Analysis of DING Trust Rulings PLR 201426014 and PLR 201642019
On June 27, 2014, the IRS released PLR 201426014. This ruling addressed all of the rulings relevant to the tax structure of a DING trust, except that there is one major factual difference upon which the IRS ruled. In that ruling, if Child 1 and Child 2 are no longer serving as the Distribution Committee, or if there are fewer than two members of the Distribution Committee serving, then all of the trust property would be distributed back to the settlor and the trust would terminate. In PLR 201426014, the IRS ruled that this trust was a non-grantor trust. In PLR 201642019, the IRS revoked that ruling, stating that the provision in the trust addressing the termination of the trust when Child 1 and Child 2 are no longer serving as the Distribution Committee, or if there are fewer than two members of the Distribution Committee serving, constitutes a reversion within the meaning of Section 673 of the Code. Under Section 673, the grantor shall be treated as the owner of any portion of a trust in which the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds 5% of the value of such portion.
It seems to make sense that if the assets automatically revert back to the grantor upon a contingency, that would be a reversion which would cause the trust to be treated as a grantor trust for federal income tax purposes. However, a DING trust should never be drafted in this way, as such a trust would not be a valid Delaware asset protection trust. A grantor of a Delaware asset protection trust cannot retain the right to receive a return of all of the assets at some time or upon some contingency. The Delaware asset protection trust statute identifies the rights that a grantor can retain with respect to a “qualified disposition” under 12 Del. C. § 3570, and the right to receive a return of the trust assets as described in PLR 201426014 is not among the rights that a grantor is permitted to retain under the Delaware statute.
It appears that the reason this fact pattern was included in PLR 201426014 is to address the concern raised in IR 2007-127 regarding whether the members of the Distribution Committee will possess a general power of appointment. The issue raised by IR 2007-127 regarding whether the Distribution Committee members possess a general power of appointment should not be an issue, and all of the comment letters that were sent to the IRS in response to IR 2007-127 said just that. The one big distinguishing factor between DINGs and the Revenue Rulings cited by IR 2007-127 is that the assets of a DING trust were never transferred from the hands of the grantor for transfer tax purposes. In the Revenue Rulings cited by IR 2007-127, the trusts were completed gift trusts. Transfers from the DING trust to a third party are treated as a taxable gift by the grantor and it would be anomalous to treat the assets of a DING as simultaneously being a taxable gift by, or includible in the estate of, the grantor and Distribution Committee member at the same time. There is no basis for that under the tax laws.
Nevertheless, after IR 2007-127 practitioners started using the so-called “shrinking distribution committee”. If a drafter is concerned about the Distribution Committee shrinking to a single person who might arguably possess a general power of appointment, it should be possible to allow the members of the Distribution Committee to elect to appoint additional members. Under the Treasury Regulations, the members of the Distribution Committee are adverse to one another because their power falls to the remaining members as the committee shrinks and they are supposedly all hoping to be the “last man standing” with the power. So under that theory of adversity, it would be against their economic best interests to appoint an additional member of the Distribution Committee and enlarge the committee again, thus taking them farther away from their theoretical desire to be the “last man standing”. Thus it should not affect their adversity with each other to give them the power to unanimously appoint an additional member of the distribution committee.
Another alternative, which was present in PLR 201310002, is to have the distribution committee vanish if you get down to two members. For many DING trusts, the taxable event that they were planning for will have already occurred and the tax benefit will have been had, and the non-grantor trust status may no longer be a necessity. In short, PLR 201642019, which revoked PLR 201426014, does not spell the end of DING trusts. It is, however, just another wrinkle in the long, tumultuous history of this structure.
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