184.108.40.206 For gifts made from revocable trusts for decedents dying before August 5, 1997, problems arose when making a gift purportedly under the annual exclusion provision from a trust.
220.127.116.11.1 In 1990, the IRS issued several rulings that held that certain gifts from trusts may be treated as a termination of a power to revoke under I.R.C. Sec. 2035, rather than simply a gift from the grantor under I.R.C. Sec. 2503(b).
18.104.22.168.2 If accorded I.R.C. Sec. 2035 treatment, gifts made within 3 years of death would come back into the grantor’s gross estate for tax purposes.
22.214.171.124.3 The rulings look to the terms of the trust instrument to determine whether or not the gift is actually a termination of a power to revoke. If the trust instrument permits distributions to someone other than the grantor, it is a termination of the power. If the trust instrument only permits payments to the grantor, the gift is deemed to flow through the grantor and thereby is properly excludible. In addition, if the trust is to terminate at death in favor of the probate estate, the gift gets exclusion treatment. This latter instance, of course, is unlikely as the presumed purpose of the trust is to “avoid probate.” TAM 901004 and TAM 901005; Keydel, “Gifts Made from Revocable Trusts,” 4 Probate & Property 51 (September/October 1990). The approach taken by the 1990 rulings is reflected by the case law. Est. of Perkins v. U.S., 90-2 USTC ¶ 60,042 (D. Ohio 1990); Est. of Jalkut, 90 T.C. 675 (1991), acq 1991-2 CB 1.
126.96.36.199.4 The IRS theory took various direct hits in court rulings. Est. of McNelley v. U.S., 16 F.3d 303 (8th Cir. 1994); Est. of Kisling v. Comr., 32 F.3d 1222 (8th Circ. 1994).
188.8.131.52.5 See Action on Decision 1995-0062, acquiescing to Est. of Kisling, supra.
It has been determined that to the extent that a transfer from a revocable trust (either outright or segregated within the trust within the trust) directed by the decedent or a guardian can be properly recharacterized as a withdrawal followed by a gift, the issue of relinquishment of a power of revocation should no longer be raised. Accordingly, the Service will no longer litigate the relinquishment issue where the decedent possesses a power to withdraw trust corpus or direct distributions to himself, regardless of whether the decedent also possesses the power to so direct distributions to other distributees. However, in other factual situations, the Service may continue to litigate the issue of whether there has been a relinquishment of a power under sections 2035 and 2038. For example, in the situation where the decedent establishes an irrevocable trust with the income interest for life to B and remainder interest to C but the decedent retains the power to change beneficiaries other than to himself, the decedent’s gross estate will include the value of the trust if the decedent relinquishes the power to change beneficiaries within three years of the date of the decedent’s death.
184.108.40.206 Corrective legislation was passed as part of the Taxpayer Relief Act of 1997.
220.127.116.11.1 Now, for estates of decedents dying after August 5, 1997, transfers from a revocable trust are treated as coming directly from the grantor. Thus, an annual exclusion gift from such a trust is not includible in the gross estate.
18.104.22.168 Gifting by an agent under a durable power of attorney raises issues. The only “modern” Maryland case held that the agent must have an explicit power to make gifts. King v. Bankerd, 303 Md. 98 (1984). In addition, a Fourth Circuit case held that the power to gift must be clearly permitted under state law or it will not be honored for federal tax purposes. Est. of Casey v. Comm., 948 F.2d 895 (4th Cir. Va. 1991); But see, Ridenour v. Comm., 36 F.3d 332 (4th Cir. Va. 994); Est. of Pruitt, T.C. Memo 2000-287 (2000).
22.214.171.124 Effective after October 1, 1999, the Maryland Circuit Court has explicit power to “authorize or direct” a guardian to make gifts or disclaim property. Estates and Trusts Article, Annotated Code of Maryland, Sec. 13-203(c).
126.96.36.199.1 For earlier years, Circuit Courts have permitted disclaiming in proper cases.