In five related rulings, the IRS issued favorable holdings addressing the income and gift tax consequences of so-called "DING trusts." The acronym stands for "Delaware Incomplete Non-Grantor" trusts, but the trust does not need to be established in Delaware. In fact, the trusts at issue in the rulings are believed to be Nevada trusts.
DING trusts primarily are used to avoid state income tax by having the trust created in a jurisdiction that will not tax the accumulated earnings of a nongrantor trust. At the same time, the Grantor's initial contribution of property to the trust is not deemed to be a completed gift subject to federal gift tax.
The Grantor had created an irrevocable trust for the benefit of himself and his issue. A corporate trustee was the sole trustee, but that corporate trustee was required to make distributions at the direction of the Grantor and/or a distribution committee composed of the Grantor and each of his four sons. The trust provided that income and principal could be distributed under three alternative methods:
- Grantor's Consent Power – The trustee must distribute income or principal to the Grantor or the Grantor's issue upon direction of a majority of the distribution committee members and the written consent of the Grantor.
- Unanimous Member Power – The trustee must distribute income or principal to the Grantor or the Grantor's issue upon direction by all distribution committee members other than the Grantor.
- Grantor's Sole Power – The Grantor may distribute principal (but not income) to the Grantor's issue as the Grantor deems advisable to provide for their health, education, maintenance and support.
Under the terms of the trust, the Grantor has a testamentary limited power of appointment. If that power of appointment is not exercised, the assets pass to the Grantor's issue.
The IRS gave five important rulings based on these facts:
- None of the circumstances existed that would cause the Grantor to be treated as the owner of any portion of the trust under the grantor trust rules.
- The Grantor did not make a completed gift subject to federal gift tax upon the initial contribution of property to the trust.
- The distribution committee members did not make a completed gift subject to federal gift tax upon making a distribution to the Grantor because any distribution from the trust to the Grantor was merely a return of the Grantor's property.
- The distribution committee members likewise did not make a completed gift subject to federal gift tax upon making a distribution to beneficiaries other than the Grantor.
- Upon the Grantor's death, the fair market value of the property in the trust would be includible in the Grantor's gross estate for federal estate tax purposes.