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News April 11, 2005 Issue

Guidance on Trust 3(c)(7) Investments

A recent Division of Investment Management no-action letter addressed the status of trusts as qualified purchasers eligible to invest in 3(c)(7) funds.

Some background: Under ICA Section 2(a)(51), for a trust to be a qualified purchaser, the trust must not have been set up for the purpose of investing in 3(c)(7) funds, and the trustee and the settlor (that’s the person who funded the trust) must be qualified purchasers.

But what if the settlor funded the trust a long, long time ago? In a 1998 no-action letter, the staff took the position that a settlor had to have been a qualified purchaser at the time it contributed assets to the trust. A trust worth at least $5 million in 1996 is evidence that at the time the settlor funded the trust, the settlor was a qualified purchaser.

The staff’s March 29 no-action letter, Trusts Under the Will of Marion Searle, took that concept a bit farther by saying you can 1) adjust for inflation and 2) group related trusts together. When Mrs. Searle passed away in 1959, her estate, valued at approximately $3.5 million, was split into 15 testamentary trusts for her grandchildren. The staff agreed that since $3.5 million, adjusted for inflation, would exceed $5 million as of 1996, Mrs. Searle would be a qualified purchaser. Moreover, the staff agreed that just because the settlor’s wealth was subsequently divided among the trusts, the trusts could be aggregated in determining whether the trust was worth $5 million in 1996.