PLR 200838026: Young beneficiary's trust-remainder disclaimers are not taxable gifts

Plain-English summary

A beneficiary under age 18 held contingent remainder interests in two irrevocable trusts created before 1977 and had received discretionary trust distributions. The beneficiary proposed disclaiming only the contingent rights to receive trust corpus at termination, while retaining separate interests, within nine months after reaching majority. For these pre-1977 transfers, the IRS applied the rule requiring an unequivocal, locally valid refusal within a reasonable time after learning of the transfer and before accepting the disclaimed property. The reasonable-time period did not begin until the beneficiary was old enough to disclaim, and distributions received while still a minor did not count as accepting the contingent remainders. Assuming the disclaimers were executed as proposed and met state procedural rules, they would not be transfers subject to federal gift tax.

Ruling snapshot

• Question: Will disclaiming the contingent remainder interests within nine months after reaching majority create taxable gifts?
• Outcome: Approved, assuming the disclaimers are executed as proposed and satisfy state law.
• Key authorities: IRC §§ 2501, 2511; Treas. Reg. § 25.2511-1(c)(2).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200838026
Release Date: 9/19/2008
Index Number: 2511.00-00, 2511.11-00

Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B04
In Re: PLR-154465-07
Date: APRIL 29, 2008
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Legend:

First Donor = ------------------
Trust 1 = -----------------------------------------------------------------------------------------
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Trust 2 = ----------------------------------------------------------------------
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Date 1 = --------------------------
Date 2 = ------------------
Date 3 = --------------------------
Date 4 = -----------------------

A = -------------------
B = -----------------------------
C = ------------------------------------
D = -------------------------
E = ------------------------
Taxpayer = ------------------------
State = ---------------
State Statute 1 = ---------------------------------------------------------- State Statute 2 = ------------------------------------------------- State Statute 3 = ------------------------------------------------- State Statute 4 = -------------------------------------------------
PLR-154465-07
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Dear --------------:

This is in response to a letter dated November 15, 2007, and subsequent correspondence, requesting a ruling on the gift tax consequences of proposed disclaimers to be executed by Taxpayer.

Facts

The facts submitted and representations made are as follows.

Trust 1

Trust 1, an irrevocable trust, was executed by First Donor on Date 1. Under Article Second, paragraph (b), of the Trust 1 instrument, the trustees are 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 (First Donor's child) or any of A's descendants, in the trustees' sole and absolute discretion in the event of illness, accident, other misfortune, or any emergency, or if, in the trustees' judgment, it is necessary to provide for the beneficiaries’ comfortable maintenance, support, or education. Trust 1 will terminate twenty years after the death of the survivor of A, B, and C and all of First 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.

On the date Trust 1 was executed, First 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 and is still living. Taxpayer, who is under age 18, is D's child and A's grandchild. The trustees may, in their discretion, make distributions of income and principal to Taxpayer, as A's descendant, during the trust term. Further, Taxpayer 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 until the termination. Taxpayer has received discretionary distributions from Trust 1.

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, subparagraphs (a), (b) and (c), the income derived from one share is to be accumulated and added to principal. The income of the second one-third share is to be paid to A, and, on his death, to E, if she survives him as his spouse. The income of the remaining one-third share is to be paid to E so long as she is A's spouse or has survived A as his spouse, or to any of A's descendants in the event of need occasioned
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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, or on E's later death if she survives A as his spouse, 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 pursuant to the right A reserved to do so in Paragraph Third, subparagraph (d)) 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 of a respective share (a child of A, if living, or if a child dies, his or her surviving issue by representation) so much income of that share as the trustee in the trustee's discretion determines. In addition, under Paragraph First, subparagraph (e), after A's death, the trustee may distribute such principal as the trustee deems necessary to an income beneficiary in the event of illness, accident, other misfortune, or 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. Any amount 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, E, and those of A's children living on Date 3. On termination, the Trust 2 principal and accumulated income will be distributed, per stirpes, to A's descendants then living who have no living ancestor who is a descendant of A.

When A executed Trust 2, A had two children, including D. D's is one of the measuring lives determining the duration of Trust 2. While A is living, 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 both A and D have died, if Taxpayer is living, he will be entitled, as a surviving issue of D, 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.

Taxpayer will attain the age of majority under State law on Date 4. With respect to each of Trust 1 and Trust 2 ,Taxpayer proposes to disclaim his contingent right to receive the trust corpus on termination of the trust. The disclaimers will be executed by Taxpayer within nine months after attaining his majority. Date 1, Date 2, and Date 3 are all before 1977.
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Taxpayer requests a ruling that 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 the State Statutes, 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
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(4) is made before the disclaimant has accepted the property. Compare § 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 will execute each disclaimer 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. Cf. §§ 25.2518- 3(a)(1)(i) and 25.2518-3(d), Examples (10) and (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.
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Finally, under § 25.2511-1(c)(2), the disclaimant must not have accepted the property before the disclaimer. In the instant case, distributions to Taxpayer prior to attaining the age of majority are not considered acceptance of the property subject to the disclaimer. cf. § 25.2518-2(d)(3); § 25.2518-2(d)(4), Example 9. Accordingly, we conclude that, based on the representations made, assuming that the disclaimers are executed as proposed, the disclaimers will not constitute transfers subject to the federal gift tax.

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.

Except as specifically ruled herein, we express no opinion on the federal tax consequences of the proposed disclaimers under the cited provisions or under any other provisions of the Code.

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

Sincerely yours,

_______
George Masnik
Chief, Branch 4
Office of Associate Chief Counsel
(Passthroughs and Special
Industries)

Enclosure
Copy for section 6110 purposes