Transfers Between DP Trusts Ruled to Not Give Rise to Foundation Expectancy

• DOI: http://doi.org/10.1002/npc.30811
• Date: 01 January 2021
• Published date: 01 January 2021

Bruce R. Hopkins’ NONPROFIT COUNSEL

January 2021 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

said, “can affect the comprehensiveness of consistency

with which a tax-exempt hospital presents its community

benefits.”

Recommendations

The GAO recommended that Congress consider

specifying in the statute (IRC § 501(r)) what services and

activities it considers sufficient community benefit. (The

report opines that the IRS lacks the authority to establish

the activities hospitals must undertake in this regard.)

The GAO made four recommendations to the IRS.

One was that the IRS update the Form 990, including

Schedule H and instructions, to ensure that the informa-

tion demonstrating the community benefits a hospital is

providing is clear and can be easily identified by Congress

and the public, including the community benefit factors.

Another recommendation was that the IRS establish a

well-documented process to identify hospitals at risk for

noncompliance with the community benefit standard

that would ensure that hospitals’ community benefit

activities are being consistently reviewed. [7.6(b)] ◆

TRANSFERS BETWEEN DP

TRUSTS RULED TO NOT

GIVE RISE TO FOUNDATION

EXPECTANCY

The IRS, having determined that an expectancy in

property destined for a private foundation is not in-

volved, ruled that a proposed transfer of assets from a

trust to an estate will not constitute an indirect act of

self-dealing (Priv. Ltr. Rul. 202042007).

Facts

H and W are the founders of and sole contributors

to this private foundation. H created trust A; W created

trust B. As of the date of this ruling, both A and B are in

probate administration. No assets have been distributed

from either trust to the foundation.

Trust A provides that H, during his lifetime, was to

receive all the trust’s income. At the death of H, all the

trust’s assets are to be distributed to the foundation. H

has died. Trust B, the assets of which include corporate

stock, provides that all its income is to be paid to her.

After W’s death, which has occurred, H had the right

to receive all trust B’s income. On the death of H, about

one-half of the assets in trust B is to be distributed to

trust A and the other assets distributed to other trusts for

the benefit of W’s children and grandchildren.

Trust B directs its trustee(s) to reimburse H’s estate for

any estate taxes imposed on H’s estate thar are attribut-

able to assets held by trust B at the time of W’s death.

Trust A’s instrument directs H’s personal representative

to recover from trust B any estate taxes imposed on H’s

estate that are attributable to the inclusion of trust B

assets in H’s estate. The entire amount of H’s estate tax,

which is significant, is attributable to the inclusion in H’s

estate of assets remaining in trust B at the time of W’s

death. H’s estate plans to pay the estate tax and obtain

reimbursement from trust B.

Trust B’s instrument requires the trustee(s) of trust

B to make any payment or distribution required by the

trust in cash or in kind. Trust B lacks the liquidity to reim-

burse H’s estate in cash for the estate tax H’s estate must

pay with respect to the trust’s assets. Trust B, however,

has sufficient illiquid assets, including the corporation’s

stock, with which to reimburse H’s estate.

The probate court involved issued an order that trust

B is required to reimburse H’s estate for the estate tax H’s

estate must pay that is attributable to inclusion of trust B

assets in H’s estate. This court also ordered the trustee of

trust B to transfer certain stock in the corporation to the

personal representative of H’s estate to satisfy the reim-

bursement obligation. Pursuant to this order, the trustee

of trust B has conditionally transferred the stock to the

personal representative of H’s estate. The foundation

represented to the IRS that the value of the stock equals

the amount of the estate tax imposed on H’s estate.

Law

Self-dealing includes any direct or indirect transfer

to, or use by or for the benefit of, a disqualified person

of the income or assets of a private foundation (IRC

§ 4941(d)(1)(E)). Acts of self-dealing with respect to

property of an estate are regarded as acts of self-dealing

with respect to assets of a private foundation that has

a beneficial interest in the property of the estate (Reg.

§ 53.4941(d)-1(b)(3)). An expectancy interest a private

foundation has in an estate is treated for tax purposes

as an asset of the foundation (e.g., Estate of Reis v. Com-

missioner (1986)).

Analysis

The IRS reasoned that the reimbursement by trust B

to H’s estate in the form of the stock, pursuant to the

trust B instrument, is payment of a “necessary expense”

associated with the administration of trust B. The foun-

dation’s only interest in trust B is as a residuary benefi-

ciary. Thus, the IRS wrote, while the foundation has an

interest in trust B’s residuary assets, the foundation “has

no interest in the stock transferred to H’s estate to satisfy

[t]rust B’s reimbursement obligation because, by defini-

tion, it is not part of the [t]rust B residuary.”

Consequently, inasmuch as the foundation has no

interest in the stock, there is no expectancy held therein

by the foundation. Thus, the IRS ruled that IRC § 4941(d)

(1)(E) is inapplicable. Therefore, the transfer of the

stock will not constitute an indirect act of self-dealing.

[12.4(a)] ◆