IRS Reverses Prior Ruling on Grantor Trust Status

News from RWHSG

Posted by Kim Chen on November 18th, 2016

An individual created an irrevocable trust for the benefit of himself, his daughters, grandchildren, and six other individuals. A corporate trustee, along with the grantor’s daughters and the six other individuals were designated as the distribution committee and, as such, were allowed to distribute as much of the trust income and/or principal as it determined to the grantor and members of the distribution committee. If both daughters were no longer members of the distribution committee, the trust property would be distributed to the grantor, and the trust would terminate. In Ltr. Rul. 201426014 , the IRS held that this provision would not cause the trust to be a grantor trust. The IRS recently revoked this ruling, concluding that the provision allowing trust property to be returned to the grantor was a reversionary interest under IRC Sec. 673 , causing the trust to be a grantor trust. Ltr. Rul. 201642019.