In Private Letter Ruling 2014400071 (released Oct. 3, 2014), the Internal Revenue Service allowed the taxpayer, a minor, to disclaim her contingent beneficial interests in two irrevocable trusts executed prior to 1977. The taxpayer was the great granddaughter of the settlor of Trust 1 and the granddaughter of the settlor of Trust 2.
Terms of Trusts
The taxpayer hadn’t yet been born when the trusts were created. The terms of both trusts, however, included the taxpayer in the class of current beneficiaries entitled to discretionary distributions of income and principal from both trusts. While noting that the taxpayer didn’t yet receive any distributions from either trust, the IRS didn’t seem to find this fact particularly relevant when analyzing the validity of proposed disclaimers. For example, the facts of PLRs 200838026 (released Sept. 19, 2008) and 201407009 (released Feb. 14, 2014) are nearly identical, and the IFS found both taxpayers’ proposed disclaimers would be valid despite the fact the taxpayer in the 2008 PLR received trust distributions prior to the date of the proposed disclaimer and the 2014 PLR made no mention of trust distributions.
At the expiration of the applicable perpetuities period, both trusts would terminate and the taxpayer would receive a per stirpital portion of the trust estate if: (1) she was living at the time of the trust termination, and (2) her parent, who was the descendant of the settlor, predeceased the trust termination date. The taxpayer desired to disclaim, within nine months of attaining the age of majority, her contingent beneficial trust interest in both trusts. The taxpayer didn’t intend to disclaim her current right to receive distributions of trust income and principal in the discretion of the trustee.
Gift Tax Principles
As each trust was established prior to the effective date of Internal Revenue Code Section 2518, which governs qualified disclaimers, the IRS reviewed the taxpayer’s proposed disclaimer applying the more general gift tax principles found in Treasury Regulations Section 25.2511. Treas. Regs. Section 25.2511-1(c) provides that, in the case of an interest created before Jan. 1, 1977, a disclaimer will be considered timely if it’s made within a reasonable time after knowledge of the existence of the transfer that created the interest to be disclaimed. Citing Jewett v. Commissioner, 455 U.S. 305 (1982), the IRS further stated that the time limitation for making the disclaimer doesn’t begin to run until the disclaimant has attained the age of majority.
In this PLR request, the taxpayer represented her disclaimers wouldn’t pass the disclaimed property pursuant to any direction on her part, and she intended to execute the disclaimers within nine months of attaining the age of majority. The IRS concluded if the taxpayer satisfied the procedural requirements of the applicable state statute governing disclaimers, the taxpayer’s disclaimers would be valid and wouldn’t constitute transfers subject to the federal gift tax.
Interestingly, IRS cited both the applicable local law and examples (10) and (11) of Treas. Regs. Section 25.2518-3(d) to find that the taxpayer may retain the right to discretionary distributions of income and principal during the continuation of the trust, while at the same time disclaim the right to receive a contingent beneficial interest in the trusts on the termination dates. The IRS determined the taxpayer’s current beneficial interest was a severable interest from her contingent remainder interest.