Jan 1, 2005 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

David A. Handler of Kirkland & Ellis in Chicago reports:

• The IRS Okays a Daisy Chain of Disclaimers

  In Private Letter Ruling 200442027 (issued June 21, released Oct. 15), the taxpayer created for his spouse an intervivos qualified terminable interest property (QTIP) marital trust. The trust would terminate nine months after formation, at which time the assets would be distributed to the spouse. The trust agreement provided that any property in the trust disclaimed by the spouse would be held in Trust 2, any property of Trust 2 then disclaimed by the spouse would pass to Trust 3, any property of Trust 3 then disclaimed by the spouse would pass to Trust 4, and any property of Trust 4 then disclaimed by the spouse would pass to Trust 5. Trusts 2 and 3 were both QTIP marital trusts. Trusts 4 and 5 were for the benefit of the spouse and the taxpayer's children.

  The taxpayer represented that his spouse intended, within nine months of funding the initial trust, to (1) disclaim all of the initial trust, causing the property to pass to Trust 2; (2) disclaim $X of her interest in Trust 2, causing such amount to pass to Trust 3; (3) disclaim $Y of her interest in Trust 3, causing such amount to pass to Trust 4; and (4) disclaim $Z of her interest in Trust 4, causing such amount to pass to Trust 5. After the disclaimers, Trusts 2, 3, 4 and 5 will all hold some trust property. The Internal Revenue Service ruled that-because the disclaimers were to be executed in accordance with state law within nine months of creation of the spouse's interest in the property and as a result the disclaimed property would pass to a series of trusts for the benefit of the spouse and the taxpayers' children without any direction on the part of the spouse — the proposed disclaimers will be qualified disclaimers under Internal Revenue Code Section 2518 and the property will be treated as passing directly from the taxpayer to the final recipient trusts, assuming the other requirements of IRC Section 2518 are satisfied. Thus, although the spouse had a limited amount of control over the disposition of the assets through her power to disclaim in favor of various trusts, it was insufficient to disqualify the disclaimers. Ultimately, the spouse could not truly control the disposition of the disclaimed property, as its destination was set forth in the trust. Interestingly, the Service did not raise “step transaction“ arguments. This is likely because disclaimers are a statutorily granted right that must be exercised within nine months of creation of the interest, and the spouse, while intending to disclaim, could not be legally required to do so by the grantor-taxpayer.

  Such a “daisy chain” of trusts could be used to give a spouse (or surviving spouse) the power to effectively decide how much of transferred assets to hold outright, and how much to allow to pass to GST exempt and non-GST exempt QTIP marital trusts and non-marital trusts.

• The Right to Demand Trust Corpus Constitutes a Right to All Income

  In Technical Advice Memorandum (TAM) 200444023 (issued July 12 and released Oct. 29, 2004), a trust for the benefit of a surviving spouse required the trustee to distribute the trust income to the spouse, or such persons as the spouse directs, in such amounts as she directs. In addition, the spouse had the right to withdraw all or part of the trust principal at any time.

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