[EstGift] The Dueling Transferors Problem in a Nutshell

[Harrison, Ellen]

Dear Jonathan
I think that if Carlyn assigns the income right, it is a gift by her of which she is the transferor for GST purposes but the deemed gift under 2519 is expressly exempted from the rule that the person most recently subject to gift tax is the transferor, so that John remains the transferor as to the principal.  See Treas. Reg. section 25.2652-1(a) (1) says Except as provided in paragraph (a)(3) of this section, the individual with respect to whom the property was most recently subject to Federal estate or gift tax is the transferor... Paragraph (a)(3) provides a special rule for reverse QTIPs.  The identity of the transferor is determined without regard to sections 2519, 2044 and 2207A.  Section 2519 makes Carlyn taxable on the transfer of principal, but not on the transfer of income.  Carlyn's transfer of the income interest is a 2511 transfer and not a 2519 transfer.  See Treas. Reg. 25.2519-1(a).  So the assignee trust will have two transferors, Carlyn and John.  The GST regulations say that if a trust has more than one transferor, they are treated as separate trusts as to the portion contributed by each, and this seems to be determined on a fractional basis by reference to the relative values of their contributions.  Treas. Reg. 25.2654-1(a)(2).

I also read Austin Bramwell's piece on the "Dueling Transferors Problem" and would like to point out that he is overbroad in summarizing Treas. Reg. 26.2652-1(a)(5) Example 4 concludes that "Because C's transfer is a transfer of a term interest in the trust that does not affect the rights of other parties with respect to the trust property, T remains the transferor with respect to the trust."  I am not convinced that this example applies to the transfer of a remainder interest.

I agree that the problem is very interesting.

Ellen Harrison | Pillsbury Winthrop Shaw Pittman LLP
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From: estgift-bounces at actec.org [mailto:estgift-bounces at actec.org] On Behalf Of Jonathan Blattmachr
Sent: Tuesday, March 05, 2013 7:15 PM
To: ACTEC EstateandGift
Subject: Re: [EstGift] The Dueling Transferors Problem in a Nutshell

Pilgrims:  Diana, Austin Bramwell (of the gift by promise fame) and I have largely finished a rather detailed article on portability.  A difference of opinion has arise on the following.

Let's say John dies, creates a QTIP trust for Carlyn and his estate makes the Reverse QTIP election and allocates a sufficient amount of John's GST exemption to the QTIP to make it have a zero inclusion ratio.  Carlyn then assigns her income interest to a new trust.  All three of us are in agreement that she will have made a 2511 gift as to the income (and a 2519 gift of the principal).   Assuming for the moment that Carlyn does not allocate GST exermption to the trust, is the actual income earned in the QTIP trust paid to the trust to which CSM has assigned her income interest exempt from GST tax by reason of the allocation of John's GST exemption to the QTIP trust?

The IRS in a 2001 PLR indicates that there are two transferors: John and Carlyn based upon the value of Carlyn's income interest when assigned to the value of trust (e.g., if the income had  a gift tax value of $500,000 and the trust had a value of $5mm when CSM assigned her income right, CSM would be the transferor as to 10% and John 90%).

Another possibility is that CSM is the transferor of all the income from the QTIP trust that is paid pursuant to Carlyn's assignment to the new trust and none of it is protected from GST tax (except to the extent Carlyn has allocated her own exemption on the assigned income interest).

The dispute really revolves about how credible the first case is.  Austin has written something up on it which Bill Crawford has just send out to all committee member..  I plan to raise this in the meeting tomorrow and Diana I would appreciate your views.  Thanks very much.  Jonathan


________________________________
Date: Tue, 5 Mar 2013 19:07:47 -0500
From: wlcrawford at actec.org<mailto:wlcrawford at actec.org>
To: estgift at actec.org<mailto:estgift at actec.org>
Subject: [EstGift] The Dueling Transferors Problem in a Nutshell
Sent on behalf of Jonathan Blattmachr

Attached please find "The Dueling Transferors Problem in a Nutshell" by Austin W. Bramwell.

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