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Sunday, May 5, 2024
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GiftLaw Note:
Donor created two trusts. At the time the trusts were created, Donor had three children (A, B, and C). A's child, D, was born after the trusts
were executed. D is the parent of Taxpayer, who has not attained the age of majority. Under the terms of Trust 1 and Trust 2, Taxpayer, as A's descendant,
is entitled to discretionary distributions of a portion of trust income, in the event certain needs arise. In addition, upon the termination of both Trusts,
Taxpayer is a contingent beneficiary of portions of principal and income from both trusts. To date, Taxpayer has not received any income or principal
distributions from Trust 1 or Trust 2. Taxpayer proposes to disclaim her contingent right to receive Trust corpus upon the terminations of Trust 1 and Trust
2. The disclaimers will be executed within nine months after Taxpayer reaches the age of majority. Taxpayer requests a ruling that the disclaimers will not
constitute transfers subject to gift tax.
Section 2501(a) imposes a gift tax on the lifetime transfer of property. Section 25.2511-1(c)(2) provides that in cases where a person disclaims
an interest created prior to January 1, 1977, the disclaimer does not result in a transfer subject to gift tax if it: (1) it is made within a reasonable
time after knowledge of the existence of the transfer; (2) is unequivocal; (3) is effective under local law; and (4) is made before the disclaimant has
accepted the property. Here, the Service explained that the time limitation for making the disclaimer does not begin to run until the disclaimant has
attained the age of majority. As such, because Taxpayer plans to execute the disclaimer within nine months after attaining majority, and assuming that
Taxpayer satisfies the procedural requirements prescribed under state law and does not accept or receive any of the benefits from the Trusts, the
disclaimers will not constitute transfers subject to the federal gift tax.
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PLR 201845002 IRS Rules on Gift Tax Consequences of Proposed Disclaimers
11/9/2018 (7/18/2018)
Dear * * *:
This responds to your authorized representative's letter of January 22, 2018, in which a ruling is requested on the gift tax consequences of your proposed
disclaimers. The facts and representations are as follows.
Trust 1
Donor executed Trust 1, an irrevocable trust, on Date 1. Under Article Second, paragraph (b) of the Trust 1 instrument, the income shall be accumulated and
added to principal. However, the trustees are authorized to pay such sum or sums from time to time out of the income, accumulated income or principal of
Trust 1 to or for the benefit of A or any of A's descendants, in the trustees' sole and absolute discretion in the event of illness, accident, or other
misfortune, or in the event of any emergency, or if in the trustees' judgment, it is necessary for the comfortable maintenance, support or education of such
person.
Article Second, paragraph (b) further provides that Trust 1 will terminate twenty years after the death of the survivor of A, B, C, and all of Donor's
descendants living on Date 1. On termination, the remaining Trust 1 principal and undistributed income will be distributed to the descendants of A who have
no living ancestor who is a descendant of A, per stirpes.
Under Article Seventh, the trust is to be construed in accordance with the laws of State. The current trustees of Trust 1 are Corporate Trustee and
Individual Trustee A.
On the date Trust 1 was executed, Donor had eleven living descendants consisting of three children (A, B, and C) and eight grandchildren, all of whom are
still living. A's child, D, was born on Date 2, after the Trust 1 instrument was executed. Taxpayer is D's child and A's grandchild. As A's descendant, the
trustees may, in their discretion, make distributions of income and principal to Taxpayer during the trust term. Further, Taxpayer, as a descendant of A,
will be entitled to receive a share of the per stirpital portion of the Trust 1 remainder if D dies prior to the termination of Trust 1, and Taxpayer
survives.
Trust 2
Trust 2, an irrevocable trust, was executed by A on Date 3.
Under Paragraph First of the Trust 2 instrument, the trust is to be held in three equal shares. Under Paragraph First, subparagraph (a), the income derived
from one share is to be accumulated and added to principal. Under Paragraph First, subparagraph (b), the income of the second one-third share is to be paid
to A. However, under Paragraph Third, subparagraph (d), A reserved the right, exercisable by will, to direct a contrary disposition of the income of this
one-third share to be effective after A's death. Under Paragraph First, subparagraph (c), the income of the remaining one-third share is to be paid to any
of A's descendants in the event of need occasioned by illness, accident or other misfortune, or in any emergency, or if in the trustee's discretion it is
necessary for the comfortable maintenance, support or education of any beneficiary or of his or her family.
Under Paragraph First, subparagraph (d), after A's death, all of the one-third shares of Trust 2 are to be combined into a single trust (less any portion of
the second one-third share for which A has made a contrary testamentary disposition of the income) along with accumulated income. Trust 2 is then to be
divided into equal shares, one such share for each of A's then living children and deceased children leaving surviving issue, the surviving issue to take
the deceased child's share by representation. During the continuation of the trust term, the trustee is to pay to the beneficiaries (A's children or their
surviving issue by representation) of a respective share so much income of that share as the trustee in the trustee's discretion determines.
Under Paragraph First, subparagraph (e), after A's death, the trustee may, as to any beneficiary, who, from time to time is receiving or entitled to receive
trust income, in the trustee's discretion in the event of illness, accident, or other misfortune, or in the event of any emergency, or if in the judgment of
the trustee it is necessary for the comfortable maintenance, support or education of any beneficiary or of the beneficiary's family, pay to or for the
beneficiary such principal as the trustee deems necessary. However, the amount so paid is to be charged against the share from which the beneficiary is then
receiving or entitled to receive income.
Under Paragraph First, subparagraph (d), Trust 2 is to terminate twenty years after the death of the last survivor of A and all of A's children living on
the date A executed Trust 2. On termination, the trust will be distributed, per stirpes, to A's descendants then living who have no living ancestor who is a
descendant of A.
Under Article Fourth, the trust is to be construed in accordance with the laws of State. The current trustees of Trust 2 are Corporate Trustee and
Individual Trustee B.
D was not yet born when A executed Trust 2 on Date 3. Because D's life is not one of the lives measuring the duration of Trust 2, D is a potential recipient
of a one-third share of the remainder. Taxpayer, as A's descendant, is entitled to distributions of income from a one-third share, described above, in the
event certain needs arise. After A has died, and if D has also died, Taxpayer, if then living, will be entitled, as D's surviving issue, to: (i)
distributions of income and principal of the Trust 2 share set aside with respect to D, and (ii) on termination of Trust 2, distribution of all or a portion
of the remainder of that share, by representation.
Proposed disclaimers
Taxpayer will attain the age of majority under State law on Date 4. Taxpayer has not received any income or principal distributions from either Trust 1 or
Trust 2.
Taxpayer proposes to disclaim her contingent rights to receive Trust corpus upon the terminations of Trust 1 and Trust 2. The disclaimers will be executed
by Taxpayer no later than within nine months after attaining her majority.
Taxpayer requests a ruling that the execution and delivery of the proposed disclaimers will not constitute a transfer subject to federal gift tax.
Law and Analysis
Trust 1 and Trust 2 are governed by the laws of State. Under State Statute 1, any individual to whom property or an interest therein is donatively
transferred by any means, including a transfer resulting from another disclaimer, may disclaim all or any portion of the transfer. Unless the terms of the
transfer otherwise provide, the disclaimer shall cause the terms of the transfer to be applied to the disclaimed transfer and to any future interests taking
effect thereafter as if the disclaimant had died immediately before the transfer.
State Statute 2 provides that a disclaimer is made by a writing showing an unconditional refusal to accept a transfer, or a portion thereof, signed by the
disclaimant, or representative, and delivered on or before nine months after the transfer, or by any later time provided in the particular case or pursuant
to other provisions of that chapter, and before any acceptance of the disclaimed interest. Delivery of a disclaimer may be accomplished by delivery to the
transferor, the transferor's personal representative or other legal representative, or the holder of legal title to the property to which the interest is
related.
State Statute 3 provides that each separate interest in property is subject to disclaimer or acceptance and each separate interest, including any specific
amount, part, fraction or asset thereof, or formula amount based on present or future facts independent of the disclaimant's volition, is subject to
disclaimer or acceptance.
State Statute 4 provides that a contingent future interest may be disclaimed in whole or in part at any time before, or within nine months after,
beneficiaries of the interest have been fully ascertained and their interests vested.
Section 2501(a) of the Internal Revenue Code imposes a tax on the transfer of property by gift. Section 2511(a) provides that the gift tax imposed under
§ 2501 applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible.
Section 25.2511-1(c)(2) of the Gift Tax Regulations provides that, in the case of transfers creating an interest in the beneficiary disclaiming made before
January 1, 1977, where the law governing the administration of the decedent's estate gives the beneficiary a right completely and unqualifiedly to refuse to
accept ownership of property transferred from a decedent, a refusal to accept ownership does not constitute the making of a gift if the refusal: (1) is made
within a reasonable time after knowledge of the existence of the transfer; (2) is unequivocal; (3) is effective under local law; and (4) is made before the
disclaimant has accepted the property. Cf. § 2518 and §§ 25.2518-1 through 25.2518-3 (providing rules for determining whether a disclaimer is
a qualified disclaimer effective for estate and gift tax purposes, in the case of the disclaimer of an interest in property that is created in the
beneficiary disclaiming by a transfer made after December 31, 1976).
As noted above, under § 25.2511-1(c), if the interest to be disclaimed was created before January 1, 1977, the disclaimant must disclaim the interest
in the property within a reasonable time after knowledge of the existence of the transfer creating the interest to be disclaimed. In the case of a
disclaimer of an interest in trust, in general, the transfer occurs when the trust is established rather than when the interest actually vests in the
disclaimant, if the transferor has not reserved any power over the trust. See Jewett v. Commissioner, 455 U.S. 305 (1982). However, the time limitation for
making the disclaimer does not begin to run until the disclaimant has attained the age of majority and is no longer under a legal disability to disclaim.
See Jewett v. Commissioner, supra, 455 U.S. at 318. See also § 2518(b)(2)(B) and § 25.2518-2(c)(1)(ii).
In this case, Taxpayer proposes to disclaim her contingent right to receive trust corpus on the termination of Trust 1 and Trust 2. She will execute the
disclaimers within nine months after reaching age 18. Under these circumstances, the proposed disclaimers will be considered to be made within the time
prescribed in § 25.2511-1(c).
Under § 25.2511-1(c)(2), the disclaimers must be unequivocal. Rev. Rul. 76-156, 1976-1 C.B. 292, which considers the application of §
25.2511-1(c), concludes that a disclaimer is unequivocal if the disclaimant's act of refusal is unambiguous in its consequences; that is, the disclaimant
must unqualifiedly refuse to accept ownership of the property. For example, a disclaimer is unequivocal if the disclaimed property must pass as otherwise
provided in the instrument, and not pursuant to the direction of the disclaimant. Similarly, a disclaimer is unequivocal if the disclaimant does not accept
the benefits from the property interest disclaimed. In this case, the disclaimed interests will not pass pursuant to any direction on the part of Taxpayer.
Further, Taxpayer will not accept the benefits of the disclaimed interests after the disclaimers. See § 25.2518-2(d)(3). Cf. § 25.2518-3(a)(1)(i)
and 25.2518-3(d), Example (10) and Example (11) (regarding treatment of certain interests in the same property as separate interests eligible for qualified
disclaimer treatment under § 2518).
Under § 25.2511-1(c)(2), the disclaimers must be effective under local law. In this case, State law specifically provides that an individual may make a
valid disclaimer of any separate interest in property while retaining other separate interests in the same property. Further, the disclaimers will be timely
under State Statute 4. Consequently, if Taxpayer satisfies the procedural requirements prescribed under State law, the disclaimers will be valid under local
law. Finally, under § 25.2511-1(c), the disclaimant must not have accepted the property before the disclaimer.
We conclude that, based on the facts submitted and representations made, if the disclaimers are executed as proposed, and assuming that Taxpayer has not
accepted or received any of the benefits of the disclaimed interests (the terminating distributions), the disclaimers will not constitute transfers subject
to the federal gift tax.
Except as expressly provided herein, we express no opinion on the federal tax consequences of the transactions under the cited provisions or under any other
provisions of the Code.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is
subject to verification on examination.
In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.
Sincerely,
Karlene Lesho
Senior Technician Reviewer, Branch 4
Office of Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosure
Copy of letter for § 6110 purposes
cc:
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