Amendment of Irrevocable Trusts Did Not Implicate §2038

By Steven B. Gorin, Esq.
Thompson Coburn LLP
St. Louis, Missouri

PLRs 200919008, 200919009, and 200919010 hold that the modification of an irrevocable trust did not implicate Internal Revenue Code §2038.

This result should bolster acceptance of a bracketed (optional) sentence in §411 of the Uniform Trust Code:

A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust.

Concern has been expressed that this provision might cause estate tax inclusion under §2038, which includes in a decedent's gross estate any trust “… where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by … the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate….”

Private Letter Ruling 200919008 addressed this concern:

Section 20.2038-1(a)(2) of the Estate Tax regulations provides that §2038 does not apply if the decedent's power could be exercised only with the consent of all parties having an interest (vested or contingent) in the transferred property, and if the power adds nothing to the rights of parties under local law.

… [O]n the creation of the trusts, Donor made a transfer of property to each trust but retained no interest in, or power over, the income or corpus of the transferred property. Although Donor has exercised a power to amend the trusts, this power derived not from the trust instruments, but from a state statute that required the consent of all the respective trust beneficiaries and, in this case, a guardian ad litem to represent the minor and unborn trust beneficiaries. The requirements of State Statute 1 and State Statute 2 and applicable state law were satisfied and the modifications of the respective trusts were approved by the local court. The modifications will not cause any portion of the trust property to be includible in the gross estate of Donor.

The possible application of §2038 to trust modifications under §411 of the Uniform Trust Code creates an issue whether or not the grantor exercises the power to amend. It is the existence of the power, and not its exercise, that is at issue. Although private letter rulings do not bind the Internal Revenue Service for taxpayers other than those receiving the rulings, the strength of the reasoning in these rulings should provide considerable comfort to taxpayers. And perhaps the rulings will promote acceptance of §411 of the Uniform Trust Code.