis, but here the counterargument is too obvious.

In previous ING rulings the members of the distributions committee have each had a contingent interest in the trust remainder after the settlor's death, typically ten pct. Subject of course to complete defeasance by the settlor's exercise of her reserved limited testamentary power to appoint, which is what makes the gift incomplete.

And this apparently has been enough to satisfy IRS, though it completely disregards the requirement of reg. section 1.672(a)-1(a) that to be "adverse" a party have a "substantial beneficial interest" in the trust -- that is to say, "not insignificant" -- that would be adversely affected by the exercise or nonexercise of a power she has been given.

Here, the default disposition in the event the settlor does not exercise her reserved power is to "a designated trust." For whose benefit is not indicated.

The members of the distributions committee are the settlor and her spouse, her parents, and her sister. The permitted distributees during the settlor's life include of course all these, but also any descendants of her parents.

Which would include the settlor's children, if she had any, which it appears she does not, yet. But it is not difficult to imagine that these as yet unborn children, and more remote descendants, are the beneficiaries for whom the trust remainder is actually intended, by way of the "designated trust."

If the settlor's spouse, parents, and sister are also beneficiaries of that trust, the letter ruling should say so. But their interests would still not be "substantial."

an empty gesture

In Rev. Proc. 2020-03, the agency said it would no longer issue advance determinations on an ill-defined subset of INGs that does not seem to correspond with the scenarios presented in these hundred-odd "favorable" rulings over the past seven or eight years.

As argued at length in the February 06 issue of my newsletter, the "no rule" policy as announced is almost completely incoherent, and may in practice apply only to some fringe scenarios in which IRS was refusing "favorable" rulings anyway.

And one supposes that if IRS has been offering unfavorable rulings the requests have been withdrawn.

But we are still seeing letters in the weekly release that were actually issued late last year, before the "no rule" policy took effect. This is one, and it illustrates yet again why IRS should have been refusing these all along.