Summary

In PLR 201208005, the Service ruled favorably on a post-mortem plan that used disclaimers to maximize the amounts passing from a decedent's estate to GST-exempt trusts.

Extended Summary

The decedent died in 2010, during the interval between the repeal of the estate tax and the generation-skipping transfer tax and their retroactive reinstatement.

During her lifetime, the decedent created a five-year GRAT. She died during the term. The GRAT instrument provided in that event, the decedent would have a general power to appoint the remainder. In default of the exercise of this power, the GRAT remainder would be payable to the decedent's spouse, or if he did not survive, to her daughter, or if the daughter did not survive, to a discretionary trust for the benefit of the daughter's descendants ("GRAT Successor Trust"). The decedent did not exercise her appointment power.

The decedent also created a revocable trust. At her death, the trust was to be divided into three separate trusts, each of which would pay income to the surviving spouse, and principal in the discretion of the trustees.

The text of the ruling does not indicate the disposition of the remainder of the three trusts at the death of the surviving spouse. However, if the husband did not survive, the decedent's revocable trust was instead to be divided into two portions, one in the amount of her unused GST exemption ("GST Trust"), to be held in further discretionary trust for grandchildren and more remote descendants until the expiration of a perpetuities period, and the residue to be distributed outright to the decedent's daughter.

If the daughter did not survive the decedent, her share was to be held in a separate discretionary trust for the decedent's grandchildren ("Grandchild's Trust"), with principal to be distributed as each grandchild attained age 25.

The decedent's spouse and her daughter were designated as co-trustees of the Grandchild's Trust, and as co-trustees with a corporate trustee of the GST Trust. The decedent's spouse was the initial trustee of the GRAT Successor Trust, to be followed by the daughter.

The surviving spouse timely executed a disclaimer of his interest in any property passing to him as a result of the decedent's death, including any portion of jointly held property representing her contribution. The daughter executed a similar disclaimer, excepting four specified assets. Each of them also disclaimed the right to participate as co-trustee in decisions to make discretionary distributions from the various trusts.

Under state law, the disclaimers resulted in the GRAT remainder being distributable to the GRAT Successor Trust, and the remainder of the decedent's revocable trust being distributable to the GST Trust to the extent of her available GST exemption, with the remainder (apart from the four properties the daughter did not disclaim) distributable to the Grandchild Trust.

The corporate trustee would act alone in making discretionary distributions from the GST Trust, and apparently, though this is not made entirely clear in the text of the ruling, no distributions would be made from either the GRAT Successor Trust or the Grandchild's Trust, at least as long as either the surviving spouse or the daughter was a trustee.

The Service ruled that:

1. the executor could elect to not have the retroactively reinstated estate tax apply;
2. the disclaimers were qualified disclaimers;
3. the GST Trust would have an inclusion ratio of zero; and
4. both the residue of the decedent's revocable trust passing to the Grandchild's Trust and the remainder of the GRAT passing to the GRAT Successor Trust would be treated as direct skips, taxable at a rate of zero percent.

CPC Commentary

For the most part, these are "comfort" rulings, confirming the disclaimer strategy had the desired effect of maximizing the use of the decedent's available GST exemption amounts and taking full advantage of the unique opportunity to make a generation-skipping transfer of essentially unlimited amounts at a zero tax rate.

It is slightly surprising that the Service ruled on the question of whether the disclaimers were in fact timely made, in conformity with state law requirements. This could be seen as a factual matter, on which the Service ordinarily does not rule (see Rev. Proc. 2012-3, section 4.02(1)).

Presumably the executor also filed a Form 8939, allocating $1.3 million in basis step up among the transferred assets, though apparently a decision was made not to use any portion of the $3 million spousal property basis increase.

Relevant Documents

	201208005: Imposition and Rate of Tax	2/24/12
	Rev. Proc. 2012-3	1/3/12
	IRS Form 8939: Allocation of Increase in Basis for Property Acquired From a Decedent	10/6/11