Rev. Rul. 81-6

1981-1 C.B. 385, 1981-1 I.R.B. 14.

                       Internal Revenue Service
                                 Revenue Ruling

                         TRUST OWNER; MINOR BENEFICIARY

                           Published: January 5, 1981

SECTION 678.--PERSON OTHER THAN GRANTOR TREATED AS SUBSTANTIAL OWNER, 26 CFR 1.678(a)-1: Person other than grantor treated as substantial owner; general rule

  Trust owner; minor beneficiary. A situation is described in which a minor beneficiary is the owner, under section 678 of the Code, of a portion of a trust in which the beneficiary has the power to withdraw certain amounts from principal and income, even though, under local law, the minor is legally prevented from exercising that power because no guardian has been appointed.

ISSUE

  Is a minor who is a beneficiary of a trust described below treated as the owned of any portion of the trust under section 678 of the Internal Revenue Code?

FACTS

  C is a minor who is a beneficiary of an irrevocable inter vivos trust created by C's parent, P, in 1979.  Under the terms of the trust agreement, an independent trustee is authorized to accumulate the net income of the trust unless, in the judgment of the trustee, all or part of the current or accumulated net income should be distributed to, or for the benefit of, C for C's support, maintenance in reasonable comfort, health and education until C reaches 25 years of age.  Also, the trustee may distribute principal to C subject to the above standard.

  The trust also provides that C has the noncumulative power in any calendar year to withdraw from principal the lesser of (1) all amount added to the trust during such year by the grantor;  or (2) the sum of $3,000.  C also has the power to withdraw the entire income of the trust until C reaches age 25.

  Unless sooner exhausted by withdrawal or distributions, the trust is to terminate upon the death of C or at such time as C reaches age 25, and any remaining amount of trust principal and income is to be distributed to C or C's estate.

  The instrument provides that trust income may be used to discharge P's obligation to support C only if P is unable to personally discharge that obligation.

  Under applicable state law, C, as a minor, is legally incapable of exercising the above powers in the absence of an appointed guardian.  Although no legal guardian has been appointed for C, there is no impediment under the trust agreement or local law to the appointment of a guardian.

LAW AND ANALYSIS

  Section 678(a) of the Code provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself.  Section 678(b) provides that section 678(a) shall not apply if the grantor of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provisions of subpart E of Part I of subchapter J, other than section 678.

  The specific question presented is whether the holder of a power the exercise of which by local law or by a legal or actual disability shall be treated as the owner of any portion of a trust for purposes of section 678(a) of the Code.

  In Trust No. 3 v. Commissioner, 285 F.2d 102 (7th Cir. 1960), beneficiaries who were minors were granted a power to terminate a trust and to take possession of the trust property.  The court held that the fact that no guardians had been duly appointed for the beneficiaries was immaterial in determining whether the beneficiaries became vested with a present right to use all or any part of the property of the trust upon making due demand.  The court noted that the taking of such routine steps as appointing a guardian would have no bearing upon the fundamental question of the legal right of the beneficiaries to terminate the trust.

  In the present case, as in Trust No. 3, no guardian has been appointed for the minor beneficiary of a trust with respect to which the beneficiary has a power exercisable solely by the beneficiary to vest the corpus or the income therefrom in the beneficiary.  Here, C, in the absence of an appointed guardian, is legally incapable of exercising the power;  however, C's inability to exercise the power because C is a minor does not affect the existence of the power.  For purposes of section 678 of the Code it is the existence of a power rather than the capacity to exercise such a power that determines whether a person other than the grantor shall be treated as the owner of any part of a trust.

HOLDING

  Under section 678(a) of the Code, C, a minor beneficiary of a trust, is treated as the owner of any portion of the trust with respect to which C has a power to vest the corpus or income in C, notwithstanding that no guardian has been appointed for C.

Rev. Rul. 81-6, 1981-1 C.B. 385, 1981-1 I.R.B. 14.