December 11, 2012
Authored by: Kathy Sherby and Stephanie Moll
PLR 201228017 provides a good reminder of the requirements for disclaiming an interest in a trust that was created prior to January 1, 1977. This PLR involves a disclaimer by a beneficiary within 9 months of attaining age 18.
In order for a disclaimer of a pre January 1, 1977 transfer not to be considered a transfer subject to gift tax, the disclaimer must be “unequivocal, effective under prior law, and prior to accepting any benefits. In addition, the disclaimer must be timely. In order to be timely, Reg. § 25.2511-1(c)(2) provides that the refusal must have been made “within a reasonable time after knowledge of the existence of the transfer.”
After reciting these general rules applicable to pre-January 1977 transfers, the PLR then relied on the Regulations under § 2518 applicable to post December 31, 1976 transfers. In respect of the timeliness of the disclaimer, the PLR states that the time period for determining the reasonableness of the lapse of time prior to the disclaimer, “the time limitation for making the disclaimer does not begin to run until the disclaimant has attained the age of majority and is no longer under a legal disability to disclaim,” citing Reg. § 25.2518-2(c).
This PLR deals with a disclaimer of interests in 2 separate trusts. In both trusts, the taxpayer is a permissible distributee of income and principal during the continuation of the trust. In one of the trusts, the taxpayer had in fact received distributions from the trust during minority. The taxpayer proposed to disclaim her contingent right under each trust to receive a principal distribution from the trust on termination of the trust at the end of the perpetuities period, while retaining the right to distributions from the trusts. While initially citing Reg. § 25.2511-1(c)(2) as to each requirement for a valid disclaimer, the PLR then cited Regs. §§ 25.2518-2 and 25.2518-3 to determine whether the proposed disclaimers met the criteria for a valid disclaimer of a pre-1977 transfer. In this PLR, the Service ruled that the proposed disclaimer “will not constitute transfers subject to federal gift tax. In issuing this ruling, the Service stated that the receipt of distributions from the trust during minority did not constitute acceptance, and that the interest as a permissible distributee during the term of the trust was a separate interest that could be retained while the interest as a remainder beneficiary in the principal on the termination of the trust could be validly disclaimed.”
One issue that is not addressed in the PLR is whether attaining the age of majority now requires a disclaimer at age 18 rather than at age 21 as set out in this Regulation, since most states have changed the age of majority from 21, the age of majority when the Regulations were issued, to age 18. Query whether the disclaimer must be now completed within 9 months of attaining age 18 rather than age 21. In this PLR, the disclaimant proposed to disclaim the trust interests within 9 months of having attained age 18, so the issue has not been addressed. In any event, no assumption should be made that a person can wait until reaching age 21 to disclaim.