This month’s Alert examines how effective use of disclaimers can save millions in taxes. The Alert examines a ruling request presented to the IRS involving such a situation.
In Private Letter Ruling 201208005 (November 1, 2011), wife died in 2010 when the estate tax had been temporarily repealed, survived by her husband, one child and one grandchild. Wife’s Will provides that husband is to receive her interest in a Grantor Retained Annuity Trust (GRAT), wife’s probate estate, wife’s share of the assets owned by a joint revocable living trust and wife’s share of joint tenancy property. The revocable living trust divides into three sub-trusts at the death of the first spouse to die – (1) a survivor’s trust to hold husband’s share of the joint trust assets, (2) a bypass trust to hold wife’s share of the joint trust assets, but not to exceed the amount that can be passed free of estate tax at the time of her death, and (3) a marital trust to hold the remainder of wife’s share of the joint trust assets not allocated to the bypass trust. Upon the death of husband, the trustee is to first distribute from the three sub-trusts an amount equal to husband’s remaining GST tax exemption (currently a maximum of $5,120,000) to a generation skipping trust (GST Trust) for the benefit of child and grandchild, with any remaining trust assets to be distributed outright to child. If child is not living upon the death of husband, the remaining trust assets are to be distributed to a grandchildren’s trust from which grandchild can request distribution beginning at age twenty-five.
Husband and child were apparently concerned with estate tax to be paid at husband’s death, as well as taxes to be paid at the death of the child. Within nine months of his wife’s death, husband disclaimed his interest in his wife’s share of the GRAT, her probate estate, her share of the joint trust assets, and her share of the joint tenancy property. Son also disclaimed his residual beneficiary interest in the GRAT, his residuary interest in wife’s share of the joint trust, his interest in his mother’s probate estate, and his interest in the GST Trust. They then requested the IRS to rule as follows: (1) the assets distributed to the GST Trust and grandchildren’s trust pursuant to the disclaimers were not subject to estate tax, (2) husband’s disclaimers of the GRAT, probate property, trust property and joint tenancy property were valid disclaimers under Internal Revenue Code § 2518, (3) child’s disclaimers of the GRAT, probate property, joint trust property, and GST Trust property were valid disclaimers, (4) the assets passing to the GST Trust would be exempt from generation-skipping transfer tax, and (5) the remaining assets passing to the grandchildren’s trust would be direct skip transfers, but would not be subject to estate or generation-skipping transfer tax due to the temporary repeal of the estate tax and generation skipping transfer tax in 2010.
With respect to the first ruling request, the IRS held that there was no estate tax on wife’s estate and the carry-over basis rules (for income taxes) would apply to the assets distributed to the GST Trust and to the grandchildren’s trust. With regard to ruling requests two and three, the IRS held the disclaimers were properly executed and as such, were qualified disclaimers. In its fourth ruling, the IRS held that the GST Trust had an inclusion ratio of zero, and thus all its assets were exempt from generation-skipping transfer tax. Finally, the IRS held the transfer of assets to the grandchildren’s trust was a direct skip for generation-skipping transfer tax purposes (meaning that the transfer would normally be subject to GST tax), but because of the temporary repeal of the GST tax, no estate tax or generation-skipping transfer tax would be applicable. The dollar amount of the disclaimed assets passing to the GST Trust and grandchildren’s trust is unknown, but it is likely this post-mortem planning strategy saved millions of dollars in estate and GST tax.
Our office focuses on estate planning and the administration of estates and trusts. We work hard to develop post-mortem planning options to minimize estate tax and GST tax for younger generations. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date with information regarding income, gift, estate and generation-skipping transfer taxes, including examples of planning strategies as demonstrated in PLR 201208005. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling or by visiting our website.