IRS issues proposed ruling on private trust companies.

• Author: Beavers, James

The IRS is seeking comments from the public on a proposed ruling regarding the use of family-owned private trust companies (PTCs) as trustees of trusts.

Fact Patterns in the Proposed Ruling

The proposed ruling presents two situations. Situation 1 involves a PTC formed under laws of a state that has enacted a PTC statute. Situation 2 involves a PTC formed in a state without a PTC statute.

Facts common to both situations: In both situations, A and B, who are husband and wife, have three children, C, D, and E. All of the children are married, and each has children. A and B have established separate irrevocable trusts for each of their children and grandchildren, and C, D, and E have established irrevocable trusts for their respective descendants. Each child or grandchild of A and B is the primary beneficiary of the trust established for that child or grandchild. Each trust receives contributions only from the person who created the trust, all grantors and beneficiaries are U.S. persons, and no trust is a foreign trust.

Each trust instrument provides the trustee with discretionary authority to distribute income and/or principal to the primary beneficiary of the trust during the primary beneficiary's lifetime. Each trust also provides the primary beneficiary with the testamentary power to appoint the trust corpus to or for the benefit of one or more family members (other than the primary beneficiary) and/or one or more charitable organizations. In addition, each trust provides that the grantor, or the primary beneficiary if the grantor is not living, may appoint a successor trustee other than himself or herself if the current trustee either resigns or is no longer able to fulfill the duties of trustee. Each trust provides that the trust will terminate no later than 21 years after the death of the last to die of certain designated individuals living at the time of the creation of the trust.

In addition to the provisions of the trust agreement, under the state statute in situation I and the governing documents of the PTC in situation 2:

1. Discretionary distributions are defined as permissible distributions that are not mandated in the trust instrument or by applicable law.

2. There are no restrictions on who may serve on the PTC's discretionary distribution committee (DDC), but no member of the DDC may participate in the activities of the DDC with regard to any trust of which that DDC member or his or her spouse is a grantor, or any trust of which...