PLR 1032010: Qualified disclaimer supports charitable estate tax deduction

Plain-English summary

A decedent's daughter proposed disclaiming her interest in specified trust assets that would otherwise pass to her trust. The assets would instead pass to a foundation recognized by the IRS as a section 501(c)(3) organization, with the disclaimed property kept in a separate account. The IRS ruled that the proposed written disclaimer would qualify under section 2518, provided it otherwise complied with the statute and applicable regulations. Assuming that qualification, the property passing to the foundation would be eligible for the estate tax charitable deduction under section 2055(a).

Ruling snapshot

• Question: Will a proposed disclaimer qualify under section 2518 and allow an estate tax charitable deduction?
• Outcome: Approved
• Key authorities: IRC §§ 2046, 2055, 2518; Treas. Reg. §§ 20.2055-1 and 20.2055-2.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201032010 Third Party Communication: None
Release Date: 8/13/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 2055.00-00, 2518.00-00 --------------------------------------------
Telephone Number:
----------------------- ---------------------
------------------------ Refer Reply To:
------------- CC:PSI:B04
----------------------------------- PLR-112563-10
Date:

----------------------------- April 27, 2010

LEGEND:

      Decedent                    = ------------------------------

      Spouse                      = --------------------------------------

      Daughter                    = -----------------------

      Daughter’s Spouse = -----------------

      Trust                       = ---------------------------

      Restated Trust             = ------------------------------------------------------------------------------

      Foundation                  = ---------------------------------------------------------

      Date 1                      = --------------------

      Date 2                      = -------------------

      Date 3                      = -----------------------

      Date 4                      = -----------------------

      Date 5                      = ---------------------------

      Date 6                      = ---------------------

      Date 7                      = --------------------

      Date 8                      = -----------------

PLR-112563-10 2

    Date 9                     = ----------------------

    Year                       = -------

    State                      = ----------------

    State Statute               = -----------------------------------------------------------------------------
                       -

Dear ------------:

   This responds to a letter dated January 11, 2010, and other correspondence,

requesting rulings on behalf of Decedent’s estate and Daughter, regarding the estate
and gift tax consequences of a proposed disclaimer.

Facts

  The facts submitted and representations made are as follows. On Date 1,

Decedent and Spouse executed Trust. On Date 2, Decedent and Spouse executed a
complete restatement of Trust (Restated Trust). On Date 3, Spouse died, survived by
Decedent and their child, Daughter.

   At Spouse’s death, Restated Trust was divided into Trust A, Trust B, and Trust C

with Decedent and Daughter named as co-trustees. Decedent’s vested interest in the
community property and his separate property were allocated to Trust A. Under Part
B(4) of Article II of Restated Trust, during his life, Decedent was the sole beneficiary of
Trusts B and C. Decedent was the primary beneficiary of Trust A for life, but the
trustees could also distribute principal for the benefit of his dependents for specified
purposes. During his life, Decedent had the right to amend or revoke Trust A and could
withdraw all of the assets.

    Under Part B(8) of Article II of Restated Trust, Decedent, as the surviving

spouse, had a limited power to “amend or direct the distribution of” Trust C during his
lifetime or “as of [Decedent’s] death” and also had a limited power to amend or direct
the distribution of Trust B “but only as of [Decedent’s] death.” Decedent’s power over
Trust B and Trust C could not be exercised in favor of Decedent, his creditors, his
estate, or the creditors of his estate, nor could the power be exercised to discharge
Decedent’s legal obligations.

  Part C(3) of Article II of Restated Trust, provides that at Decedent’s death, “any

property received upon or by reason of the death of [Decedent] shall be allocated to
PLR-112563-10 3

Trust A.” The trustee is to administer all of the remainder of Trusts A, B, and C (to the
extent not effectively appointed) as follows. Under Part C(6) of Article II, after
distributing specific gifts and tangible personal property, the trustee is to hold the
residue of Trusts A, B, and C in trust for the benefit of Daughter (Daughter’s Trust).
During her life, Daughter is to receive so much of the net income and principal as the
trustee in its discretion deems reasonable for Daughter’s health, education,
maintenance, and support. Daughter has a limited lifetime or testamentary power to
appoint the trust to her issue or the issue of Decedent and Spouse’s marriage. The
power cannot be exercised in favor of Daughter, her creditors, her estate, or the
creditors of her estate, nor can the power be exercised to discharge Daughters’ legal
obligations. At Daughter’s death, to the extent not effectively appointed, her trust will be
distributed to her then living issue by right of representation.

   On Date 4, Decedent appointed all of the assets of Trust C outright to Daughter.

On Date 5, Decedent executed an amendment of Trust A that provides if Daughter
makes a qualified disclaimer under applicable federal and state law of Trust A assets
that would otherwise be distributable to the trust established for Daughter’s benefit
under Restated Trust, the disclaimed assets will be distributed to Foundation (Date 5
Amendment).

    On Date 6 (Date 6 Amendment), Decedent exercised his right to amend Trust A

and Trust B to provide, in part, that Daughter will serve as sole trustee when Decedent
ceases to serve. The Date 6 Amendment also revises the terms of Daughter’s Trust.
The new terms of Daughter’s Trust are substantially similar to the original terms of that
trust; however, the new terms provide Daughter a limited power to appoint the trust to or
for the benefit of any person or charitable entity, but not in favor of Daughter, her
creditors, her estate, or the creditors of her estate, and not to discharge Daughter’s
legal obligations.

   On Date 7, Decedent died testate, a resident of State. He was survived by

Daughter who is also a resident of State. Daughter is currently serving as sole trustee
of Trusts A and B.

   At Decedent’s death, Trust A held cash, publicly traded securities, and a 100

percent interest in each of two parcels of real estate situated in State. Daughter
proposes to execute a written disclaimer to disclaim all of her interest in specific assets
that were in Trust A at Decedent’s death and which would otherwise pass to Daughter’s
Trust at Decedent’s death. It is represented that Daughter has not accepted any
interest or benefit from any of the assets that will be subject to her disclaimer. Daughter
will execute the disclaimer no later than Date 8 which is nine months after Decedent’s
date of death. Daughter will not receive any consideration in money or money’s worth
from Foundation or from any other person for making the disclaimer.
PLR-112563-10 4

    Foundation was established in Year and has received a letter from the Internal

Revenue Service stating that it is an organization described in §§ 501(c)(3) and 509(a)
of the Internal Revenue Code. Foundation currently has two directors, Daughter and
Daughter’s Spouse. Foundation is governed by amended and restated bylaws dated
Date 9 (Date 9 Bylaws). The Date 9 Bylaws provide, in part, that all assets Foundation
receives as the result of a qualified disclaimer under § 2518 of the Internal Revenue
Code made by any director or officer of Foundation, must be segregated from the other
assets of Foundation and maintained in a separate account. In addition, the director or
officer who executed the qualified disclaimer will have no power or authority to
determine the contributions to be made to any charity from the separate account funded
by the disclaimed assets or from any income earned on that account.

   The taxpayers have requested the following rulings:

  1. Daughter’s proposed disclaimer will constitute a qualified disclaimer under

§ 2518 of the Internal Revenue Code.

    2. Assuming that the proposed disclaimer is a qualified disclaimer under § 2518,

the property that passes to Foundation as a result of Daughter’s proposed disclaimer
will be eligible for the estate tax charitable deduction under § 2055(a).

Ruling 1

   Section 2046 provides that for estate tax purposes, disclaimers of property

interests passing upon death are treated as provided in § 2518.

   Section 2518(a) provides that, if a person makes a qualified disclaimer with

respect to any interest in property, the federal estate, gift, and generation-skipping
transfer tax provisions will apply with respect to such interest as if the interest had never
been transferred to such person.

   Under § 2518(b), 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; (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 relates not later than the date which is nine 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 twenty-one; (3) the person disclaiming the interest
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.
PLR-112563-10 5

   Section 2518(c)(1) provides that a disclaimer with respect to an undivided portion

of an interest which meets the requirements of § 2518(b) shall be treated as a qualified
disclaimer of such portion of the interest.

   Under § 25.2518-1(b) of the Gift Tax Regulations, if a qualified disclaimer is

made, the disclaimed 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 disclaimer.
Accordingly, the person making a qualified disclaimer is not treated as making a gift.

   Section 25.2518-2(d)(2) provides, in pertinent part, 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. A fiduciary 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 general, a disclaimer is not a qualified disclaimer

unless the disclaimed interest passes without any direction on the part of the
disclaimant to a person other than the disclaimant. The disclaimer will not be qualified 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).

   Section 25.2518-3(a)(1)(i) provides that if the requirements of the section 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.

   Section 25.2518-3(a)(1)(ii) provides that a disclaimant shall be treated as making

a qualified disclaimer of a separate interest in property if the disclaimer relates to
severable property and the disclaimant makes a disclaimer that would be a qualified
disclaimer if such property were the only property in which the disclaimant had an
interest. Severable property is property that can be divided into separate parts each of
which, after severance, maintains a complete and independent existence. For example,
a legatee of shares of corporate stock may accept some shares of the stock and make
a qualified disclaimer of the remaining shares.

   Section 25.2518-3(a)(2) provides, in part, that a disclaimer of both an income

interest and a remainder interest in specific trust assets is not a qualified disclaimer if
the beneficiary retains an interest in other trust property unless, as a result of the
PLR-112563-10 6

disclaimer, such assets are removed from the trust and pass, without any direction on
the part of the disclaimant, to persons other than the disclaimant or to the spouse of the
decedent. The disclaimer of an undivided portion of an interest in a trust may be a
qualified disclaimer.

   Section 25.2518-3(c) provides that the disclaimer of a specific pecuniary amount

out of a pecuniary or nonpecuniary bequest or gift can be a qualified disclaimer
provided that no income or other benefit of the disclaimed amount inures to the benefit
of the disclaimant either prior to or subsequent to the disclaimer. Following the
disclaimer, the amount disclaimed and any income attributable to such amount must be
segregated based on the fair market value of the assets on the date of the disclaimer or
on a basis that is fairly representative of the value changes that may have occurred
between the date of transfer and the date of the disclaimer.

   In Rev. Rul. 72-552, 1972-2 C.B. 525, the decedent, who was the president and

a director of a corporation organized under § 501(c)(3), transferred property to the
corporation. In his capacity as president and a director, the decedent, in conjunction
with the other directors of the corporation, had the power to direct the disposition of the
corporation's funds for charitable purposes. The ruling holds that, because the
decedent retained the right, in conjunction with others, to designate the entities that
would possess or enjoy the property transferred to the corporation, the property
transferred by the decedent to the corporation was included in the decedent's gross
estate at his death under § 2036.

   Under State Statute, a beneficiary may disclaim an interest in whole or in part, or

with reference to specific parts, shares, or assets, by means of a written disclaimer.
Unless the instrument creating an interest directs to the contrary, the interest disclaimed
passes as if the person disclaiming died immediately prior to the date of transfer of the
interest.

   In the present case, at Decedent’s death, Trust A, as amended, became

irrevocable, and the amendments to Trust B made under Decedent’s exercise of his
power over that trust also became effective. Daughter proposes to timely disclaim all of
her interest in specific assets in Trust A that would otherwise pass at Decedent’s death
from Trust A to Daughter’s Trust. It is represented that Daughter has not accepted any
of the benefits of the interests in property she will disclaim. Daughter’s actions in her
capacity as the sole fiduciary of Trust A do not constitute acceptance of the assets held
in Trust A. See, § 25.2518-2(d)(2).

  Under the Date 5 Amendment, the property proposed to be disclaimed by

Daughter will pass to Foundation. Pursuant to the terms of the Date 9 Bylaws of
Foundation, the property passing to Foundation as a result of the disclaimer will be
segregated and maintained in a separate account from the other assets of Foundation.
Accordingly, Daughter will not have the power to make any determination with respect
PLR-112563-10 7

to the recipients of distributions of income or principal from the segregated funds of
Foundation.

  Accordingly, based on the facts submitted and representations made, we

conclude that Daughter’s proposed disclaimer will constitute a qualified disclaimer under
§ 2518 provided the disclaimer otherwise complies with the requirements of § 2518 and
the applicable regulations, including § 25.2518-3.

Ruling 2

 Section 2001 imposes a tax on the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States.

  Section 2033 provides that the value of the gross estate includes the value of all

property to the extent of the interest therein of the decedent at the time of his death.

    Section 2036(a) provides that the value of the gross estate shall include the

value of all property to the extent of any interest therein of which the decedent has at
any time made a transfer (except in the case of a bona fide sale for an adequate and full
consideration in money or money's worth), by trust or otherwise, under which he has
retained for his life or for any period not ascertainable without reference to his death or
for any period that does not in fact end before his death, (1) possession or enjoyment
of, or the right to the income from, the property, or (2) the right, either alone or in
conjunction with any person, to designate the persons who shall possess or enjoy the
property or the income from the property.

    Section 2038(a)(1) provides that the value of the gross estate includes the value

of all property to the extent of any interest therein of which the decedent has at any time
made a transfer (except in case of a bona fine sale for adequate and full consideration
in money or money's worth), by trust or otherwise, where the enjoyment thereof was
subject at the date of his death to any change through the exercise of a power, either by
the decedent alone or in conjunction with any person, to alter, amend, or revoke, or
where the decedent relinquished any such power during the 3-year period ending on the
date of the decedent's death.

  Under § 2055(a)(2), for estate tax purposes, the value of the taxable estate shall

be determined by deducting from the value of the gross estate the amount of all
bequests, legacies, devises, or transfers to or for the use of any corporation organized
and operated exclusively for religious, charitable, scientific, literary, or educational
purposes. A corporation that qualifies under § 501(c)(3) is one that is organized and
operated exclusively for these purposes.
PLR-112563-10 8

   Section 20.2055-1(a) of the Estate Tax Regulations provides that a deduction is

allowed under § 2055(a) from the gross estate of a decedent who was a citizen or
resident of the United States at the time of his death for the value of property included in
the decedent's gross estate and transferred by the decedent during his lifetime or by will
for charitable purposes.

    Section 20.2055-2(c)(1)(i) provides that in the case of a bequest, devise, or

transfer made by a decedent dying after December 31, 1976, the amount of a bequest,
devise, or transfer for which a deduction is allowable under § 2055 includes an interest
that falls into the bequest, devise, or transfer as the result of a qualified disclaimer under
§ 2518.

   In the present case, the value of the property in Trust A at Decedent’s death is

includible in Decedent’s gross estate. Some of this property will be subject to
Daughter’s disclaimer. Under the Date 5 Amendment, property subject to Daughter’s
disclaimer will pass to Foundation as a result of the disclaimer. Foundation has
received a letter from the Internal Revenue Service concluding that Foundation is an
organization described in § 501(c)(3). Accordingly, based on the facts presented and
the representations made, we rule that, assuming the proposed disclaimer is a qualified
disclaimer under § 2518, the property that passes to Foundation as a result of
Daughter’s proposed disclaimer will be eligible for the estate tax charitable deduction
under § 2055(a).

   Except as specifically ruled herein, we express no opinion on the federal tax

consequences of the proposed disclaimer under the cited provisions or under any other
provisions of the Code. The estate tax ruling in this letter applies only to the extent that
the relevant sections of the Internal Revenue Code are in effect during the period at
issue.

  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.
PLR-112563-10 9

  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,

                                            _________________________
                                            James Hogan
                                            Chief, Branch 4
                                            Office of Associate Chief Counsel
                                            Passthroughs and Special Industries

Enclosure
Copy for section 6110 purposes

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