Thursday, June 11, 2015

No Split Gift Election Where Spouse Was a Potential Beneficiary

A husband created a Family Trust for the benefit of his wife and their descendants. Under the trust, an independent trustee may pay to or use for the benefit of the wife, or any one or more of husband’s descendants and their spouses so much or all of the income and principal of the trust as the trustee determines in its discretion for their support, health and education. He also set up and funded two grantor retained income trusts (GRATs). At the end of the GRAT terms, the remaining trust assets will be paid into the Family Trust. Husband and wife filed gift tax returns, electing under Code section 2513(a) to split the gifts to the trusts, so that one-half of each gift would be deemed to be made by each spouse for federal gift tax purposes.

Under Section 2513, a gift-splitting election can only be made for gifts to a person OTHER THAN a spouse. Since the husband’s spouse was a beneficiary of the Family Trust, the election played out as follows:

a. If the property is transferred in part to a spouse and in part to third parties, the consent applies as to the part passing to third parties if such interest is ascertainable at the time of the gift and severable from the interest transferred to the spouse. Reg. Sec. 25.2513-1(b)(4).

b. In Rev.Rul. 56-439, a gift to a trust where the trustee has discretion to allocate amounts among the spouse and other descendants of the donor gives rise to a gift to the spouse that is not susceptible of determination and is not severable.

c. Thus, no part of the gifts by the husband here were eligible for gift splitting.

This reporting occurred for several years. However, since the statute of limitations has expired for the earlier years, the gift splitting undertaken in those return years, including allocations of GST exemption, will remain in effect, even though not permitted under the Code.

PLR 201523003

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