Taxation & Estate Planning

IRS ADVISES THAT §2511(c) MEANS WHAT IT SAYS

By Charles Rubin

Starting this year, Code §2511(c) takes effect. This provision provides that notwithstanding any other provision of §2511, and, except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as a wholly owned grantor trust.

Some practitioners have suggested that this provision means that a gift to a wholly owned grantor trust will NOT be treated as a gift under the Code, even if it otherwise would be treated as a gift. This reading does not appear to be correct, and the IRS has now issued a Notice confirming that.

So what does the provision mean? Only that transfers to a trust will be treated as a gift, unless the trust is a wholly owned grantor trust. Previously, it was possible to transfer property to a trust but it could be characterized as an incomplete (and thus a nontaxable) gift depending on the facts and circumstances, including retained powers of the transferor. This result has been legislated away.

Come January 1, 2011, this provision sunsets ? good riddance.

NOTICE 2010-19

Full post as published by Rubin on Tax on February 02, 2010 (boomark / email).