Posts Tagged: IRS Notice

PLR 201825003 – IRS Determines Conditional Transfer of a Remainder Interest a Completed Gift

PLR 201825003

IRS Determines Conditional Transfer of a Remainder Interest a Completed Gift

Author: John H. Ramsey of Goulston & Storrs

In PLR 201825003, released June 22, 2018, the IRS considered whether the transfer of a remainder interest in a collection of artwork to two foreign museums was a completed gift for gift tax purposes. In this case, a favorable ruling would have been that the transfer did not constitute a completed gift.

Upon the death of the taxpayer’s spouse, the taxpayer transferred (i) legal title, (ii) naked ownership and a (iii) remainder interest in an art collection to the museums. The taxpayer retained a life interest in the artwork, but retained no right to transfer title to the collection.  The transfer was dependent on receiving a favorable ruling from the IRS and several conditions subsequent, each of which was not within the taxpayer’s control.

Nevertheless, the IRS concluded that the transfer of the remainder interest was a completed gift (see Section 2501 of the Internal Revenue Code, Regs Section 25.2511-2(b) – requiring no dominion and control of property nor any retained interest by the taxpayer; taxpayer has no power to change the disposition).  In this case, the IRS concluded that a completed gift would be made because the taxpayer did not retain sufficient rights to change the disposition of the property.

Importantly, though this topic was not discussed in the letter ruling, the transfer described would not qualify for a charitable income tax deduction, as contributions to foreign charities generally do not qualify for the income tax deduction and a gift of a future interest in tangible personal property is considered made only when all intervening interests have expired under Section 170(a)(3) of the Code. In addition, the gift would not qualify for the gift tax charitable deduction, as the taxpayer retained an interest in the transferred property and the gift was not structured as a qualifying charitable remainder trust or guaranteed annuity, as described in Section 2522(c)(2) of the Code.  Therefore, despite making a completed gift for gift tax purposes, the taxpayer would be left with no offsetting deduction.

The full PLR can be found at: https://www.irs.gov/pub/irs-wd/201825003.pdf.

 

PLR 201834011 – Consequences (or Lack Thereof) of Divisions and Gift of QTIP Income Interest

PLR 201834011

Consequences (or Lack Thereof) of Divisions and Gift of QTIP Income Interest

Author: Kevin Ellis of Hemenway & Barnes LLP

In PLR 201834011, released August 24, 2018, the Internal Revenue Service ruled that a surviving spouse’s division of a Qualified Terminable Interest Property (“QTIP”) Trust, and her subsequent non-qualified disclaimer of the interests of one of the resulting trusts to a charitable remainder beneficiary, has no adverse income, estate or gift tax consequences.

The decedent’s spouse (the “Spouse”) was the beneficiary of a traditional Marital Trust (on which a QTIP election was made) (the “QTIP Trust”). The Spouse proposed, by court-approved agreement, to split the single QTIP Trust into two trusts on a non-pro rata basis, and thereafter to disclaim her interest in one of the two resulting trusts. The underlying trust provided that if the Spouse disclaimed an interest in the QTIP Trust, the disclaimed interest would pass to a charitable trust.

At issue in the PLR were the following:

  1. Would the division of the QTIP Trust trigger any gain recognition or loss?
  2. Would the resulting trusts, after the division, still qualify as QTIP trusts?
  3. Would the deemed gifts from the Spouse’s disclaimer of her interests in one resulting trust qualify for the gift tax charitable deduction?
  4. Would such a gift of the assets of one of the resulting trusts remove those assets from the Spouse’s gross estate?
  5. Would the disclaimer as to one of the resulting trusts also cause a deemed gift of the other, non-disclaimed trust (of which the Spouse continued to be the sole income beneficiary)?
  6. Would the disclaimer cause the Spouse’s retained interest in the non-disclaimed trust to be valued at zero under IRC § 2702 (and presumably cause a deemed gift as a result)?

The IRS’s ruling was favorable to the taxpayer on all accounts. The ruling bifurcated the proposed transaction – first, the division of the QTIP Trust into two resulting trusts, and next, the subsequent gift of interests in one of those trusts. The IRS ruled that:

  1. The non-pro rata division of the QTIP Trust into two resulting trusts (one of which the Spouse would disclaim) would not cause a recognition of any gain or loss under IRC §61 or §1001 because the same beneficiary – the Spouse – held the same interests in the QTIP Trust before and after division.
  2. The division of the QTIP Trust would not disqualify the two resulting trusts from continued treatment as QTIP trusts. The terms of the resulting trusts mirrored those of the QTIP Trust, and the Spouse continued to be the sole income beneficiary, with a qualifying lifetime income interest in both resulting trusts.
  3. The Spouse will be treated as having made a gift of her income and remainder interests in the disclaimed resulting trust, and such a gift qualifies for the gift tax charitable deduction (because the disclaimed assets pass to a charitable trust). It is important to note that IRC §§ 2511 and 2519, together, provide that when a spouse makes a gift (or makes a non-qualified disclaimer, which is treated like a gift) of her income interest in a QTIP trust, she is deemed to have made a gift of the entire property of such QTIP trust – even though she only had an income interest in the property. In this case, that gift of the entire interest was not an issue because the gift tax charitable deduction allowed for deductibility of the entire gift.
  4. The assets of the disclaimed trust are deemed to have been transferred under IRC §2519, and as a result will not be included in the Spouse’s gross estate under IRC §2044(a).
  5. Following on the IRS’s treatment of the transaction as two separate steps, the deemed gift of the assets of one resulting trust would not cause a deemed gift of the assets of the retained resulting trust under IRC §2519 because the two trusts were to be treated as distinct, separate trusts.
  6. Building on the findings in (4) and (5), the IRS concluded that the Spouse’s disclaimer of the assets in one resulting trust will not cause her interest in the retained trust to be valued at zero under IRC §2702, again because the two trusts were distinct and separate from each other.

The full PLR can be found at: https://www.irs.gov/pub/irs-wd/201834011.pdf

 

IRS Notice: 2018-61 – Effect of IRC Section 67(g) Costs Paid or Incurred in the Administration of an Estate or Trust

IRS Notice: 2018-61 – Effect of IRC Section 67(g)

Costs Paid or Incurred in the Administration of an Estate or Trust

Author: Kerry Reilly of K. Reilly Law LLC

Section 67(g) was enacted as part of the Tax Cuts and Jobs Act, December 22, 2017. That section disallows the itemized miscellaneous deductions exceeding the 2% floor for tax years beginning after December 31, 2017 and ending January 1, 2026.

Generally, the Adjusted Gross Income (AGI) of a trust or estate is calculated the same way for those entities as it is for an individual (Section 67(e)), which would support the disallowance of the above deductions. However, exceptions are provided under Section 67(e)(1) for costs paid or incurred for transactions that would not have been otherwise incurred if the property was not held in a trust or estate (see Regulations Section 1.67-4). Additionally, deductions allowed under Sections 642(b), 651 and 661 shall continue to be allowed for trusts and estates in determining AGI (Section 67(e)(2)).

The Notice highlights that it is the “type of service” that is determinative for whether it is an allowed deduction solely as a result of the trust or estate framework or would continue to be incurred regardless of the entity (includible – IRS Form 1041, 706, decedent’s final 1040 versus Form 706, property maintenance costs – not includable (see Regs. Section 1.67-4(b) and (c))).

The Notice goes on to say that “nothing in Section 67(g) affects the ability of the estate or trust to take a deduction listed under Section 67(b),” and that the Treasury and IRS will be issuing regulations to that effect.

Lastly the Notice asks for comments on Section 67(g) as it relates to a beneficiary’s ability to deduct Section 67(e) expenses upon the termination of a trust or estate pursuant to Section 642(h).

The full text of the Notice can be found at: https://www.irs.gov/pub/irs-drop/n-18-61.pdf