Thursday March 28, 2024

Rev. Rul. 81-7

GiftLaw Note:
Exclusion; transfer in trust; present v. future interest. A trust provision that gives a legally competent adult beneficiary the power to demand corpus does not qualify a transfer to the trust as a present interest eligible for the gift tax annual exclusion under section 2503 (b) of the Code, if due to the donor's conduct, the beneficiary lacks knowledge of the power and does not have a reasonable opportunity to exercise it before it lapses.

ISSUE


Does a trust provisions that creates a power in an adult beneficiary to demand corpus qualify a transfer to the trust as a present interest eligible for the gift tax annual exclusion under section 2503(b) of the Internal Revenue Code, if the beneficiary does not have a reasonable opportunity to exercise the power before it lapses and lacks knowledge of its existence?

FACTS


On December 29, 1979, G created and funded an irrevocable trust for the benefit of A, a legally competent adult, for A' s life with remainder to B. The trust instrument gives the independent trustee absolute discretion to distribute trust income and principal to A for life. Income not distributed is added to corpus. At A' s death any remaining, undistributed corpus and income is payable to B free of trust.

In addition, the trust instrument provides of follows:

The beneficiary may demand immediate distribution at any time (up to December 31 of the year in which an addition, including the original corpus, is made to the trust) of the sum of $3,000 per donor or the amount of the addition from each donor whichever is less. The demand right is not cumulative.

Neither G nor the trustee informed A of the demand right with regard to the initial contribution to the trust before the demand right had lapsed.

LAW AND ANALYSIS


Section 2503(b) of the Code authorizes an annual exclusion of $3,000 per donee for gifts of present interests. No exclusion is allowed for gifts of future interests. Section 25.2503-3 of the Gift Tax Regulations describes a present interest as "[a]n unrestricted right to the immediate use, possession, or enjoyment of property or the income from property..." and a future interest as one "... limited to commence in use, possession, or enjoyment at some future date or time."

The courts have recognized that if a trust instrument gives a beneficiary the power to demand immediate possession and enjoyment of corpus or income, the beneficiary has a present interest. Crummey v. Commissioner, 397 F. 2d 82 (9th Cir. 1954). See also Rev. Rul. 73-405, 1973-2 C.B. 321. However, it is necessary to consider not only the terms of the trust, but also the circumstances in which the gift was made in order to determine whether the gift is a present or future interest. When the delivery of property to a trust is accompanied by limitations upon the donee's present enjoyment of the property in the form of conditions, contingencies, or the will of another, either under the terms of the trust or other circumstances, the interest is a future interest even if the enjoyment is deferred only for a short time. The question is not when title vests, but when enjoyment begins. Disston v. Commissioner, 325 U.S. 442 (1945), Ct. D. 1642, 1945 C.B. 426; Fondren v. Commissioner, 324 U.S. 18 (1945), Ct. D. 1627, 1945 C.B. 421; Ryerson v. United States, 312 U.S. 405 (1941), Ct. D. 1496, 1941-1 C.B. 443; Roderick v. Commissioner, 57 T.C. 108 (1971).

Section 25.2511-1(g)(1) of the regulations provides that donative intent is not an essential element of a gift. The gift tax is applied on the basis of objective facts and circumstances and not on the subjective motives of the donor. Although donative intent is not relevant to whether a transfer is subject to the gift tax, the donor's intent, as gleaned from the circumstances of the transfer, is a relevant consideration in determining when the rights actually conferred are meant to be enjoyed. Fondren v. Commissioner. Where the facts and circumstances of a particular case show that the donor did not intend to give the donee a present interest, no annual exclusion under section 2503(b) of the Code is allowable.

In this case, G created the trust shortly before the end of the year, at which time the supposed right would lapse. G did not inform A of the existence of the demand right before it lapsed. In failing to communicate the existence of the demand right and in narrowly restricting the time for its exercise, G did not give A a reasonable opportunity to learn of and to exercise the demand right before it lapsed. G' s conduct made the demand right illusory and effectively deprived A of the power.

HOLDING


A trust provision giving a legally competent adult beneficiary the power to demand corpus does not qualify a transfer to the trust as a present interest eligible for the gift tax annual exclusion under section 2503(b), if the donor's conduct makes the demand right illusory and effectively deprives the donee of the power.




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