Disclaiming a contingent share of two old family trusts is not a taxable gift

Plain-English summary

When you give up a right to receive property, tax law sometimes treats that "disclaimer" as if you had made a gift to whoever gets the property instead, which could trigger gift tax. Special rules let a beneficiary walk away from an inheritance without that gift-tax result if the refusal is timely, unequivocal, valid under state law, and made before accepting any benefit. Here a young beneficiary held only contingent future rights to receive principal when two old irrevocable family trusts eventually terminate; she had never received a distribution and wanted to disclaim those contingent remainder rights. Because both trusts were created before 1977, the older common-law disclaimer standard in Treasury Regulation § 25.2511-1(c) applies (not the newer "qualified disclaimer" rules of § 2518). A key wrinkle: for a beneficiary who was a minor, the clock to disclaim does not start until she reaches the age of majority, so disclaiming within nine months of turning 18 is timely. The IRS concluded that, assuming she disclaims as proposed and never accepts the benefits, the disclaimers will not be transfers subject to federal gift tax. The practical payoff: she can cleanly step out of the trusts without owing gift tax.

Ruling snapshot

• Question: Will the beneficiary's proposed disclaimers of her contingent rights to trust principal be transfers subject to federal gift tax?
• Outcome: Approved (the disclaimers will not be gift-taxable transfers, provided she accepts no benefits)
• Key authorities: IRC §§ 2501, 2511; Treas. Reg. § 25.2511-1(c); Jewett v. Commissioner, 455 U.S. 305 (1982); Rev. Rul. 76-156

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201845002                                              Third Party Communication: None
Release Date: 11/9/2018                                        Date of Communication: Not Applicable
Index Number: 2511.00-00, 2511.11-00
                                                               Person To Contact:
------------------------                                       ------------------------, ID No. --------------
-------------------                                            Telephone Number:
---------------------------------------                        ----------------------
                                                               Refer Reply To:
In Re: ------------------                                      CC:PSI:04
       ---------------------------------------                 PLR-102553-18
                                                               Date:
                                                               July 18, 2018

LEGEND:
Donor                      =        -------------------
A                          =        --------------------
B                          =        ------------------------------
C                          =        --------------------------------------
D                          =        -------------------
E                           =       -------------------------
Taxpayer                   =        ------------------
Trust 1                    =        ---------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Trust 2                    =         ---------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    ---------------------------------------------------------------------
Date 1                     =        ---------------------------
Date 2                     =        --------------------
Date 3                     =        ---------------------------
Date 4                     =        ------------------------
Corporate Trustee =                 --------------------------------------------------------------
Individual Trustee A =              ------------------------
Individual Trustee B =              ------------------------
State                      =        ------------
State Statute 1            =        ------------------------------------------
State Statute 2            =        ------------------------------------------
State Statute 3            =        ------------------------------------------
State Statute 4            =        ------------------------------------------
PLR-102553-18                                2

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

This responds to your authorized representative's letter of January 22, 2018, in which a
ruling is requested on the gift tax consequences of your proposed disclaimers. The
facts and representations are as follows.

Trust 1

Donor executed Trust 1, an irrevocable trust, on Date 1. Under Article Second,
paragraph (b) of the Trust 1 instrument, the income shall be accumulated and added to
principal. However, the trustees are authorized 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 or any of A's descendants, in the trustees' sole and absolute discretion in the event
of illness, accident, or other misfortune, or in the event of any emergency, or if in the
trustees' judgment, it is necessary for the comfortable maintenance, support or
education of such person.

Article Second, paragraph (b) further provides that Trust 1 will terminate twenty years
after the death of the survivor of A, B, C, and all of 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.

Under Article Seventh, the trust is to be construed in accordance with the laws of State.
The current trustees of Trust 1 are Corporate Trustee and Individual Trustee A.

On the date Trust 1 was executed, 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. Taxpayer is
D's child and A's grandchild. As A's descendant, the trustees may, in their discretion,
make distributions of income and principal to Taxpayer during the trust term. Further,
Taxpayer, as a descendant of A, 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.

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, subparagraph (a), the income derived from one share is
to be accumulated and added to principal. Under Paragraph First, subparagraph (b),
the income of the second one-third share is to be paid to A. However, under Paragraph
PLR-102553-18                                 3

Third, subparagraph (d), A reserved the right, exercisable by will, to direct a contrary
disposition of the income of this one-third share to be effective after A's death. Under
Paragraph First, subparagraph (c), the income of the remaining one-third share is to be
paid to any of A's descendants in the event of need occasioned 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, 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) 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 (A's children or
their surviving issue by representation) of a respective share so much income of that
share as the trustee in the trustee's discretion determines.

Under Paragraph First, subparagraph (e), after A's death, the trustee may, as to any
beneficiary, who, from time to time is receiving or entitled to receive trust income, in the
trustee's discretion in the event of illness, accident, or other misfortune, or in the event
of 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, pay
to or for the beneficiary such principal as the trustee deems necessary. However, the
amount so 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 and all of A's children living on the date A executed
Trust 2. On termination, the trust will be distributed, per stirpes, to A's descendants
then living who have no living ancestor who is a descendant of A.

Under Article Fourth, the trust is to be construed in accordance with the laws of State.
The current trustees of Trust 2 are Corporate Trustee and Individual Trustee B.

D was not yet born when A executed Trust 2 on Date 3. Because D's life is not one of
the lives measuring the duration of Trust 2, D is a potential recipient of a one-third share
of the remainder. 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 A has
died, and if D has also died, Taxpayer, if then living, will be entitled, as D's surviving
issue, 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.
PLR-102553-18                                  4

Proposed disclaimers

Taxpayer will attain the age of majority under State law on Date 4. Taxpayer has not
received any income or principal distributions from either Trust 1 or Trust 2.

Taxpayer proposes to disclaim her contingent rights to receive Trust corpus upon the
terminations of Trust 1 and Trust 2. The disclaimers will be executed by Taxpayer no
later than within nine months after attaining her majority.

Taxpayer requests a ruling that the execution and delivery of 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 that chapter, 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.
PLR-102553-18                                5

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
(4) is made before the disclaimant has accepted the property. Cf. § 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 proposes to disclaim her contingent right to receive trust corpus
on the termination of Trust 1 and Trust 2. She will execute the disclaimers 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. See § 25.2518-
2(d)(3). Cf. § 25.2518-3(a)(1)(i) and 25.2518-3(d), Example (10) and Example (11)
(regarding treatment of certain interests in the same property as separate interests
eligible for qualified disclaimer treatment under § 2518).
PLR-102553-18                                  6

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. Finally, under § 25.2511-1(c), the disclaimant
must not have accepted the property before the disclaimer.

We conclude that, based on the facts submitted and representations made, if the
disclaimers are executed as proposed, and assuming that Taxpayer has not accepted
or received any of the benefits of the disclaimed interests (the terminating distributions),
the disclaimers will not constitute transfers subject to the federal gift tax.

Except as expressly provided herein, we express no opinion on the federal tax
consequences of the transactions under the cited provisions or under any other
provisions of the Code.

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

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.

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,

                                                   Karlene Lesho

                                           Karlene Lesho
                                           Senior Technician Reviewer, Branch 4
                                           Office of Associate Chief Counsel
                                           (Passthroughs and Special Industries)

Enclosure
Copy of letter for § 6110 purposes



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