PLR 200029048: Timely disclaimer of a trust principal interest is not a gift

Plain-English summary

A trust beneficiary retained an income interest but disclaimed a fractional share of a separate interest in trust principal. The beneficiary had accepted income, but represented that he had accepted no principal and delivered a written disclaimer within nine months of learning of the transfer. The IRS concluded that the disclaimer was timely under the gift tax regulation governing interests created before 1977. If the disclaimer was also valid under state law and met the regulation's other conditions, it would not be a taxable gift. The IRS expressly did not decide whether the disclaimer was valid under state law.

Ruling snapshot

• Question: Does the partial disclaimer of the principal interest avoid gift tax despite acceptance of trust income?
• Outcome: Approved, conditional on state law validity and the remaining regulatory requirements.
• Key authorities: IRC §§ 2501, 2511, and 2518; Treas. Reg. §§ 25.2511-1(c)(2) and 25.2518-3.

Full text (IRS public release)

Internal Revenue Service                         Department of the Treasury

Index Number: 2511.00-00                         Washington, DC 20224



                                                 Person to Contact:
Number: 200029048                                Telephone Number:
Release Date: 7/21/2000
                                                 Refer Reply To:
                                                 CC:DOM:P&SI:4/ PLR-103744-00
                                                 Date:
                                                         April 25, 2000


         Re:

Legend

Decedent              =

Taxpayer              =

Date 1                =

Date 2                =

Date 3                =

Grandchild 1          =

Grandchild 2          =

Grandchild 3          =

Trustee               =

Charity               =

Dear            :

       This is in response to your authorized representative’s letter dated February 8,
2000, requesting rulings that Taxpayer’s disclaimer with respect to a fractional share of
Taxpayer’s interest in Trust principal constitutes a valid disclaimer under § 25.2511-1 of
the Gift Tax Regulations and does not constitute a gift under § 2501 of the Internal
Revenue Code.

Facts

         Decedent died testate on Date 1. Pursuant to the terms of Decedent’s will, the

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residue of Decedent’s estate was distributed to an irrevocable trust (Trust) for the
benefit of Decedent’s three grandchildren (Grandchild 1, Grandchild 2, and Grandchild
3).

        Article Eighth, Section A of Decedent’s will provides, generally, that during the
trust term two-thirds of the trust income will be distributed for the use and benefit of
Grandchild 1 during his life. Upon Grandchild 1's death and until the termination of
Trust, the trust income allocated to Grandchild 1 will be used for the benefit of
Grandchild 1's issue who are living at each respective date of income distribution. If
Grandchild 1 is not survived by any issue, the trustees are directed to pay or apply such
income in equal shares for the use and benefit of Grandchild 2 and Grandchild 3, during
their respective lives. In the event that either Grandchild 2 or Grandchild 3 shall be
deceased or shall thereafter die during the trust term, the trustees are directed to pay or
apply the income which such deceased Grandchild would have received, if living, for
the use and benefit of the issue of such deceased Grandchild who are living at each
respective date of income distribution.

        Article Eighth, Section B of Decedent’s will provides, generally, that during the
trust term the remaining one-third of the trust income will be distributed for the use and
benefit of Grandchild 2 during her life. Upon Grandchild 2's death and until the
termination of Trust, the trust income allocated to Grandchild 2 will be used for the
benefit of Grandchild 2's issue who are living at each respective date of income
distribution. If Grandchild 2 is not survived by any issue, the trustees are directed to
pay or apply such income in equal shares for the use and benefit of Grandchild 1 and
Grandchild 3, during their respective lives. In the event that either Grandchild 1 or
Grandchild 3 shall be deceased or shall thereafter die during the trust term, the trustees
are directed to pay or apply the income which such deceased Grandchild would have
received, if living, for the use and benefit of the issue of such deceased Grandchild who
are living at each respective date of income distribution.

        Article Eighth, Section F provides that Trust will terminate upon the death of the
last to die of Grandchild 1, Grandchild 2, and Grandchild 3. Upon the termination of
Trust, the trustees are directed to assign, transfer, and distribute the principal and all
undistributed income of Trust to and among the persons then entitled to the income, in
the shares and proportions to which they are so entitled. However, if the grandchild
dying last was currently receiving income at the time of his or her death, the issue of
such grandchild shall be entitled to share collectively in the principal and undistributed
income of Trust in the same percentage as such grandchild was sharing in the income
at the date of his or her death.

       In the event that no person is entitled to the principal of the trust under Article
Eighth, Section F, the trustees are directed to assign, transfer, and pay the principal
and all undistributed income of Trust to Charity.

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        Grandchild 1 died on Date 2, survived by his two children, Grandchild 2, and
Grandchild 3. Taxpayer, one of Grandchild 1’s surviving children, currently is entitled to
receive a portion of Grandchild 1’s two-thirds income interest in Trust during the Trust
term. If either Taxpayer or his issue is alive when Trust terminates, Taxpayer, or his
issue, is entitled to receive a proportionate share of the principal and undistributed
income of Trust upon termination. It is represented that Taxpayer first learned of the
existence of Trust after the death of his father (Grandchild 1). On Date 3, less than
nine months after the death of Grandchild 1, Taxpayer disclaimed a fractional share of
his interest in the principal of Trust. Taxpayer, however, retained his right to his share
of Trust income and his remaining interest in Trust principal.

       Taxpayer has received and accepted distributions of income from Trust since
Grandchild 1’s death, but has neither received nor accepted any distributions of
principal.

Ruling Requests

        1) Taxpayer’s disclaimer of a fractional share of his interest in Trust principal is a
valid disclaimer under § 25.2511-1 of the Gift Tax Regulations; and

      2) Taxpayer’s disclaimer of a fractional share of his interest in Trust principal will
not constitute a gift under § 2501 of the Internal Revenue Code.

Law and Analysis

      Section 2501(a)(1) imposes a tax, for each calendar year, on the transfer of
property by gift by any individual, resident or nonresident.

       Section 2511 provides that the tax imposed by § 2501 shall apply 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)(1) provides that the gift tax also applies to gifts indirectly
made. Thus, any transaction in which an interest in property is gratuitously passed or
conferred upon another, regardless of the means or device employed, constitutes a gift
subject to tax.

       Section 25.2511-1(c)(2) provides that in the case of taxable transfers creating an
interest in the person disclaiming made before January 1, 1977, where the law
governing the administration of the decedent’s estate gives a beneficiary, heir, or next-
of-kin 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 is made within a reasonable time after knowledge of the
existence of the transfer. The refusal must be unequivocal and effective under the local

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law. There can be no refusal of ownership of property after its acceptance. In the
absence of facts to the contrary, if a person fails to refuse to accept a transfer to him of
ownership of a decedent’s property within a reasonable time after learning of the
existence of the transfer, he will be presumed to have accepted the property. In any
case where a refusal is purported to relate to only a part of the property, the
determination of whether or not there has been a complete and unqualified refusal to
accept ownership will depend on all of the facts and circumstances in each particular
case, taking into account the recognition and effectiveness of such a purported refusal
under local law.

        Thus, for a disclaimer to be recognized for federal gift tax purposes, with respect
to a property interest created in a pre-1977 transfer, it must be (1) recognized under
local law, (2) made within a “reasonable time” after knowledge of the existence of the
transfer, (3) made before the acceptance of the property transferred, and (4)
unequivocal.

        The Supreme Court has recognized that, under the regulations, an interest must
be disclaimed within a reasonable time after obtaining knowledge of the transfer
creating the interest to be disclaimed, rather than a reasonable time after the
distribution or vesting of the interest. Jewett v. Commissioner, 455 U.S. 305 (1982).
The requirement in the regulations that the disclaimer must be made within a
“reasonable time” is a matter of federal, rather than local law. Jewett, 455 U.S. at 316.
Whether a period of time is reasonable under the regulations is dependent on the facts
and circumstances presented. See, e.g., Jewett v. Commissioner, 70 T.C. 430, 438
(1978), aff’d, 455 U.S. 305 (1982).

        With respect to property interests created after December 31, 1976, § 2518 and
the regulations thereunder set forth the requirements that must be met for a disclaimer
to be treated as a qualified disclaimer for federal gift tax purposes. While § 2518 and
the regulations thereunder do not govern the disclaimer of property interests created
before January 1, 1977, they are nevertheless instructive to the extent they represent a
uniform federal rule for disclaimers that is applicable to the estate tax, the gift tax, and
the tax on generation-skipping transfers.

       Section 2518 provides that if a person makes a qualified disclaimer with respect
to any interest in property, then such interest is treated as if it had never been
transferred to the disclaimant.

       Under § 25.2518-2(d)(4), Example 1, A established a trust for the benefit of B,
then age 22. Pursuant to the terms of the trust, the current income of the trust is to be
paid quarterly to B. Additionally, one-half the principal is to be distributed to B when B
attains the age of 30 years. The balance of the principal is to be distributed to B when
B attains the age of 40 years. B received a distribution of income on June 30, 1977.
On August 1, 1977, B disclaimed B’s right to receive both the income from the trust and

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the principal of the trust. B’s disclaimer of the income interest is not a qualified
disclaimer for purposes of § 2518(a) because B accepted income prior to making the
disclaimer. B’s disclaimer of the principal, however, does satisfy § 2518(b)(3).

       Section 25.2518-3(b) provides that a disclaimer of an undivided portion of a
separate interest in property which meets the other requirements of a qualified
disclaimer under § 2518(b) and the corresponding regulations is a qualified disclaimer.
An undivided portion of a disclaimant’s separate interest in property must consist of a
fraction or percentage of each and every substantial interest or right owned by the
disclaimant in such property and must extend over the entire term of the disclaimant’s
interest in such property and in other property into which such property is converted.

        In § 25.2518-3(d), Example (8), E died testate on September 13, 1978. Under
the provisions of E’s will, E’s shares of stock in X, Y, and Z corporations were to be
transferred to a trust. The trust provides that all income is to be distributed currently to
F and G in equal parts until F attains the age of 45 years. At that time the corpus of the
trust is to be divided equally between F and G. F disclaimed the entire income interest
in the trust while retaining the interest F has in corpus. G disclaimed G’s entire corpus
interest while retaining G’s interest in the income from the trust. If the remaining
requirements of § 2518(b) are met, either disclaimer will be a qualified disclaimer.

        Section 25.2518-3(a)(1) provides that, if the requirements of § 2518 are met, the
disclaimer of all or an undivided portion of any separate interest in property may be a
qualified disclaimer even if the disclaimant has another interest in the same property.
In general, each interest in property that is separately created by the transferor is
treated as a separate interest. For example, if an income interest in securities is
bequeathed to A for life, then to B for life, with the remainder interest in such securities
bequeathed to A’s estate, and if the remaining requirements of § 2518(b) are met, A
could make a qualified disclaimer of either the income interest or the remainder, or an
undivided portion of either interest.

       Under § 25.2518-3(d) Example 21, C created a trust which provides that all
current income is to be distributed equally between D and E for the life of D. D also is
given a testamentary general power of appointment over the corpus. D disclaimed the
testamentary power to appoint an undivided one-half of the trust corpus. Assuming the
remaining requirements of § 2518(b) are satisfied, D’s disclaimer is a qualified
disclaimer under § 2518(a).

       In this case, Taxpayer represents that he executed a written disclaimer and
delivered it to Trustee within nine months of learning of the existence of the transfer
creating the interest. Accordingly, we conclude that Taxpayer’s disclaimer was made
within a reasonable time after knowledge of the existence of the transfer under
§ 25.2511-1(c)(2). Taxpayer also represents that he has neither received nor accepted
any distributions of principal. Therefore, if the disclaimer is valid and effective under the

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governing local law and such validation is consistent with applicable state law as would
be applied by the highest court of the state, and if the other requirements of      §
25.2511-1(c)(2) are satisfied, Taxpayer’s disclaimer of a fractional share of his interest
in Trust principal is a valid disclaimer under § 25.2511-1 and does not constitute a
transfer subject to gift tax under § 2501.

      The rulings contained in this letter are 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.

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed concerning whether
Taxpayer’s disclaimer is effective and valid under the governing state law.

      This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

         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,
                                              Assistant Chief Counsel
                                              Passthroughs and Special Industries
                                       By:    Robert Honigman
                                              Acting Assistant Branch Chief
                                              Branch 4

Enclosure (1)
      Copy for section 6110 purposes