PLR 200030012: Children's disclaimers allow a marital trust election

Plain-English summary

A decedent's will created a trust that could pay income or principal to a surviving spouse and three children. The children timely disclaimed their rights to distributions during the spouse's life while retaining their later interests, and would not serve as trustees. A court approved dividing the trust into two shares and requiring annual income distributions to the spouse. The IRS ruled that the children's disclaimers were qualified under section 2518 and were not gifts by them. It also ruled that the executor could elect qualified terminable interest property treatment for one fractional share under section 2056(b)(7), based on the disclaimers and court orders.

Ruling snapshot

• Question: Were the children's partial disclaimers effective for tax purposes, and could one reformed trust share qualify for the marital deduction election?
• Outcome: Approved on the represented facts and court orders.
• Key authorities: IRC §§ 2056(b)(7) and 2518; Treas. Reg. §§ 25.2518-2 and 25.2518-3.

Full text (IRS public release)

Internal Revenue Service                   Department of the Treasury

Index Number:     2056.07-00; 2518.02-00   Washington, DC 20224

Number: 200030012                          Person to Contact:
Release Date: 7/28/2000                    Telephone Number:

Refer Reply To:
CC:DOM:P&SI:4-PLR-119098-99
Date:
April 26, 2000

Re:

Legend

Decedent =

Spouse =

Child 1 =

Child 2 =

Child 3 =

Date 1 =

Date 2 =

Date 3 =

Date 4 =

Executor =

Court =

State =

County =

Statute A =

Statute B =

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Dear             :

This responds to your letter dated December 2, 1999, and subsequent
correspondence, requesting rulings on behalf of Spouse, Child 1, Child 2, and Child 3
regarding the application of § 2518 of the Internal Revenue Code to disclaimers of
interests in a trust and on behalf of Executor regarding the application of § 2056 to the
division and reformation of a trust.

You represent the facts as follows:

Decedent died testate on Date 1 survived by Spouse, Child 1, Child 2, and
Child 3. Article THIRD of Decedent’s will dated Date 2, provides that the remainder of
Decedent’s estate be held in trust. Specifically, Article FOURTH provides with respect
to the trust that:
...
(3)    During the life of my husband, [Spouse], the trustees shall make such
distributions of income and principal from time to time to benefit one or
more members of the class consisting of my husband, [Spouse], and my
three children, as the Trustees deem advisable, giving priority to the
needs of my husband; provided, however, that no person who would
directly benefit by a distribution shall have any power with respect to such
distribution, even if such person is a Trustee.

(4)    Upon the death of my husband, [Spouse], or in the event he shall fail to
survive me, the trustees shall divide any remaining trust property free of
trust equally among my three children, [Child 1], [Child 2], and [Child 3],
per stirpes.

Article THIRD of Decedent’s will names Spouse, Child 1, Child 2, and Child 3 as
the trustees of the trust.

Child 1, Child 2, and Child 3 have executed irrevocable disclaimers of their
respective interests in trust in any income or principal distributions from the trust during
the lifetime of Spouse. The disclaimers were delivered to the Executor of Decedent’s
estate and the Register of Wills for County by Date 3. Date 3 is not later than 9 months
after Decedent’s death. Child 1, Child 2, and Child 3 will not serve as trustees of the
trust, and the Executor of Decedent’s estate will petition Court to appoint a substitute
co-trustee to serve with Spouse.

The Executor of Decedent’s estate petitioned Court for permission to fractionally
divide the trust created under Article FOURTH into two separate shares with identical
terms. The Executor has also petitioned the Court to require the annual distribution of
income to Spouse (who is the only eligible beneficiary following the execution of the
disclaimers) from any trust created under Article FOURTH. The Executor intends to

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qualify one of the fractional share trusts as qualified terminable interest property (QTIP)
for federal estate tax purposes, make the election under § 2056(b)(7), and qualify for
the marital deduction. On Date 4, Court granted the Executor’s petition and ordered the
division of the trust under Article FOURTH into two shares, one share to be funded with
a fractional share of the property, and the second trust to be funded with the balance,
such division to be made in accordance with the fair market value of the property at the
time of the division. The Court also granted the request to reform the trust to require
that the income be distributed at least annually.

Under State law, a person to whom an interest in property would have devolved
by whatever means may disclaim such interest in whole or in part. A disclaimer in
whole or part may be made of any present or future interest, vested or contingent,
including a possible future right to take as a distributee under an unexercised power of
appointment or under a discretionary power to distribute income or principal. A
disclaimer relates back for all purposes to the date of the death of the decedent.
Generally, unless a testator provided for another disposition, the disclaimer shall be
equivalent to the disclaimant’s having died before the decedent. Statute A. Child 1,
Child 2, and Child 3 represent that there are no express or implied agreements that the
disclaimed interests are to be given or bequeathed to a person specified by them. In
addition, Child 1, Child 2, and Child 3 received no compensation for their disclaimers.

You have requested the following rulings:

1. The disclaimers by Child 1, Child 2, and Child 3 of their respective interests in
the trust as discretionary beneficiaries of income and principal along with their refusals
to serve as co-trustees constitute qualified disclaimers under § 2518(b) and are not
treated as gifts for Federal gift tax purposes.

2. The valid disclaimers, together with the division and reformation of the trust
requiring that income be distributed to Spouse at least annually, enables the Executor
to qualify one of the fractional share trusts as a QTIP marital trust under Decedent’s
will.

Ruling Request No. 1 – Disclaimers

Section 2518(a) provides that, if a person makes a qualified disclaimer with
respect to any interest in property, Subtitle B (relating to the estate, gift and
generation-skipping transfer taxes) shall apply with respect to such interest as if the
interest had never been transferred to such person.

Section 2518(b) provides that the term “qualified disclaimer” means an
irrevocable and unqualified refusal by a person to accept an interest in property but only
if—

1. such refusal is in writing,

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2. such writing is received by the transferor of the interest, the transferor’s legal
representative, or the holder of the legal title to the property to which the
interest related not later than the date which is 9 months after the later of—
(A) the date on which the transfer creating the interest in such person is
made, or
(B) the day on which such person attains age 21,
3. such person has not accepted the interest or any of its benefits, and
4. as a result of such refusal, the interest passes without any direction on the
part of the person making the disclaimer and passes either—
(A) to the spouse of the decedent, or
(B) to a person other than the person making the disclaimer.

Section 25.2518-1(b) of the Gift Tax Regulations provides that, if a qualified
disclaimer is made, the property is treated, for Federal gift, estate, and generation-
skipping transfer tax purposes, as passing directly from the transferor, and not from the
disclaimant, to the person entitled to receive the property as a result of the dislaimer.

Section 25.2518-2(d)(2) provides that if a beneficiary who disclaims an interest in
property is also a fiduciary, actions taken by such person in the exercise of fiduciary
powers to preserve or maintain the disclaimed property shall not be treated as an
acceptance of such property or any of its benefits. Under this rule, for example, an
executor who is also a beneficiary may direct the harvesting of a crop or the general
maintenance of a home. A fiduciary, however, cannot retain a wholly discretionary
power to direct the enjoyment of the disclaimed interest. For example, a fiduciary’s
disclaimer of a beneficial interest does not meet the requirements of a qualified
disclaimer if the fiduciary exercised or retains a discretionary power to allocate
enjoyment of that interest among members of a designated class.

Under § 25.2518-2(e)(1), in order to constitute a qualified disclaimer, the
disclaimed interest must pass without any direction on the part of the person making
the disclaimer to a person other than the disclaimant. The requirements of a qualified
disclaimer under § 2518 are not satisfied if the disclaimant, either alone or in
conjunction with another, directs the redistribution or transfer of the property or interest
in property to another person (or has the power to direct the redistribution or transfer of
the property or interest in property to another person unless such power is limited by an
ascertainable standard).

Under § 25.2518-3(a)(1), 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

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income interest or the remainder, or an undivided portion of either interest. A could not,
however, make a qualified disclaimer of the income interest for a certain number of
years.

In § 25.2518-3(d), Example 8, under the terms of E’s will, E’s shares of stock in
X, Y, and Z corporations are transferred to a trust. The trust instrument 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 disclaims F’s entire income interest in the trust while retaining the interest F has in
corpus. The example concludes that the disclaimer is a qualified disclaimer.

Section 25.2518-3(d), Example 11, describes a situation where under the terms
of a testamentary trust, W is to receive all trust income for life. The trustee has the
power to invade trust corpus for the support and maintenance of D during the life of W.
At W’s death, the trust corpus is payable to D. D disclaims the right to receive
distributions of trust corpus during W’s lifetime, but retains the right to receive the
remainder on W’s death. The example concludes that D’s disclaimer is a qualified
disclaimer.

In the present case, Child 1, Child 2, and Child 3 executed irrevocable
disclaimers of any income or principal distributions from the trust during Spouse’s
lifetime. It was represented that the disclaimers were valid under State law and were
delivered to the Executor of Decedent’s estate not later than 9 months after Decedent’s
death. Child 1, Child 2, and Child 3 also represented that they have not accepted any
benefits from the disclaimed property. Therefore, based on the facts and
representations, we conclude that the disclaimers executed by Child 1, Child 2, and
Child 3 satisfy the requirements of § 2518, constitute qualified disclaimers, and are not
treated as gifts for Federal gift tax purposes.

Ruling Request No. 2 - Qualified Terminable Interest Property

Section 2056(a) provides that the value of a decedent’s taxable estate is
determined by deducting from the value of the gross estate an amount equal to the
value of any interest in property that passes or has passed from the decedent to the
surviving spouse, but only to the extent that such interest is included in determining the
value of the gross estate.

Section 2056(b)(1) provides the general rule that no deduction is allowed for an
interest passing to the surviving spouse if, on the lapse of time, on the occurrence of an
event or contingency, or on the failure of an event or contingency to occur, the interest
passing to the surviving spouse will terminate or fail.

Section 2056(b)(7) provides an exception to the terminable interest rule in the
case of qualified terminable interest property.

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Section 2056(b)(7)(A) provides that qualified terminable interest property is
treated as passing to the surviving spouse and no part of such property is treated as
passing to any person other than the surviving spouse. Thus, the value of such
property is deductible from the value of the gross estate under § 2056(a).

Section 2056(b)(7)(B)(i) defines the term “qualified terminable interest property”
as property: (1) which passes from the decedent, (2) in which the surviving spouse has
a qualifying income interest for life, and (3) to which an election under
§ 2056(b)(7)(B)(v) applies.

Section 2056(b)(7)(B)(ii) and the regulations thereunder provide that the
surviving spouse will be considered to have a qualifying income interest for life if: (1)
the surviving spouse is entitled to all the income from the property, payable annually or
at more frequent intervals, and (2) no person, including the surviving souse, has a
power to appoint any part of the property to any person other than the surviving spouse
during the surviving spouse’s lifetime.

Section 2056(b)(7)(B)(v) provides that an election under § 2056(b)(7) with
respect to any property is to be made by the executor on the return of tax imposed by
§ 2001. The election, once made, is irrevocable.

In the present case we conclude that, as a result of the disclaimers by Child 1,
Child 2, and Child 3 and the Court orders, the fractional share of trust will satisfy the
requirements of § 2056(b)(7) and the Executor of Decedent’s estate may elect to treat
the property passing to that trust as qualified terminable interest property.

Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under the cited provisions or
any other provisions of the Code. 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.

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

Sincerely,
Assistant Chief Counsel
(Passthroughs and Special Industries)
By: Robert Honigman
Acting Assistant to the Branch Chief
Branch 4