In Private Letter Ruling 201540006 (released Oct. 2, 2015), the Internal Revenue Service ruled that a taxpayer’s disclaimer of her right to trust distributions was made within a reasonable time—nine months from the date of her marriage to the trust beneficiary. As such, her disclaimer didn’t constitute a taxable gift.
A parent set up an irrevocable trust (Trust 1) for the benefit of his son. Pursuant to Trust 1, the trustee was to distribute net income to the son; if the son was legally married, his spouse (the taxpayer in this instance) was to receive one-half of the trust income. If the son’s spouse survived him, she was to receive all the distributable net income for her life according to the trust’s terms. If the son had children at the time that he died, the trustee was to distribute income to each child, share and share alike.
Trust 1 had several other terms, including a provision stating that if the son died and his surviving spouse (taxpayer) wasn’t “in being at the date of these presents,” the trust would terminate 21 years after the death of the surviving spouse (taxpayer), the son’s children or his siblings, whichever occurred first. On termination, the trustee was to deliver the corpus and undistributed income to a foundation. When Trust 1 was established, the taxpayer wasn’t “in being.”
Prior to his marriage to the taxpayer, the son had a prior spouse, adult children from that first marriage and one surviving sibling.
Before he married the taxpayer, the son established an irrevocable trust (Trust 2) for the taxpayer’s benefit. It provided in Section 6.1(b) that as long as the taxpayer lived with the son, she would receive a sum certain each month, charged first to income and then to principal. Trust 2 also provided for the taxpayer’s medical and educational expenses. The trustee also had discretion to make payments of principal to the taxpayer in addition to the payments made under Section 6.1(b). Under Trust 2, the taxpayer was to receive certain distributions when she reached certain ages.
Trust 2 also provided that if the taxpayer and the son marry, which would entitle the taxpayer to receive distributions from Trust 1, and the taxpayer didn’t disclaim her rights under Trust 1, her rights under Trust 2 would terminate, and its assets would be distributed to the son’s grandchildren. Similarly, if the son and the taxpayer weren’t cohabitating at the time of the son’s death, Trust 2’s assets would be distributed to the son’s grandchildren.
In an affidavit, the taxpayer attested that she didn’t participate in establishing Trust 2, had no control over Trust 2’s provisions and had no knowledge of Trust 2 until after it was established.
Nine months after the taxpayer and the son married, the taxpayer sought to execute and deliver to the trustee of Trust 1 a disclaimer to irrevocably disclaim her entire beneficial interest in Trust 1. In her disclaimer, she stated that she didn’t receive any distributions from Trust 1; any benefit from Trust 1; and any consideration in return for making the disclaimer.
The trustee of Trust 1 petitioned the state court, seeking an order to deposit with the court 50 percent of the Trust 1 income, which represented the amount to be distributed to the taxpayer under the terms of Trust 1. The court denied the trustee’s request and ordered the trustee not to distribute the amount to the taxpayer and hold it in trust until further order.
The taxpayer thus sought three rulings from the IRS. First, she asked the IRS to rule that her disclaimer of her entire beneficial interest in Trust 1, within nine months of her marriage to the son, was made within a reasonable time after knowledge of the existence of Trust 1 for purposes of Treasury Regulations Section 25.2511-1(c)(2). Second, she requested that her disclaimer of her entire beneficial interest in Trust 1 didn’t constitute a taxable gift under Internal Revenue Code Section 2501. Finally, she asked that the provision in Trust 2, which terminated her beneficial interest in that trust in the event she didn’t disclaim her interest in Trust 1, didn’t constitute consideration in return for making the disclaimer or otherwise constitute the acceptance of ownership of the interest in Trust 1.
No Gift: Disclaimer Made Within Reasonable Time
The IRS found that the taxpayer’s disclaimer of her entire beneficial interest in Trust 1 was effective and as such, didn’t constitute a taxable gift under IRC Section 2501.
The taxpayer and the son were residents of a state whose laws provided that a
disclaimer is effective when filed “within a reasonable time after the person able to disclaim acquires knowledge of the interest.” A disclaimer is presumed to have been filed within a reasonable time if it’s filed within nine months after whichever occurs latest: (1) the time of the creation of the trust; (2) the time the first knowledge of the interest is acquired by the person able to disclaim; and (3) the time the interest becomes indefeasibly vested. The disclaimer must be in writing; signed by the disclaimant; identify the creator of the interest; describe the interest to be disclaimed; state the disclaimer; and state the extent of the disclaimer. Additionally, a disclaimer must be filed with the trustee or individual responsible for making distributions. A disclaimer can’t be made after a beneficiary has accepted the interest she sought to disclaim.
Under IRC Section 2511(a), a gift tax is imposed on a transfer in trust. Under Treas. Regs. Section 25.2511-1(c)(2), for transfers creating an interest in a beneficiary made before Jan. 1, 1977, where a beneficiary has a right to refuse to accept ownership of property transferred from a decedent, a refusal to accept ownership doesn’t constitute 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.
The IRS found that the taxpayer satisfied all of the elements of Treas. Regs. Section 25.2511-1(c), and her refusal precluded the transfer as a gift. First, the taxpayer had knowledge of Trust 1 in a certain year, but she wasn’t a beneficiary of Trust 1 until she became the son’s spouse in a subsequent year. She thus had no interest in Trust 1 until she married the son, and she executed a disclaimer within nine months after that marriage. The disclaimer was therefore made within a reasonable time under Treas. Regs. Section 25.2511-1(c).
The disclaimer was also unequivocal because the disclaimed property passed to other beneficiaries as provided in Trust 1 and not pursuant to the taxpayer’s direction. Furthermore, the disclaimer was valid under both the state where the trust was administered and the state where the taxpayer and son resided, because the taxpayer hadn’t accepted any distributions from Trust 1. Finally, the state court had ordered the trustee to hold the distributions in trust; thus, the taxpayer never received any distributions prior to making the disclaimer.
Finally, the IRS found that the taxpayer didn’t receive any consideration for the disclaimer. She didn’t accept any benefits from Trust 1 and didn’t receive anything in return for the disclaimer. Specifically, the taxpayer and her spouse never entered into any mutual bargain or contract agreement: She had no knowledge of Trust 2 until after it was established.