In Private Letter Ruling 201831003 (Aug. 3, 2018), the Internal Revenue Service concluded that a taxpayer’s proposed disclaimer of his interest in a trust created prior to 1977 will be timely and not result in a taxable gift pursuant to Internal Revenue Code Section 2511 if made within nine months of the taxpayer learning of the existence of the trust.
Taxpayer Contingent Beneficiary of Pre-1977 Trust
The initial trust beneficiary exercised a power of appointment over the trust in her will in favor of several persons, including the taxpayer. The trust was originally created and funded prior to 1977, although several modifications relating to the succession, powers and responsibilities of the trustees were made to the trust after 1977. Based on the terms of the trust, the taxpayer was a contingent beneficiary and would have received at least a portion of the trust property after the initial beneficiary’s death had the POA not been exercised.
Disclaimer After Initial Beneficiary’s Death
The taxpayer proposed to disclaim his entire interest in the trust after the initial beneficiary’s death, and represented to the IRS that, other than a general awareness of the possible existence of numerous trusts established within the family, he had no actual knowledge of the trust, hadn’t received a copy of the trust or known any of its terms and hadn’t received any benefits from the trust.
Effectiveness and Timeliness of Disclaimer
At issue for the IRS in this ruling was: (1) whether Treasury Regulations Section 25.211-1(c)(2) applied to determine whether the taxpayer’s proposed disclaimer was effective for federal transfer tax purposes, and (2) if so, whether the taxpayer’s proposed disclaimer was timely within the meaning of such regulation.
The IRS concluded that Treas. Regs. Section 25.2511-1(c)(2) applied to the taxpayer’s proposed disclaimer. The Section applies to disclaimers of interests created by taxable transfers made before 1977. Because the trust was created prior to Jan. 1, 1977 and, under its terms, the taxpayer was a contingent beneficiary upon creation of the trust, the IRS concluded that the “taxable transfer” creating the taxpayer’s interest in the trust for purposes of the regulation was made on the date the trust was created; and therefore, the regulation applied to determine whether the taxpayer’s proposed disclaimer was effective for federal transfer tax purposes.
Treas. Regs. Section 25.2511-1(c)(2) provides that a disclaimer won’t result in gift tax if it’s made by the disclaimant within a reasonable time after knowledge of the existence of the transfer creating the interest. In the PLR, the IRS noted that, in the absence of facts to the contrary, a disclaimer made within nine months of the disclaimant learning of the existence of the transfer creating the interest would generally satisfy the reasonable time requirement. Accordingly, the IRS concluded that the taxpayer’s proposed disclaimer will be timely if the disclaimer is in fact made within nine months of the taxpayer learning of the existence of the trust and, assuming all of the taxpayer’s other representations with respect to the proposed disclaimer are accurate (such as, whether the taxpayer accepts any benefits from the trust and meets all other state law disclaimer requirements), the taxpayer’s disclaimer of his entire interest in the trust won’t be a taxable gift under IRC Section 2511.
In determining that nine months after learning of the existence of the transfer would generally satisfy the reasonable time requirement for disclaimers related to pre-1977 transfers, the IRS relied on the nine-month test for qualified disclaimers of interests created after 1976, set forth in Treas. Regs. Section 25.2518-2(c)(1). Had the post-1976 transfer regulation applied in this instance, however, the taxpayer’s proposed disclaimer would have resulted in a taxable gift because the nine-month test would have commenced on the creation of the trust, not on the taxpayer learning of the existence of the trust. See Treas. Regs. Section 25.2518-2(c)(3)(i) (“If the transfer is for the life of an income beneficiary with succeeding interests to other persons, both the life tenant and the other remaindermen, whether their interests are vested or contingent, must disclaim no later than 9 months after the original transfer creating an interest”).
The PLR also makes clear that the date the taxable transfer occurs dictates whether the pre-1977 transfer regulation or the post-1976 transfer regulation applies to the disclaimer, even if the trust is subsequently modified. A query whether a modification to the trust that was more substantive than a modification to the trust provisions would have produced a different result for the taxpayer.
